One of the most serious decisions homeowners facing foreclosure may be asked to make is to sign over the deed to their home. Transferring ownership of the property diminishes their ability to keep control over the house, and may just reward a scammer with an easy target. Just as serious and potentially dangerous, though, is the decision to sign over a power of attorney to a third party to represent the homeowners.

Homeowners in financial hardships who are being sued for foreclosure need to be cautious when anyone says they can help them if the owners just sign over a power of attorney to the third party. Oftentimes, this will be in the context of selling the property to a Realtor or investor through a short sale. The question the homeowners should ask is what the third party will do to “take care” of the foreclosure lawsuit and other matters, and if they can help the owners do these tasks on their own without giving them the power to represent them as attorney in regards to the foreclosed house.

Anyone requesting the power of attorney to take care of the legal issues surrounding the foreclosure may be especially suspect. The summons is simply a legal document that the court sends foreclosure victims to inform them that they are being sued. The bank is suing for foreclosure of the house, and the people responsible for paying the mortgage are being “summoned” to court to make an answer to the lawsuit. Either the homeowners or their attorney can file an answer with the court or request more time to sell the home.

For this reason, it may be a better idea to hire an actual real estate attorney or contract attorney to help in dealing with the courts and the Realtor or investor who wants the short sale. That way, the homeowners will know who they are hiring and that the attorney is competent to deal with the legal process of the foreclosure. Just giving any third party power over the home is usually not a good idea, and is something that will be taken advantage of.

In fact, the vast majority short sales set up by real estate agents or private investors do not involve the owners signing a power of attorney. A power of attorney would be used if the owners were disabled or otherwise unable to get to court to represent themselves and they wanted someone else to represent them just in that one instance of the foreclosure lawsuit. These types of limited powers of attorney are more common between family members or trusted friends, rather than third parties trying to put together a deal in their own best interests.

Unless there are a lot of other protections for the owners in the deal, it might not be a good idea at all to sign over power over the house. Maybe if they can revoke any decisions made by the representative, they will be able to retain enough power to rescind any bad decisions made by the limited attorney. However, even in this case, it is more likely the third party who will benefit the most from having near-complete control over the fate of the house.

Thus, it would probably be best if the foreclosure victims found a Realtor or investor who guided them in what to do about the summons on their own, and was just there to facilitate the short sale or other deal to stop foreclosure. Realtors already represent the homeowners if they are listing the house for sale or attempting to locate buyers — owners do not need to give them even more power to represent them in court, as well. » Read more: Executing a Power of Attorney to Help Prevent Foreclosure

If you owe $800,000 on a $550,000 house, and give the bank the $550,000 house, can the bank then try to collect the $250,000 difference? Or to use the legal terminology, can the bank seek a deficiency judgment?

The answer, in California, is probably not. California Code of Civil Procedure §580b states:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

In plain English, this means California is for most homeowners a non-recourse state when it comes to “purchase money mortgages.” These are mortgages, including in some cases second mortgages, that were taken out in order to purchase a house that the buyer actually lived in.

California’s Anti-deficiency Laws: Who’s Protected

Three major groups of California mortgage debtors are thus excluded from the protection of California’s pro-homeowner C.C.P. 580b:

(1) Investors who purchased homes in order to flip them without ever intending on living or renting in them

(2) investors who purchase a property as a rental

(3) homeowners who take on additional mortgage debt after purchasing their house.

California also has a second law protecting mortgage debtors from their banks: C.C.P. 580d. This law covers all housing debt, including HELOCs, home improvement loans, and 2nd mortgages, but the law only applies to non-judicial foreclosures. These creditors can still collect the remaining debt in a judicial foreclosure.

Anti-deficiency Laws in Practice: An Example

Here is a scenario showing how 580b and 580d work together:

Bob purchased a house with $0 down and a 500K interest-only mortgage. After the value of his house went up he took out a 2nd mortgage, on which he owes 100K. Now his house is worth 400K and has 600K in mortgage debt.

Let’s say Bob stops paying and his house is foreclosed and sold for 400K. That leaves 200K in debt unpaid. The first lender gets all of the 400K, but cannot get the 100K remaining that Bob owes.

The second lender now has a choice. It can just eat the entire 100K loss, or it can go the route of a judicial foreclosure. The bank probably won’t do that if Bob has little assets and lots of debt, but if Bob has a high-paying steady job the lender just might try: $100,000 is a lot of money to lose. » Read more: Jingle Mail And California Law – Giving The Mortgage Back To The Bank