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Scenario- I have a property that has 3 deed holders. The 1st (BofA) is not willing to pay anything to the 3rd (Kaiser). The 3rd is asking for 15% of the balance. The seller can not contribute and the buyer can only put in a limited amount based on what the 2nd (Greentree) is willing to settle for and not much more. The 3rd was taken out 14 days later from the 1st and 2nd for the exact same amount as the 2nd. All are purchase money loans.
1.) What is typical payout to 3rd if the 2nd is getting 10%, should they not get less? Still learning so please be gentle with the responses. I have seen some blogs that were a little intimidating.
2.) Hypothetically speaking...if the house went to FCL would my client be protected under the Debt Forgiveness Act for all 3 deeds?
Thanks in advance!
You are confusing deficiency with tax relief and they are completely separate.
Most lien holders other than the first get 10% of the balance, although Greentree is a nightmare. they usually want more than 10%, but any lien holder can demand anything they want...doesn't mean they'll get it.
If it goes to FC there is no "forgiveness" nothing was forgiven. The lender can chose to forgive the remaining balance later, but usually they try to collect in court if it goes to FC or they sell the debt to a collections agency.
The MDFA (Mortgage Debt Forgiveness Act) usually applies to only first homes primary residences and usually the first loan. Although I think purchase money counts. The homeowner would normally have to pa taxes on the "forgiven" portion of the note, but up until the end of this year they won't if it falls under the primary residence provision.
Thank you for your response.
I always check from which state the poster is posing a question. Uiliani is in CA, the same as me.
I believe Smitty practices back East. While her opinion may be correct in her state, I would say there remains confusion as to what happens here in CA.
If there is a Trustee Sale, the 1st mortage holder is finished. They don't get to sell the debt to collections.
If the 2nd was truly purchase money, they quite likely are also finished.
But if it was a HELOC, they probably still have recourse.
I have never yet seen a 3rd mortgage that was taken out 14 days after the 1st & 2nd were recorded that would qualify as Purchase Money. It is quite likely the 3rd may still hold recourse.
I think this link from NAR will give a more definitive answer to the questions posed:
Thank you! Yes CA is a tricky state...Yes that 3rd mortgage is really bazarre to me because its not out far enough for HELOC but seems a little to late for a purchase money loan.
Harry, In California, I understand if it goes to FC they can't pursue..Is that correct? BUT if they write it off after with 1099 forgiven, aren't taxes still a potential?
Uilani, I'm not an expert in California short sales by any means. Harry knows what he is talking about. California dances to their own beat.
There are many more qualified people here from the CA area that can help, but from the little I know from CA Harry is dead on.
The general rules governing deficiencies (in California) are as follows: