[McLovin]

Just out of curiosity, when did she buy it?

I've seen the numbers for a lot of 4 plexes in No. and So. Cal that have sold over the past 10 years. I have to say, I don't get it. The numbers NEVER pan out. Things like paying $950,000 for a property that generates gross rentals of $60,000 a year, if at full occupancy.

Crazy stuff like that - which actually sells - I don't get because even in a best case scenario, the property doesn't work.

Anyways, how underwater is she?

A short sale would be ok, but she seems to not understand what a short sale is. Because she says it will solve her problems "except for the bank." By definition, a short sale solves the bank problem. B/c in a short sale, the bank agrees to take less than it is owed. She can't "short sell" without the bank's consent, b/c without the bank's consent, the bank won't release their mortgage.

If she hasn't paid for a year, and the property was already underwater then, it is probably hopelessly underwater by now. By the time you add in the delinquent payments, penalties, interest, etc.

If she wants to "walk away" she can just do nothing. Keep collecting the rents. Legally, nothing is going to happen to her, that hasn't already happened (screwed credit, etc.).

Eventually, the bank will get around to foreclosing. She says after they start foreclosure, she'll tell the tenants to start paying the bank, but that makes no sense. If she's not telling the tenants that now, why tell them after foreclosure starts? The start of foreclosure doesn't change anything as far as the rents.

What will likely happen is the bank will eventually do 2 things:

1) They'll start a non-judicial foreclosure proceeding. This is the normal, out of court foreclosure, where they'll issue a Notice of Default and start the clock ticking to a foreclosure sale.

2) At the same time, they'll file with the court an action which will include a cause of action to appoint a receiver. They'll go in on a motion at the beginning of the case for an order to appoint the receiver, which will be granted. The receiver will go to the property and post notices to the tenants telling them they need to pay him instead of the owner going forward. There will also be an order for her to turn over any rents she has, the security deposits, books and records, etc. She will be out of possession of the property from that point on, the receiver will be in full control.

The receiver will be in place for 4-8 months while the non-judicial foreclosure moves forward. It'll likely be set for public sale, but postponed by the bank several times for various reasons.

But, it will eventually in that time period go to a sale, which will take place at the courthouse. At the sale, the bank will "credit bid" the amount of the debt. Because the property is underwater, the credit bid by definition will be more than the property is worth, so there won't be any other bidders. The property will therefore be purchased by the bank at the foreclosure sale.

The bank will then sell the property. They will not get from the sale enough money to pay their debt.

From there, there's an issue. Since she is living at the property, and it's not more than 5 units, there's a chance that the loan is classified as a "residential" loan and may be non-recourse. That means they can't come after he personally for a deficiency. This is probably the most impt legal issue she needs to find out! i.e., is her loan recourse or nonrecourse.

If the loan is non-recourse, after the foreclosure sale, the matter will be over.

If it is a recourse loan (and it very well may be, she needs to check her loan docs), then technically she will be responsible for the deficiency. Whether the bank actually goes after her for it is hard to predict. A lot depends on the financials she gave them when she took out the loan. If they show a lot of assets, esp. real estate with equity, they may go after her.

If she has other assets, she could start doing some, umm, "asset planning" in advance of all of this.