Recourse vs. Non-Recourse Loans in California

An important subject in the short sale real estate industry is the difference between recourse and non-recourse loans; which is a completely different issue than tax liability… Below is a very brief breakdown of the qualifications and repercussions of both types of loans.

Non-Recourse Loans Definition

: the borrower is not personally liable for the loan. The lender’s only security is the property itself, not the borrower’s personal assets.

1. Loans secured by and used to purchase an owner-occupied, 1-4 unit residential property.
   
   1. Primary residence
      
   2. Original purchase loan
      
2. Any Seller carry back real estate loan secured by the property being sold.

Have you ever refinanced your loans since purchasing your house? If the answer is yes, your loan falls into what is called a recourse loan.

RECOURSE LOANS

Recourse Loan Definition:

the borrower is personally liable for the loan. The lender’s security is primarily the property BUT also the borrower’s personal assets. The lender may file a deficiency judgment if the property forecloses and the loan is not fully satisfied. Likewise, the lender may file a deficiency judgment against the borrower based on the lender’s total losses absorbed in a short sale transaction.

Examples of Recourse Loans = Refinances, H.E.L.O.C.’s not obtained to purchase the property.

As most people have refinanced their loans sometime after the purchase of their house this becomes a very disturbing point. Despite doing a short-sale and avoiding foreclosure you may still be liable for the “lender’s total losses absorbed” in the transaction. So now, you may be wondering why bother. This is where the separation between good and great agents comes into play. I say the difference between good and great because anything less than good will never run into this problem. Only good, confident agents can successfully close escrow on short-sales.

Satisfied vs. Released:

When recourse loans approve a short sale in writing it is very important to attempt to achieve the verbiage ‘satisfied’ or ‘satisfaction’. “Satisfied” is a legal term which restricts the lender from pursuing a deficiency judgment against the borrower. The words ‘release’ or re-convey simply mean that the lender agrees to allow escrow to close. They retain the right to pursue a deficiency judgment if the word ‘satisfied’ or ‘satisfaction’ is not used.

This challenge usually comes into play late in the process and there has already been so much time, energy, persistence and patience given by your agent, a good agent may now be so concerned with all of this being done in vain that they may feel inclined not to argue semantics such as “release” vs. “satisfied”. Why risk losing the deal? While a great agent will not allow fatigue to compromise their primary fiduciary responsibility to the seller. Even though most banks are verbally claiming they are not going to pursue these rights, it can't feel good to have it on the record.

I see too many agents discounting the seller as just a signature in the process, and they even seem to try and cut the seller out of the process almost completely. As a seller of a short sale you are still liable for many things, and an agent that looks at you as though you are not a significant part of the equation or looks at you like a discounted part of the equation is probably practicing fiduciary negligence, but this is hardly place to rant and rave on this issue. I will talk later about the fiduciary responsibilities to a short sale owner at a later post.

Seth Miller | West Covina Real Estate Consultant

Associate Brokers Real Estate Hound West Covina

www.MyRealEstatePro.net

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