By Robert B. Jacobs
Contra Costa Times Correspondent
Posted: 05/31/2009 12:00:00 AM PDT

This is the first column in a two-part series concerning California's "Security First" rule.
With the downturn in the market, lots of homeowners find their home is worth less than they owe on it. Sometimes these owners run into financial trouble due to illness, divorce, or loss of employment. When this happens, they often can't make their monthly mortgage payments.
When the market was good, these homeowners had several options. Because of rapid and significant market appreciation, owners often had substantial equity when trouble arose in their home after holding it for a short period of time.
If they couldn't make their payments, they could sometimes refinance their home and borrow against their equity, which would provide them with cash for living expenses and mortgage payments.
If they couldn't qualify for a refinance loan, then they could sell their property and cash out their equity.
That's all changed. Because of the economic downturn, many owners find themselves "upside down" in their properties, with their home being "under water." The terms are commonly used to refer to properties where the mortgage debt is more than the property value.
California has a "Security First" rule. This means a lender can't ignore a mortgage and sue directly on a loan. When a property is "underwater" and a borrower has assets other than real estate, a lender might prefer to ignore the mortgage and sue directly on the promissory note.
When borrowers take out a mortgage loan, they sign a promissory note whereby they agree to make monthly payments. If there is little or no equity in a property, the lender might prefer to just ignore the mortgage and sue the borrower on the promissory note.
But California law usually won't allow this, because of the "Security First" rule. California requires a lender to foreclose on a mortgage before looking to a borrower's other assets.
Next week's column will discuss some practical effects of the "Security First" rule with respect to short sales.
Robert B. Jacobs practices real estate, business and construction law in the Bay Area. Reach him at This email address is being protected from spambots. You need JavaScript enabled to view it.">This email address is being protected from spambots. You need JavaScript enabled to view it. or The foregoing article is not a complete discussion of the subject addressed, and should not be relied on. Readers with specific questions or issues should consult an attorney.
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