Article: Money – Refi loans could prove costly in foreclosure
Homeowners behind in their mortgage payments after hocking the house to pay for a major remodel or a new boat or car may be in for a rude awakening.
If they previously refinanced and their lender decides to foreclose, they may not only lose their house, but the bank also may be able to go after their other financial assets including stocks, savings and their paycheck.
And even if the bank doesn’t go after their other assets, a foreclosure may mean a big tax bill from the IRS and state Franchise Tax Board for any shortfall between what the bank gets for the sale of the owner’s home and the value of the loan.
In the past, when a lender foreclosed, the homeowner usually still had the original loan they got when they purchased the house. Original loans, considered purchase money, are non-recourse loans that limit lenders to recovering only what they can get when they sell the house. They can’t go after the owner to pay any difference between the foreclosure sales price and the loan balance.
But in California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower’s assets once they obtain a court judgment.
“They can literally go after everything you have,” Hall says.
There are a few limited exceptions. Retirement accounts are excluded, and declaring bankruptcy could protect some homeowners.
Interesting times lie ahead! I guess the lesson is to put as much money as you can into your retirement accounts!