Q.  Hello Moe; I have a second mortgage with Ditech, will they pursue me for a deficiency judgment if I walk away from my home?

A. When you are in foreclosure, your state laws are very important to understand when it comes to your rights.  You’d need to have a clear understanding of these basic laws to comprehend what may happen to you in the future.  In addition, it is wise to study what other lenders are doing when they’re in the second mortgage position.

I will give you a couple examples here of two states that I’m pretty familiar with.  One would be my home state of California, and then that of Arizona.

If you have a purchase money second mortgage in the states of California or Arizona, these loans are considered non-recourse and your lender would not be allowed to pursue a deficiency judgment against you.  From the best of my knowledge, these mortgages would have to been used to purchase the home and not be some type of home equity line of credit (HELOC)  where you could spend that money on other items besides purchasing your property. 

If your second mortgage is on an investment property or it is some type of cash out refinance, then most likely your loan is recourse in your state and they may be able to pursue you for a deficiency judgment.  However, this is not automatic and your lender would have to get a court action to come after you.

A new trend that we’re finding out in our forum, is that many second mortgage lenders are selling off these loans on the secondary market to investors.  It is a way for investors to get rid of that depreciating asset that is costing them money and selling it for pennies on the dollar. Apparently it is not worth the gamble of attempting a loan workout, or the risk of it going to foreclosure auction, where these lenders may get nothing at all.  So, it looks like Ditech will most likely charge the mortgage off and then sell your loan before they pursue a deficiency judgment.  If they do this, you will now be dealing with someone else other than Ditech.  Most likely some type of professional collection agency that you can possibly negotiate with.

It remains to be seen exactly what these new entities are doing with these purchase second mortgages.  Will they go after borrowers personally or can they foreclose also?  My theory is that they will go aggressively after borrowers to attempt to collect and even pursue wage garnishments in some states.  Especially, those people who walk away from debts and can afford to pay them.  These are the people that need to worry about the legal recourse of debt collectors who are dead set on collecting a debt. 

Borrowers who are underwater and cannot afford their debts, are most likely bankrupt and or insolvent.  There are laws out there that protect them, but there are no laws that protect people who walk away from debts they can afford.