My ex-wife and I tried to short-sale our home in California. We had taken out a home equity loan when living there for home improvements and...

Question

My ex-wife and I tried to short-sale our home in California. We had taken out a home equity loan when living there for home improvements and the 2nd mortgage bank initially refused to accept the terms of the short sale (we had an offer which the primary lender agreed to). At the last minute, they finally agreed to the terms (meaning they would accept about $1,600 as a settlement), but the contract expired so we had to file an extension. The primary lender refused to extend it any longer, opting to go to foreclosure. It is somewhere in that process now. Now that it's foreclosed (or will be soon), can the 2nd mortgage demand we fulfill the initial terms of that loan, meaning we would owe somewhere around $25K? Everything I have read so far indicates they can come after us for that, but I wanted to confirm that A.) that is true, and B.) they can demand we continue to pay on the loan (or even file suit against us) even though they were willing to accept significantly less if the short sale had gone through.

Answer

Yes, even if the lender loses their security because the holder of the 1st mortgage forecloses, you are still liable on the promissory note that you signed that was secured with a 2nd mortgage.

Yes, you can be sued by the holder of the 2nd if you do not make payments on the note as agreed. That promissory note probably has a legal fees provision that will increase the total amount you would owe if you allow suit to get filed against you.

You might try calling and talking to the lender to see if you can negotiate a payoff of the 2nd for the amount they were willing to accept on a short sale even though it did not occur.

Answer

I agree with Mr. Rimer. This is one of the key reasons I HATE short sales. There is NO benefit to the owner/seller and can backfire badly as happened to you. The borrower is almost always FAR better off structuring a strategic default by making sure it is the second, not the first, that forecloses. All the time, money and energy spent on trying to get the short sale could have been invested in managing your default to avoid this situation.