Would the "security first rule" prevent a bank from suing us? 5 Answers as of October 16, 2013

My mother owns a property that has been in default for 2 years, both on the first and second loans. The second lien holder sent a letter saying they have charged off the loan and now it's with a collection agency. Can the collection agency sue my mother? Two lawyers responded yes. I came across the "security first rule" in an article. Wouldn't this prevent a bank from suing us if it's a credit card? Thank you.

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Danville Law Group | Scott Jordan
The other two lawyers are correct. The second lien holder has the option if the property is worth less than the first mortgage. It also depends on the type of loan the second is. If it is a HELOC, the "security first rule" does not apply.
Answer Applies to: California
Replied: 10/16/2013
Janke Legal Consulting | Bruce C. Janke
By security first rule, I assume you are talking about California's antideficiency law. It is more complicated than this, but basically it means that most first mortgage purchase money loans are nonrecourse, meaning the lender is limited to foreclosing and selling the home has has no recourse to sue for the deficiency, which is the difference between the remaining loan balance and the amount the house sells for at auction. However the law does not necessarily apply to second mortgages, which are often recourse loans. To be sure, you should have a lawyer read the deed of trust for your mother's second loan. I don't know what you mean by a credit card. If you had some sort of home equity line of credit secured by the property that came with a credit card, then it most likely is a recourse loan.
Answer Applies to: California
Replied: 10/16/2013
Durham Jones & Pinegar | Erven Nelson
That depends on the location of the property. If in Nevada, the second lien holder could sue your mother on the debt and waive (or give up) its interest in the collateral. Second lien holders frequently do just that in Nevada because their liens are worthless due to the market crash in real estate. In Nevada, the security first rule? is called the One Action Rule? and provides that if a lender does not foreclose on the collateral first it will lose the collateral (the home) as security. But, the debt survives and the lender can sue the borrower on the promissory note. There are a few things to try. If the first lien holder would foreclose, the second lien holder would have only 6 months from the foreclosure sale to file a lawsuit against your mother. If it failed to do so within 6 months, the debt would in effect be discharged. Another avenue to pursue would be to ask how much the second lender paid for the promissory note. If it purchased the debt from another lender at a discount, then it can recover from your mother only the amount it actually paid for the debt. For example, if the current lender bought the debt from the original lender for 60% of the face value, then the current lender could get only that 60% from your mother even if she owes 100%. Other states have different laws, so you need to talk to a lawyer in the state in which the property is located.
Answer Applies to: Nevada
Replied: 10/16/2013
The Law Office of Darren Aronow, PC
The Law Office of Darren Aronow, PC | Darren Aronow
They charge it off, then they sue you in civil court as an unsecured judgment and then they can attach that judgment to another property, garnish your salary and/or freeze your bank account.
Answer Applies to: New York
Replied: 10/16/2013
Scott Goldstein | Scott Goldstein
No - they can sue on the note.
Answer Applies to: New Jersey
Replied: 10/16/2013
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