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13 September 2013

Second Mortgage Still On Credit After Foreclosure?

The basis of FCRA is requiring creditors to report accurate and truthful information about accounts to the bureaus. For example, a creditor continuing to report an account that is paid in full as owing a balance would be a violation of the FCRA, just the same as a creditor continuing to report a late payment […]

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The basis of FCRA is requiring creditors to report accurate and truthful information about accounts to the bureaus. For example, a creditor continuing to report an account that is paid in full as owing a balance would be a violation of the FCRA, just the same as a creditor continuing to report a late payment that never was.

CA Civil Code 580b operates as a bar to recovery of a particular debt (in this case the purchase money 2nd). As soon as the 2st forecloses, the debt for the 2nd is wiped out. All personal liability for that debt is eliminated, similar to how a bankruptcy discharge eliminates liability. And just like a debt discharged in a bankruptcy, a creditor cannot continue to report a balance owed or new lates on a debt that legally the consumer no longer owes. Of course the status of the account, including the late payments, up to the date of the foreclosure will remain for the 7 years + 6 months, but there cannot be any new late payments reported or a balance owing reported after the foreclosure.

The act of reporting a balance owed or past due is an act of trying to collect.  This violates the above civil code and the creditor is in violation of the law.

A California real estate attorney friend of mine has successfully used California’s statute of limitations to do the same thing (if the last payment was more than 4 years ago, the statute has ran and the creditor can no longer legally enforce the debt. In some cases the statute is 6 years because the debt falls under the UCC). In some cases it requires court action to enforce this, but more often than not it can be done with a demand letter.

Why is this the case?

We are talking about deeds of trust here, which are complicated even for attorneys, unless they practice in this area and deal with it on a daily basis.

For a junior mortgage, there are 2 different rights involved – the right to a non-judicial foreclose (per the power of sale in the deed of trust) and the right to commence an action (either to sue for a judicial foreclosure or a money judgment). The time period is different for each of these rights.

1) The right to sue for a money judgment and/or a judicial foreclosure:

The statute of limitations for commencement of an action ALWAYS runs from the date of the breach, unless otherwise allowed by statute. For obligations based on a written contract that time period is 4 years. For obligations based on a negotiable instrument the time period is 6 years (which is what most 2nd mortgages would are). In other words, the statute of limitations begins when the borrower stops making payments, not when a senior lien holder forecloses. This applies to actions to enforce a right, such as a judicial foreclosure, as well as an action for a money judgment. This limitations period is further shortened for junior mortgages (i.e. 2nds) sold out by a foreclosing senior mortgage: California Code of Civil Procedure 580a states an action for a money judgment (i.e. deficiency) “must be brought within three months of the time of sale under the deed of trust or mortgage.” The general statute of limitations provisions of California Code of Civil Procedure §337 supports this same time period by stating that any action for a money judgment after a non-judicial foreclosure is 3 months.

2) The right to a non-judicial foreclosure:

The power of sale in a deed of trust is enforceable up to 10 years after the maturity date of the obligation if the maturity date is stated in the recorded deed of trust. If the maturity date is not stated in the recorded document, but instead in the unrecorded promissory note, the power of sale is enforceable up to 60 years from the date of the recording of the deed of trust.

Assuming the 2nd is a negotiable instrument with standard terms, the time a 2nd mortgage holder has to sue a borrower for a deficiency, money judgment, or judicial foreclosure is 6 years and 1 month from the date of the last payment, or 3 months from the date a senior mortgage forecloses on the property, whichever is earlier. The statute of limitations must be used affirmatively, which in California would be in the form of a declaratory relief action requesting the court to make a judicial determination that the debt is unenforceable except the right to conduct a non-judicial foreclosure if the property has not already been foreclosed.

If the senior mortgage never forecloses, the right to sue for any money judgment is still barred by the statute of limitations of 4 or 6 years, but the 2nd mortgage holder retains the right to conduct their own non-judicial foreclosure for maturity + 10 years, or 60 years from the recording date.

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