C.C.P. 580b - Helocs and Purchase money - Update

Question: ... there seems to be a variety of responses on the web concerning California law and purchase money HELOC's with no case law. I'm in the same situation as above 80/20 with a purchase money HELOC, it is even checked purchase money on the loan doc for the HELOC. Is there any definative answer regarding this question? I called the state AG office and one of the staff said it should still fall under 580b, but they were interested to know of others in the same situation. I've seen several post with people in the same situation being pursued by the banks, but very little concerning the resolution to what happens when a lender or collector comes after them. Does anyone know? It seems that lenders purposely created such loans during the boom to circumvent 580b, which seems rather weak ground to stand on if brought to court. If however the second becomes unsecured after a foreclosure does this change the nature of the loan? Sorry I have several questions, but I'm not finding any definative answers.

Answer

1. I would say nothing definitive as I still have not seen any case law on

HELOCs and defaults or even 580b and short sales.

But, watch out for interesting 2 part closings. There is a wrinkle with HELOCs. Some deals which were funded in two steps... 80% for the purchase and then the 20% Heloc funded.

2. When the paperwork says purchase money - CA license collection lawyers back off.

All you have to do is mention that you do not understand how in the world

a CA licensed attorney would pursue a collection effort where CCP 580b fits

the facts and the HELOC itself says purchase money. (as some loans say in the header or on the front page)

Between unfair debt collection statutes, unfair business torts and attorney

sanctions... no CA attorney in his right mind would stay on that file.

We have seen some jump off file in less than 12 hours.

3. We have never seen a lender or collection firm continue their pursuit after foreclosure when we inform them of the loan's non recourse status. It may take a few letters to the lender's legal department, but in our experience they back down. 580b and 726 are the foundation of solid strategic defaults... banks know the law.

I also think we see it playing out in the way the banks go after defaults on high end properties.

When recourse loans are involved we are seeing a few judicial foreclosures.

However it seems on non recourse loans the banks would rather let the homeowners be responsible for the maintenance and taxes. I know people in Ranch Santa Fe with non recourse loans who had not paid their lender for 18 months. I hear about friends have friends who have not paid in two years.

4. Contrary to lies which roll off the tongue of collection agents, CCP 580b covered loans do not become “unsecured” debts after a foreclosure – they become loans which were paid in full by the return of the collateral.

The lenders argue they can attempt to collect on a 580b loan right up until the foreclosure. They can be very clear about the law when they have to be. I once ripped a client’s collector for calling me on my cell phone early in the morning. (The call woke my 4 month old.) I told the collection lady these were non recourse loans. I said she broke the law for attempt to collect on a debt which no longer is a debt. She very quickly informed the foreclosure did not go through as scheduled.