Default on Mortgage: Recourse / Non-Recourse

[jq26]

General question re: foreclosure remedies. I just heard a tax attorney/financial planner state two separate times that, in almost all states, if there is a default on purchase money loans, the bank's only recourse is to foreclose. There is no personal liability involved.

The reason I ask is because I did some quick research a few weeks ago and I did NOT come up with the same answer. I thought that in almost all states, there is personal liability attached by means of a deficiency judgment following foreclosure. The non-recourse escape from liability is only available in a small handful of states (California mostly) and is narrrowed even more so that it only in those states if:

1) it is a purchase money loan (ie: no refis or home eq.)

2) the property is used for primary residence

The result of all this is that 99.9% of foreclosures result in personal liability by the borrower. Even Pennsylvania's 'anti-deficiency' statute has a misleading title because all it does is set a short SoL and strict procedures as to how lenders needs to sue for deficiency- it is pretty clear. (Whether or not the bank chooses to pursue a lawsuit is a matter entirely different).

So my question is, who is right? Is there recourse for all of these foreclosure deficiencies? I was surprised to hear this guy who has 30 years of experience giving tax & risk management planning advice based on what I thought was a flawed assumption.

[Rick9972]

I am not a lawyer or a home specialist, but I have done alot of research in real estate investing and know several people in the housing business.

This is what I have been told and is my currently held belief. (Until proven otherwise)

The original mortgage made on a primary residence is a non-recourse loan. It will remain so until said loan is paid or re-financed. Any type of money back loan is a recourse loan, and a refinance that does not provide "money back" but replaces the original mortgage is a recourse loan. (I always took this to mean the only mortgage that is non-recourse is the first one that provides ownership to you.)

I was also informed that with the many loan products out there in this day and age the only way to know for sure is to review your loan documents. It is there somewhere in the fine print.

HOpe this helps until the real experts show up.

[Recovering Attorney]

Let's not get confused.

"Non-recourse" means that the lender agrees not to go after you personally even after he takes the security back. No deficiency allowed. Usually a contracted status

In most mortgage situations, you sign a note which is your IOU, and the mortgage, which pledges the house to secure your promise to pay the IOU. On default, the bank's "recourse" is to sue you on the note or foreclose the mortgage. Most do the latter as the property will be the greatest repayment source. I have never heard that they HAD to foreclose. And they have a right to sue you for the balance, unless restricted by agreement or statute.

A "purchase money mortgage" is given priority over other liens, but I have never seen that , by definition, it is a non-recourse loan. Someone better tell the hoi polloi

[jq26]

Thanks for the replies.

"Non-recourse" means that the lender agrees not to go after you personally even after he takes the security back. No deficiency allowed. Usually a contracted status

Why would any lender contract to restrict their right to full recovery? If contracted after default, then I could see it being used as an incentive to the owner not to trash the house so that the lender can extract maximum value on resale...but not if they contract "non-recourse" in the original loan terms.

On default, the bank's "recourse" is to sue you on the note or foreclose the mortgage. And they have a right to sue you for the balance, unless restricted by agreement or statute.

This is in line with what I thought. As far as I know, very few states (Cali + others to a lesser degree) have anti-deficiency laws that forbid or restrict deficiency judgments.

Someone better tell the hoi polloi

Seriously. No one seems to knows what they are liable for. One would think the extent of responsibilities would be clear when hundreds of thousands of dollars are on the line. I've heard quite a few times lately from owners who were underwater and were debating foreclosure to get out from under...seems like wishful thinking.

[flacorps]

Jonathan Alper on how it works in Florida:

http://www.alperlaw.com/mortgage_fcdef.html

No automatic deficiency judgments; there must be a separate evidentiary hearing if the mortgagee wants to get one.

I just had a friend tell me that his second mortgagee doubled his monthly payments because his home is "in a high foreclosure area" ... and apparently the loan docs have a clause that allows it to be done.

Guess what? It's going to cause him to stop paying on the loan, the home is going to get foreclosed on, and the holder of the second is going to get zip because the value of the home won't even cover the first anymore. Oops.

[Amerikaner83]

I just had a friend tell me that his second mortgagee doubled his monthly payments because his home is "in a high foreclosure area" ... and apparently the loan docs have a clause that allows it to be done.

Guess what? It's going to cause him to stop paying on the loan, the home is going to get foreclosed on, and the holder of the second is going to get zip because the value of the home won't even cover the first anymore. Oops.

That IS a "high-foreclosure area" indeed.