What are recourse and non recourse loans?

Do you know where you stand on your mortgage loans?

The California Legislature passed a law in August 2010, which addressed the deficiency issue in foreclosures and short sales.  Deficiency is when the value of the property at time of sale is insufficient to satisfy the amount of the mortgage loans.

The law, effective January 1, 2011, basically makes the first mortgage a non recourse loan for the homeowner, who owns a 1 to 4 unit building in California.  A non recourse loan is a loan provided by a lender and the lender does not have the power to go after the homeowner for the amounts owned when the lender has taken the home as collateral.  Wow, that is a mouthful but what does it mean?

The law is especially pertinent during this foreclosure and short sale home crisis. If a lender takes possession of the property, the displaced homeowner is not liable for the difference between the original first mortgage and the amount the property is resold for or the amount forgiven in a short sale. The two key elements to keep in mind here is it appears the Federal Government has not addressed this issue at this time and this law only addresses those loans which are the original mortgages on the property. Therefore this law does not address second mortgages, refinanced loans or home equity loans.

It appears that the second mortgages, refinanced loans and home equity loans still could be recourse mortgage and the lenders still would have the option to recover the difference between their initial mortgage amounts and the amounts they received at the time of the resale of the property.

Each state is different when it comes to loan regulations so you will want to check with your state to determine if it is a non recourse state and if the regulations only address secured non recourse loans.


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