Chase Bank 2nds

One of the key points we look for when we advise upside-down owners is whether they have multiple loans. This is because if a foreclosure by Trustee Sale occurs, generally it will be the first loan that forecloses and that action would wipe out the second lender's security levaing them a right to sue the borrower for any deficiency. However, under California law, when both loans are owned by the same lender, a "merger" of interest occurs. The foreclosure by one is treated as the foreclosure of both and in California neither would have any deficiency recourse against the borrower.



One area we have seen often is lenders breaking the merger by selling off the second loan after a default occurs. Although there has not been much action by these second lenders to pursue a deficiency, we have raised the defense that the buyer of such a loan really had nothing to lose since there was no real value in the security for the loan and therefore they should not be able to sue the borrower for any unpaid amount on the second loan following a foreclosure by the first. We expect to see a lot of such lawsuits over the next few years brought by collection companies and others who may pay pennies on the dollar and then sue for the full dollar.



Today we encountered a change to that typical sell-off strategy. In this case, Chase held both the first and second loans and was demanding recourse which the borrower could not pay. The borrower had some leverage because of the merger and had some defenses if Chase sold the second to another creditor. But Chase flipped this on its head. Instead, Chase assigned the first loan to Bank of America which immediately filed a Notice of Default to start foreclosure, a foreclosure which will wipe out the security for the Chase second loan. The assignment broke the merger but it did not create a defense against Chase filing a lawsuit on the second because Chase already owned the second loan.



We already know that Chase more than any other lender is playing hardball in the short sale and foreclosure process. This unique strategy change is no doubt intended to improve their odds of recovering from a borrower that may have some assets.... assets that Chase would have learned about through the Short Sale Hardship application. This approach, coupled with Chase's common unwillingness to approve short sales, suggests that they view the short sale process not as loss mitigation but rather as a means of gathering information on the borrower that they can use to sue the borrower and get more money. In our initial discussions of this strategy, we think there are a number of other defenses to such a strategy that seeks to run around the established legal policy that a lender must look to its security first.



If you or your clients are dealing with Chase loans in a short sale, be wary especially where two loans are involved. Let us know what your experiences are so together we can develop the best response to not only defeat this strategy but to convince Chase to cooperate with the short sale.



The information presented in this Article is not to be taken as legal advice. Every person's situation is different. If you are upside-down on your loan(s), especially if you're facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.
 
Cari Drolet
Lotus Realty Group
Founder/Ceo
Professional Short Sale Negotiators for home owners and Realtors
858-764-7300