Quit Claim Protections/Foreclosure Issues?
Question:
However, on another property, they fall behind and get foreclosed upon. Can this foreclosure affect their other home? Could a deficiency judgment come back and haunt them even though they have "Quit Claimed" their primary residence? If so how and why?
Answer:
Deficiency judgements are rare, although in this world of over-mortgaged properties and dropping values it is happening more. That said, then yes there is a possibility of it happening, and if it does it will cause problems.
People use quit claim to transfer ownership, and it can be useful that way in some very limited situations. However, quit claiming ownership to a family member when you still hold a mortgage is extremely dangerous. Here is why:
If you hold a mortgage to the property, in almost all situations the details of the mortgage demand that there be no change of ownership. If there is a change of ownership, most mortgages have an acceleration clause, which means the mortgage must be paid off in full immediately. This is to keep people from doing flaky transcations and the bank getting people paying on the loan who are not as credit worthy as who they loaned it to. Flakey transactions like Quit Claiming ownership to relatives.
Some people try to get around this using a Quit Claim Deed. Now, a QCD says that you pass all your ownership rights to another person, but you do not guarantee that you have ownership, or that there might be other mortgages or liens to worry about. So there is lots of room for legal problems and gray areas that could cause lots of problems for future sales of the property. But, you don't have to file the QCD so the acceleration clause in a mortgage won't be triggered.
Now, where the problem comes in, if you do get a deficiency judgement on anuther property, the other lender will have an option to place a judgement lien on the other property. If that happens, it fouls up the economics of the other property. However, if you say "You can't do that, I did a QCD and passed ownership onto my relative" that alerts the bank of the ownership claim and triggers the acceleration clause. no win situation.
So the likelyhood of it happening is low. But if it does happen, it will the unholiest mess you will ever see in your life.
Yes, if the lender finds out that they own another property, they can petition the court to have both properties sold, even though the lender is only on one of the properties.
That prevents people from allowing a second home to be "let go". Because they do risk losing the first one.
Though it is legally possible, I have only seen it excercised in extreme cases...mostly when there was material misrepresentation in obtaining the loan to start with.
PS: Deficiency Judgements used to be rare, but they are now commonplace, and in almost every recent foreclosure I have seen, there is always a deficiency judgement reported.most people get close to 100% financing and the property rarely sells to cover what is due...and it's very, very easy for a lender to get the judgement.
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