Deficiency Judgments: Recourse Loans vs. Non-Recourse Loans

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do mortgage companies usually seek a deficiency judgment on home foreclosures

Depends upon whether it is a recourse loan or not. A recourse loan is one where the lender can come after you for any excess amount of money you owe. Whether a loan is recourse or non-recourse varies with the state you are in, whether it was a purchase money loan or a refinance, and always, what it says in the Note.

For a non-recourse loan, that's it. If something happens and the property does not fetch enough money at sale to pay the lender off, that lender is out of luck whether they want to be or not. These are often used in reverse 1031 exchanges, where the accommodator is going to hold title to the property for a while but is usually unwilling to shoulder the risk that the lender may be able to come after them for a deficiency. Due to the fact that the lender cannot come after the borrower for the difference, these are riskier loans and therefore carry a higher rate-cost trade-off than recourse loans. This is nothing more than any rational person would expect.

The law is different everywhere, but I don't think have never seen a cash out refinance that was not a recourse loan. In short, take the money now, but if you don't pay it back, they are going to come after you in court and with a multitude of tools to get that money back.

Note that just because a loan is non-recourse does not mean that the lender will necessarily approve a short payoff. In fact, it is usually harder to get those approved because the lender knows that this is the only chance they have to get their money, whereas with a recourse loan they can attach other assets to pay for their loan. However, note that just because your loan is non-recourse doesn't mean they can't try for a deficiency judgment. If you don't show up in court, they win by default. If you did something to invalidate the non-recourse protection, such as fraud in obtaining the loan, the lender can and probably will win in court.

Finally, it is to be noted that just because a lender does have recourse and can attach other assets does not mean that they will. If you're down to $0.47 to your name, they'd have to be pretty silly to waste a lawyer's time doing so. However, just because you don't have it now doesn't mean that you will never have it. Statute of limitations also varies, but if you receive a financial windfall within the first few years, don't be surprised if the lender who you thought forgave the difference is standing right there, demanding their metaphorical pound of flesh.

Caveat Emptor

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1 Comments

Rick said:

Excellent information! I have a question. I own a home, has 2 loans, both were used to buy my home in California. It is owner-occupied so it is pretty much a non-recourse loan on both loans. The second loan is not a heloc.

I am selling my home in a short sale but the lender approved the short sale with the condition that I still owe the money. But can they do this if this is a non-recourse loan? Can they come after me for the difference? If I just let it go into foreclosure, they can't come after me so should I let it foreclose or should I go ahead with the short sale knowing that they cant come after me anyway?

I have a couple of thousand dollars to my name and that's it! No assets, low paying job.

Your comments would be appreciated!

Thank you.

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About this Entry

This page contains a single entry by Dan Melson published on February 20, 2014 7:00 AM.

The Era of Make Believe Loans and The Law of Unintended Consequences was the previous entry in this blog.

Why All The Fuss Over Real Estate Transactions? is the next entry in this blog.

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