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Welcome to the call! Thank you for getting to the call early.

Today’s topic is Recourse vs. Non-recourse loans what they are, how to determine which type the homeowner has, and the whether the homeowner may be suceptable to a deficiency judgement.

This is one of the most common questions and areas of confusion we have here at HREU, so the purpose of todays call is to explain the difference between a recourse and non-recourse loan.  Also we will cover the different circumstances of a deficiency judgement, and how the homeowner can avoid one.

Before we get started, I have 1 minute of quick housekeeping items:

1.    As your coach, I expect you to be visiting the University’s blog daily.  The blog is for YOU, the students: The address is www.TimAndJulieHarris.com.  Keep yourself updated on all the latest real estate and mortgage news, especially information on short sales and reo’s.

2.    As a student at HREU you are also expected to be listening to the Daily Motivational Messages that we send to your email every week day.  There are many, many things we share with you in these messages, all of which are specifically designed to move you forward in business and in life.

3.    Don’t forget that every Friday we have a bonus to all of you, it’s the Friday Interview with a Superstar.  Listen to your daily message for the phone number so you can participate in this great series of calls!  Nearly every other Friday there IS a call, so don’t miss it! 

Great, let’s get started on the topic for today: 

Recourse vs. Non-recourse loans what they are, how to determine which type the homeowner has, and the whether the homeowner may be suseptable to a deficiency judgement 

The essential difference between a recourse and non-recourse loan has to do with which assets a lender can go after if a borrower fails to repay a loan. As a matter of principle, borrowers almost always favor non-recourse loans, while lenders almost always favor recourse loans.

In both types of loans, the lender is allowed to seize any assets that were used as collateral to secure the loan. In most cases, the collateral is the asset that was purchased by the loan. For example, in both recourse and non-recourse mortgages, the lender would be able to seize and sell the house to pay off the loan if the borrower defaults.

The difference comes if money is still owed after the collateral is seized and sold. In a recourse mortgage, the lender can go after the borrower's other assets or sue to have his or her wages garnished. In a non-recourse mortgage, however, the lender is out of luck. If the asset does not sell for at least what the borrower owes, the lender must absorb the difference and walk away.

While potential borrowers might find it attractive to hold out for non-recourse loans, it is important to remember that they come with higher interest rates and are reserved for individuals and businesses with the best credit. Additionally, failure to pay off a non-recourse debt may leave other assets unharmed, but the borrower's credit score will be affected in the same way as a failure to repay recourse debt.

California Law

Deficiency Judgment
Lenders may not seek a deficiency judgment if (1) the foreclosure is non-judicial or if (2) foreclosure is on a purchase money obligation. The same rules do not apply to guarantee or later lien holders. The lenders may seize alternative collateral. If the lender forecloses by filing a lawsuit, then the lender can obtain both a foreclosure sale order and a judgment against the borrower for a deficiency after the court-ordered sale, but only for the difference between the judgment and the fair value of the security.
Most common form of foreclosure in California is Non-judicial foreclosure. 

A nonrecourse debt or non-recourse debt or nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply paid out the difference. Thus, non-recourse debt is typically limited to 80% or 90% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan. The purpose of non-recourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in the first-loss position with these loans, not the borrower.

Deficiency Judgements – and how they work with foreclosure.  Is your state a judicial or non-judicial foreclosure state?  HINT: If the deed is held by a trustee in your state, you live in a non-judicial foreclosure state.

Judicial foreclosure

An in-court foreclosure is called a judicial foreclosure, a lawsuit with specific parameters. Again the foreclosure laws will vary a great deal from state to state. A judicial foreclosure allows the lender to institute a lawsuit calling the entire note due and requesting a court ordered sale of the property to satisfy the note

When a judicial foreclosure permits the calling of the note due, taking the property may not be enough to satisfy your debt. The lender will gain a deficiency judgment against the borrower. A deficiency judgment demands that, if the lender does not receive all amounts due them from foreclosure sale of the property, the remaining balance of the debt should be paid by the borrower. The rules and requirements of both property types and borrower actions will vary greatly by state, so competent legal counsel is absolutely necessary.

Non judicial foreclosure

With an out of court process, or non-judicial foreclosure, the process is usually handled by an attorney or a foreclosure professional. In some states, the process allows the lender to re-take the property without getting any other compensation from the borrower. Other states will allow a deficiency judgment after the foreclosure process is completed. This type of foreclosure occurs when borrower has no other obvious assets or ability to pay, when the property is worth more than the loan outstanding, or when it appears that this is the only legal option.

In general the borrower has rights to bring payments up to date, in which case, the note may not have to be paid off. In many states the borrower may also have redemptive rights after the process has occurred.

Deed in lieu of foreclosure

another way of dealing with a mortgage default that will require the cooperation of both the lender and the borrower is to transfer the property by means of a deed in lieu of foreclosure. Fast and inexpensive (legal fees), both parties agree to transfer the property to lender, avoiding the time and expense of foreclosure. Most importantly, the borrower may avoid the possibility of the lender pursuing them for a deficiency judgment.

Bankruptcy

The possibility always exists that declaring bankruptcy may be the last form of refuge in a loan default. Lenders will want to avoid such a situation as bankruptcy creates numerous delays at a considerable cost. Competent legal counsel should be sought in determining if this is the right avenue for you

With all of the alternatives discussed above, the specific rules applicable to your state will determine whether you would face the risk of having a deficiency judgment ordered on behalf of the lender. Utilize our site and the resources offered to make an educated decision as to how to proceed if you in financial distress, facing foreclosure or are in the midst of the process.

Homework:  Prepare all the items we discussed you should have in your listing preparation package.  Make copies of the items you will use over and over again; create a file for those items.  Rehearse or roles play your listing presentation with any new items and see how you would handle objections.  Practice rejecting the listing if it is not one you would take and say you are going to ask another agent-specialist to contact them. 

Closing - contact info/hreu.helpserve.com- inspirational quote from 

Woody Allen 

Eighty percent of success is showing up