Bill's Answer:
Bills.com Resident Expert
(Note from Bill: The following is a good but brief comparison of recourse and non-recourse loans in California, and how this issue pertains to Home Equity Lines of Credit. For a more in-depth discussion of these issues, see "Is My HELOC a Recourse or Non-Recourse Loan in California?")
I think by refinancing only your second loan, you turned the loan into a recourse loan. A recourse loan is one where the lender can collect the amount you owe on a deficiency balance. A non-recourse loan is a loan that the bank can only look to their secured interest. In other words, they can only foreclose, they cannot get a deficiency judgment and attempt to collect it. Whether a loan is recourse or non-recourse varies with the state you are in.
The big mistake homeowners make is when they unknowingly turn a non-recourse second loan into a recourse loan by refinancing it. So how is a second mortgage also a non-recourse loan? Simple, in an 80/20 loan, it was "purchase money" for your home. A purchase money loan is one where the money went from the lender, to escrow, and then to the seller or to pay purchase closing costs. In California purchase money loans made on your home (note: not second home or investment properties) are non-recourse.
The mistake comes when you refinance your second purchase money mortgage. Because it is no longer a purchase money loan, a refinance transforms it into a recourse loan. That means the lender has the option of chasing you into bankruptcy collecting it. Or worse, they will sell it to a debt collector.
I suggest that you confirm the status of your second loan with your lender, and see if another form of refinance (to club both the loans) will make it a non-recourse loan.
For more information on mortgages, please visit our mortgage information page.
I hope this information helps you Find. Learn & Save.
Best,
Bill
Quinn W.
Petaluma, CA | March 27, 2012
Petaluma, CA | March 27, 2012
Dear Bill,
I had my interest rates lowered on my first loan of $455,000 from 6.5% to 3. 75% two years ago even though I had no equity in the house. I left my second alone($160,000) and did not refinance that loan. I contacted the lenders of my first loan and they said that it transformed into a recourse loan (as in a refinance). I am looking at short selling the house in California since my once $610,000 house is now worth $410,000. Will I owe the bank the difference between the purchasing and selling prices of the property on the first loan that is now recourse? What about the IRS? This is my first house and I have no money down and I have been paying interest only.
Thank you,
Quinn
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Bills.com
March 27, 2012
March 27, 2012
California' s anti-deficiency / no-recourse laws are tricky. If you refinance a California purchase-money home loan you remove the anti-deficiency protections for purchase money loans in a foreclosure. However, California's legislature created a nice exception for homeowners who agree to short sale their homes. This is found in California CCP 580e. If a California homeowner short-sells their home, they do not have liability for any deficiency balance.
Regarding the debt income issue, the federal Mortgage Forgiveness Debt Relief Act and its California counterpart apply in the situation you described.
Regarding the debt income issue, the federal Mortgage Forgiveness Debt Relief Act and its California counterpart apply in the situation you described.
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Larry C.
Modesto, CA | October 22, 2011
Modesto, CA | October 22, 2011
i own a home in california. i stripped the second with a chapter 13 bankruptcy. in the event of foreclosure or shortsale, will the line of credit turn the nonrecouse into a recourse loan.
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Bills.com
October 24, 2011
October 24, 2011
The facts you shared confuse me, and as a result I am unable to answer your question. If the "second" you mentioned is the exact same loan as the "line of credit," then you have no personal liability for this loan because, as you said, it was stripped in a Ninth Circuit Court chapter 13. (Other circuit courts may not allow a chapter 13 to strip a junior loan.) If the "line of credit" you mentioned is a separate loan, and if it was purchase money loan that was never refinanced, then it is a non-recourse loan. If the "line of credit" was not a purchase money loan, then you have personal liability for this loan.
Consult with a California lawyer who has real property experience.
Consult with a California lawyer who has real property experience.
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Kay L.
Sacramento, CA | October 17, 2011
Sacramento, CA | October 17, 2011
Hi Bill, I hope you can help answer my question... I am current on my first home which is underwater, and have just been approved for a new home loan (without needing the rental income agreement for my first home. What could happen if I shortsale or foreclose on my first home after I buy my second home?
I love my first home and thought about renting it out, but my fair is that in about 5 years my monthly mortgage will convert into principle and interest at a high interest rate and I would no longer be able to keep the house then, and I heard that the Debt Forgiveness program where you may not not have to pay taxes on your Shortsale/Foreclosed home is to expired end of 2012... Any advice or suggestions will help.
Thanks.
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Bills.com
October 17, 2011
October 17, 2011
It is true that the Mortgage Forgiveness Debt Relief Act (MFDRA) will expire at the end of the 2012, if Congress does not extend it.
As the law currently stands, if your short sale takes place after 2012, you will be required to declare as income the amount of debt that your lender forgives. There is still one way out, potentially. If you meet the IRS' definition of hardship, you can use the IRS Form 982, to avoid paying taxes on the forgiven debt.
The MFDRA only applies to one's principal residence, whereas a taxpayer who meets the hardship test of the Form 982 can avoid the taxes on any forgiven debt.
I suggest that you consult with a tax professional, to see if you can use the Form 982. Keep in mind that if you refinance your current loan, it will become a non-recourse loan, it is currently a recourse loan. Potentially being responsible for the deficiency balance is something you should consider as well. If your current loan is a non-recourse loan, before you finalize your refinance, you need to think long and hard about such factors as: how far underwater you are on the home; how likely your lender would be to try to aggressively collect on the deficiency balance; and whether you could file bankruptcy and discharge the deficiency balance.
As the law currently stands, if your short sale takes place after 2012, you will be required to declare as income the amount of debt that your lender forgives. There is still one way out, potentially. If you meet the IRS' definition of hardship, you can use the IRS Form 982, to avoid paying taxes on the forgiven debt.
The MFDRA only applies to one's principal residence, whereas a taxpayer who meets the hardship test of the Form 982 can avoid the taxes on any forgiven debt.
I suggest that you consult with a tax professional, to see if you can use the Form 982. Keep in mind that if you refinance your current loan, it will become a non-recourse loan, it is currently a recourse loan. Potentially being responsible for the deficiency balance is something you should consider as well. If your current loan is a non-recourse loan, before you finalize your refinance, you need to think long and hard about such factors as: how far underwater you are on the home; how likely your lender would be to try to aggressively collect on the deficiency balance; and whether you could file bankruptcy and discharge the deficiency balance.
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Fred M.
Truckee, CA | September 07, 2011
Truckee, CA | September 07, 2011
Bought a condo in California in 2006 - 30-year Freddie Mac mortgage of $360,000. Refinanced $350,000 balance in 2009, same bank, for lower interest rate - under Obama-sponsored program for Freddie Mac. No additional money taken out or rolled in. Condo value now down to $250,000. Did the refinance change a non-recourse loan to a recourse loan...even though nothing changed other than the interest rate? Thanks.
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Bills.com
September 08, 2011
September 08, 2011
As indicated in my original answer above, I read California law and related court cases to say that a refinanced home loan is not a purchase money loan. Only purchase money loans are covered by California's anti-deficiency rules.
What gives me pause in your question is that the change to your loan may not be considered a refinance, but instead a loan modification where the original purchase money loan was changed and not paid-off by a subsequent loan. Bring all of the documents relating to the original loan and the refinance/modification to a California lawyer who has experience litigating real property or contract law. He or she will advise you accordingly.
What gives me pause in your question is that the change to your loan may not be considered a refinance, but instead a loan modification where the original purchase money loan was changed and not paid-off by a subsequent loan. Bring all of the documents relating to the original loan and the refinance/modification to a California lawyer who has experience litigating real property or contract law. He or she will advise you accordingly.
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Anh N.
San Jose, CA | September 05, 2011
San Jose, CA | September 05, 2011
I heard that beginning in 2011, all RE 1st loans in California, regardless whether they are purchase money or refinanced, were made non-recourse by new legislations.
And since mid 2011, all 2nd loans are meade non recourse, too.
Is that true?
If so, could you give me the source of the legislations.
Thank you very much
Anh
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Bills.com
September 06, 2011
September 06, 2011
I am unaware of any sweeping changes to the California anti-deficiency legislation that you described.
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Fred M.
Truckee, CA | September 07, 2011
Truckee, CA | September 07, 2011
California SB 458, effective July 11, 2011, provided some additional relief on short sales with refinanced loans and with seconds. Unclear of how it's actually working.
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Mike S.
Concord, CA | October 07, 2011
Concord, CA | October 07, 2011
Unfortunately Arnold vetoed that legislation last year, so refinanced loans remain recourse loans.
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Mike D.
Murrieta, CA | August 24, 2011
Murrieta, CA | August 24, 2011
I purchased a home in California in 2005 . 80/15/5 type loan, Interest only. I had to vacate the home due to a job transfer . I am currently 3 months behind in payments. Both loans were purchase money and never refinanced . The lean holder on the second is Chase bank. This second loan I believe is a HELOC , but all money went toward purchase of home. They are trying to convince me to continue to make payments until the home short sales or the loan will be turned over to the legal dept. and they will come after me for deficiency.
Please advise.
Thanks
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Bills.com
August 25, 2011
August 25, 2011
Purchase money loans in California are non-recourse loans. Things get a bit tricky when it comes to HELOCs. It depends on the language of the agreement. If the HELOC closed after the sale of the property was final, since the home had already been transferred to the buyer, it could be a recourse loan under California law.
Given the complexity of the issue and the size of the debt at stake, you should speak to an experienced attorney to find out if your HELOC is a recourse or non-recourse loan.
Given the complexity of the issue and the size of the debt at stake, you should speak to an experienced attorney to find out if your HELOC is a recourse or non-recourse loan.
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Mike D.
Murrieta, CA | August 30, 2011
Murrieta, CA | August 30, 2011
The loan on the second was a home equity loan and not a HELOC. I don't know if that makes much difference. However, the deed of trust for the second loan or HEL is dated 3 days before the loan on the first. In other words the second lien or loan closed 3 days before the lien or loan on the first. I have lost a great deal of money on this home already and right now my concern is trying to get a short sale. However the lien holder on the second is trying to convince me to continue to make payments on the loan until it short sales. That could be months and a great deal more money down the drain. I am currently seeking advice from a real estate attorney on how to proceed . Might You have some suggestions of some here in Southern California. Thanks. Learned a great deal from your web sight. Mike D
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Bills.com
August 31, 2011
August 31, 2011
I don't have a recommendation to give you, but respect the fact that you are seeking one. Do you know anyone in your community or circle of acquaintances who has used the services of an attorney for similar reasons? If not, just make sure that you interview attorneys carefully. If the real estate attorney you are going to meet with is pressuring you to pay a high fee or promising something that sounds too good to be true, get a second opinion. Please report back on how things develop for you, Mike, so others can learn from your experience.
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Jim B.
Phoenix, AZ | August 02, 2011
Phoenix, AZ | August 02, 2011
I cant seem to find a definitive answer anywhere so I just joined to ask here. Are fha loans covered by the antidificiency law? I have read that they are and also that they are not and that federal laws trump state laws.
Also, I realized that my mortgage does state that there is recourse for the lender. But, if state laws in my state of Arizona can be enforced, than I believe they should trump that clause in the mortgage.
I let the ex wife take the house in divorce and she cannot refi to get my name off and if she ends up losing it down the road it just makes me sick to think that I can be sued for the deficiency when I wasnt even able to live in the dang house. We divorced 7 months after we bought it. It was my first house. Doubt the judge would take that into consideration if we ever ended up in court.
Any help???
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Bills.com
August 02, 2011
August 02, 2011
Consult with an Arizona lawyer to learn the answer to your question.
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Beverly D.
Victorville, CA | July 11, 2011
Victorville, CA | July 11, 2011
My husband purchased a home in California in 2007 with an 80/20 100% financing loan. The 2nd was a fixed loan and not a HELOC. Never refinanced. We walked away from the home and about 18 months later, the 2nd was sold to LTD financial and then about 6 months after that the 1st forclosed. On his credit report, the 2nd says "sold to another office". Now, he is receiving calls from LTD every day and they leave messages stating "they are attempting to collect a debt". I thought that because it was an 80/20 loan that was never refinanced, they were unable to come after him but the calls sound pretty threatening.
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Bills.com
July 12, 2011
July 12, 2011
Your second loan should be a non-recourse loan, as the loan was used to purchase the home.
It is also the case that a collection agent should not threaten you over a debt that is not legally owed.
I suggest that you contact an attorney that specializes in violations of the FDCPA (Fair Debt Collections Practices Act), the law that governs debt collectors. The lawyer should be able to tell you if the collector is violating the FDCPA, whether you can take action against the collector, and confirm that your loan is a non-recourse loan.
It is also the case that a collection agent should not threaten you over a debt that is not legally owed.
I suggest that you contact an attorney that specializes in violations of the FDCPA (Fair Debt Collections Practices Act), the law that governs debt collectors. The lawyer should be able to tell you if the collector is violating the FDCPA, whether you can take action against the collector, and confirm that your loan is a non-recourse loan.
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Jeff S.
Novato, CA | June 28, 2011
Novato, CA | June 28, 2011
Both my first and second are original purchase money loans, in CA, never modified or refied. At the time I bought the home we were renting, and because the new home was a model-home the developer asked for a three-month rent-back, which we gave them. We moved directly into the home at the end of that 3 months, and have lived here the last four years. This is obviously our prinicipal residence, and always has been, but could that 3-month rent-back be construed, by the lender, as an "investment property" at time of sale, and therefore be a recourse loan?"
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Bills.com
June 28, 2011
June 28, 2011
I doubt it. However, consult with a California lawyer who has real property experience to research this issue and the details of the purchase to learn a more precise answer.
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Mike S.
Fremont, CA | June 10, 2011
Fremont, CA | June 10, 2011
Is it true that even if your loan was refinanced, ie not purchase money loan, that if the bank forecloses through the power of sale (non-judicial foreclosure), then they cannot come after you after for any deficiency judgement. This is for California.
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Bills.com
June 10, 2011
June 10, 2011
In my opinion, the answer to your question is no. For a more in-depth discussion of the issue you raised, see the Bills.com resource Is My HELOC a Recourse or Non-Recourse Loan in California?.
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