California Mortgage Lenders Using Short Sales To Seek Deficiency Judgments On "Non-Recourse" Purchase Money Home Loans?

In San Diego County, California, North County Times reports:

• [B]orrowers can face deficiency judgments at any point on certain types of loans. But California law allows special privileges for what is known as "purchase money" loans, or the original loan used to purchase the home. On such mortgages, a bank cannot legally sue the borrower for nonpayment. The bank's only means of recouping the loan is to foreclose on the house. Therefore, a homeowner late on payments on a purchase money loan cannot face a lawsuit ---- even if the owner put no money down.

• But all bets are off if the borrower refinanced the mortgage. Especially on home equity lines of credit, lenders can sue the borrower for the unpaid amounts following either foreclosure or short sale.

• However, lawyers said, if the borrower negotiates a short sale, the bank might issue a contract that says it will agree to sell the house and release the borrower from the "trust deed," the contract saying the borrower must pay back the loan in full. Lenders might include a clause in a short sale contract that releases the lien but creates the possibility for a lawsuit to collect debts at a later date, said John Brady, a San Diego attorney.

• Effectively, lenders will try to transform a purchase-money loan into one in which the bank can sue to collect, Brady said."They're being sneaky," he said. "They're trying to keep the door open to be able to collect on any deficiency."

For the story, see Lawyers say lenders set stage to collect on 'short sales' (Foreclosure may be better option for some struggling homeowners).