Refinancing and Recourse vs. Non-Recourse Loans
My blog entry from September 5, 2008 on the differences between recourse and non-recourse loans generated lots of interest and questions. The most asked question on everyone’s mind is can a non-recourse loan become a recourse loan. In my research I have found the answer to be, yes.
Let me say that I am not an attorney or tax account and do not claim to be one. Nor am I an expert on the many types of financing instruments available. My original blog entry was provided by an attorney and my follow-up information below has not been reviewed by a “qualified” person.
Our discussion here pertains generally to loans used in the purchase of residential (single-family, owner-occupied) real estate. There are many different types of loan vehicles used in the commercial real estate arena, which could be either recourse or non-recourse. There really is no standard, but rather terms that are determined by the lender on a case-by-case basis.
A non-recourse loan is a loan where the lender can only look to the secured-interest of the real estate in satisfying a deficiency judgment. What this means is in a foreclosure a lender can only look to the property in satisfying any shortfall in the loan amount and the final auction or sales price. With a recourse loan, a lender could pursue a borrower’s personal assets in satisfying any shortfalls.
Typically, in California a loan that is made on a purchase where the funds come from a lender, go into an escrow and are distributed to the seller or seller’s lender are non-recourse. So, a purchase loan of 80% and a purchase money second of 20% would both be non-recourse because the funds would go to the seller either to pay-off their mortgage as part of the purchase or into their pocket.
If a borrower was to refinance the first mortgage of or refinance the second, if he or she had equity, and pulled the equity out of their home with a HELOC (Home Equity Line of Credit) then these funds would be recourse because they were either not used in the initial purchase or the funds were available directly to the borrower.
When in doubt review the deed of trust of your current loan and when refinancing or obtaining a HELOC ask the lender if your new loan will be recourse or non-recourse. I have not heard of a borrower requesting a recourse-refinance loan be changed to a non-recourse refinance loan. I am not saying a lender would or would not comply, I just never had requested it myself or had a client that did. However, I had clients in the commercial arena who requested a recourse purchase money loan on a commercial property be revised to a non-recourse type loan and was able to have their request satisfied because the lender felt the property was sufficient in satisfying any potential deficiency judgments in the future.