I shudder when I read blanket statements that California mortgages are Non-Recourse. Why do I shudder? Because people BELIEVE IT and are making decisions about whether to let their home go to foreclosure based on an incomplete understanding of the facts.
So what ARE the facts?
Under California law, a mortgage debt is considered "non-recourse" when the mortgage was made under the following two circumstances:
- The mortgage was made to purchase a 1 - 4 unit property and the borrower occupies at least one of the units.
- The Seller financing for all or a portion of the purchase price of the property.
A mortgage with Recourse is one in which neither of the above two exemptions applies. Examples of recourse debt are:
- Refinanced mortgages
- Home equity lines of credit and/or 2nd mortgages obtained after purchase
- Mortgages for non-primary properties (including vacation homes and investment properties)
Given the previous run-up of property values combined with low interest rates, the number of people who DIDN'T refinance their homes and, in many cases, add a Home Equity Line of Credit is extremely low. Only those owner-ocuppant homeowners who retained their purchase money mortgage(s) on their primary residence have non-recourse debt, everyone else has recourse debt.
The second important part of this recourse equation:
- the foreclosing lender waives their right to recourse unless they choose to pursue a Judicial Foreclosure instead of a Trustee Sale. Given that the homeowner has a Right to Redemption in a judicial foreclosure, lenders rarely pursue this option.
- the non-foreclosing lender - typically the 2nd or Home Equity lienholder - still has the right to pursue the deficiency for up to four years.
Homeowners should always consult with an attorney regarding their personal situation.
Wendy Cutrufelli
Broker Associate
925.917.1135
The positions on this site are my own and don't necessarily represent Alain Pinel Realtors' positions, strategies or opinions.
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Wendy - this is really good advice! I hope my California cousins heed your warning! Great Blog!
If the lender decides to do a non-judicial forclosure then the loan is non recourse. Most foreclosures in California are non-judicial.
Joe,
Thanks for reading my blog and leaving a comment. Let me add a bit of additional clarification: If the lender conducts a non-judicial foreclosure AND the mortgage(s) meet the above criteria, they are non-recourse. You are right though, if a lender chooses a judicial foreclosure, it is a different story entirely. Proves that any homeowner facing the possibility of foreclosure should consult with an attorney that specializes in the foreclosure process!
What if the property was purchase originally as an owner occupied home, but years later, used as a rental property? The mortgages are 80/20 and neither ever refinanced. They are the original mortgages. Is this property still considered non-recourse, if it becomes an non-judicial foreclosure?
Hi Todd,
The answer will vary whether your 2nd lien is recourse or non-recourse. Generally, if the 2nd lien is recourse and you don't pay the $$ the 2nd lender is requiring to remove their right to pursue a post-closing deficiency, they can - and typically WILL - pursue you for the deficiency after the short-sale closes.
It is important to consult with an attorney who specializes in short-sale and foreclosure to determine if your loan is recourse or non-recourse under California law and to have that attorney review the approval terms provided by the lender(s). It may cost you a few hundred dollars - but could potentially save you thousands.
What about mobile homes in a park? Are they recourse or non-resource? I live in a mobile home in a park here in California, and alot of people are walking away. What will happen to them?
How about raw land that was acquired with the intention of constructing a primary residence?
wew own 2 houses, our primary resoidnece has about $200000 equity. OUr investmetn property is under water. We need to give up onthe Sacramneto investment property. Because we never lived there, & it has alwys been an "investment does tha mean it will be recouse. I guess if we have to pay taxes on it, tha is one thing, but will the bank try & get payment out of our home equity? I talked to a bankruptcy attorney & he siad we are not good candidates due to the equity in our home.