Information on California Recourse Loan

What is the meaning of a "Recourse Loan"? I am a resident of California.

I have 80/20 loan when I first bought my home, 20 being HELOC. The following year I refinanced this HELOC with another HELOC, but with fixed rate. Does this mean this HELOC became a recourse loan in California?

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Bill's Answer
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  • A purchase money loan is not a recourse loan in California.
  • Refinancing a purchase money loan converts the loan to a recourse loan.

(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

Bills.com

79 Comments

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  • 35x35
    Jun, 2012
    jon
    I have a 1st time buyer 30 year fixed fha loan in California, never refinanced. Is this loan recourse or non-recourse? Thanks
    0 Votes

    • 35x35
      Jun, 2012
      Bill
      Here's the test in California: Was the loan a purchase money loan? If yes, then the loan is covered by California's anti-deficiency law. A purchase money loan is one used to purchase the property. If you used the loan you described to purchase the property, then it is a purchase money loan, and therefore is covered by California's anti-deficiency law.
      0 Votes

  • 35x35
    Mar, 2012
    Quinn
    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
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      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.
      0 Votes

  • 35x35
    Oct, 2011
    larry
    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.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      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.
      0 Votes

  • 35x35
    Oct, 2011
    Kay
    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.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      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.
      0 Votes

  • 35x35
    Sep, 2011
    Fred
    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.
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      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.
      0 Votes

  • 35x35
    Sep, 2011
    Anh
    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
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      I am unaware of any sweeping changes to the California anti-deficiency legislation that you described.
      1 Votes

    • 35x35
      Sep, 2011
      Fred
      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.
      0 Votes

    • 35x35
      Oct, 2011
      Mike
      Unfortunately Arnold vetoed that legislation last year, so refinanced loans remain recourse loans.
      0 Votes

    • 35x35
      Oct, 2011
      Lynda
      California SB 458 is the source.
      0 Votes

  • 35x35
    Aug, 2011
    mike
    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
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      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.
      0 Votes

    • 35x35
      Aug, 2011
      mike
      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
      0 Votes

    • 35x35
      Sep, 2011
      Bill
      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.
      0 Votes

  • 35x35
    Aug, 2011
    Jim
    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???
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      Consult with an Arizona lawyer to learn the answer to your question.
      0 Votes

  • 35x35
    Jul, 2011
    Beverly
    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.
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      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.
      0 Votes

  • 35x35
    Jun, 2011
    Jeff
    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?"
    0 Votes

    • 35x35
      Jun, 2011
      Bill
      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.
      0 Votes

  • 35x35
    Jun, 2011
    Mike
    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.
    0 Votes

  • 35x35
    Jun, 2011
    Ana
    We bought a house in Northern California for 400k. A few years later we refinanced and rolled up credit card debt+ 30k in cash for a new loan of 490k when the house was "worth" 625k. The neighborhood plummetted and the house is now worth only 260k on Zillow. Due to schools and neighborhood, we moved out a few months ago and now rent out the home we own. We have not missed any payments and our fico score is in the high 700's (783+757). Our tax bill this year was terrible because we can no longer claim the houses taxes as deductions and I make good money. 1) We want to buy another house. We qualify even without the rental income for the underwater house. 2) We will most likely never see the equity for the underwater house. 3) Should we buy a new house and then try to shortsale or foreclose the underwater house. 4) The loan balance is 479k. 108 of the original 409k refinance was for credit card and cash (it was one loan, not two,.. there is no second). If it sells for say 260,000, I am still liable for the 108 as income tax from the IRS.. but what about the rest? Is THAT recourse in california? - if recourse.. could the underwater house bank come after me and take the NEW house I just bought?
    0 Votes

    • 35x35
      Jun, 2011
      Bill
      Recourse, in this context, means the lender has the right to hold the borrower personally responsible for any deficiency balance. To over-simplify, under California law, a lender may not hold the borrower of a purchase money loan for real property personally responsible for a deficiency balance in the event of a foreclosure. (Again, this is an oversimplification, but it conveys my general point.) A refinanced mortgage/deed of trust is not a purchase money loan, and therefore is not subject to California's anti-deficiency/no-recourse rule.

      Here, you refinanced your purchase money loan. Therefore, this refinanced loan is not subject to California's no-recourse law. If the loan balance is $479,000, and the house sells for $260,000, the borrower(s) has/have liability for the $119,000 deficiency balance. If this is unpaid, the lender has the right to file a lawsuit against the borrower(s), obtain a judgment, and use the judgment to collect the amount due. If you remain a California resident, see the Bills.com resource California Collection Laws to learn more about your rights and liabilities.
      0 Votes

  • 35x35
    May, 2011
    Cheryl
    Completed a short sale in CA in 2011. Had a 1st and 2nd (80/20) loans with the same bank. Both were 'purchase money' loans for a primary residence and were never refinance (2nd loan was a HELOC taken out at the time to purchase home). I understand that SB931 CCP 580e protects CA borrowers from deficiency liability after a short sale on the 1st loan but not on the 2nd loan. Wouldn't the 2nd loan fall under the protection of CCP 580b since it was an original purchase money loan?
    0 Votes

    • 35x35
      May, 2011
      Bill
      I read 580b to cover foreclosures, and not short sales. However, consult with a California lawyer about your situation. He or she will read your short sale contract and will be able to advise you more precisely.
      0 Votes

  • 35x35
    Feb, 2011
    Adel
    If my house is in the process of foreclosure with a non-recourse loan, can I still purchase a new home(assuming I qualify, with my parents as co-signers)? Do the foreclosing bank come after me with the new house or my other assets?
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      You can still purchase a new home if you qualify for the loan. The foreclosing bank has no recourse to come after you for a deficiency balance, IF your loan is a non-recourse loan.

      If you had a recourse loan, where you were on the hook for a deficiency balance, then they creditor could pursue collections against you. Collection efforts could lead to a law suit, a judgment, and ways to enforce the judgment: wage garnishment, bank levy, and filing a lien against you.
      0 Votes

    • 35x35
      May, 2011
      William
      Bought a home in CA. in 2005.Countrywide serviced the80/20 loans that were both used to purshase the house on the same day.Lived there 5 years, The home went to shortsale last year.Bank of America took over the servicing of the loans in 2007,The home sold last fall and now a company called Real Times Resolutions accepted 3k at closing. Now they asy I owe them 67000.for the 2nd and are calling and demanging payment.Both loans used to purchase.I thought these were non recourse non deficency loans. Can ahyone help
      0 Votes

    • 35x35
      May, 2011
      Bill
      California SB 931, which became law Jan. 1, 2011 and is now Calif. CP 580e, outlaws the collection of deficiency balances on first mortgages or deeds of trust following a short sale. You have no liability for the deficiency on the first. The new law does not include second mortgages or deeds of trust. You have personal liability for any deficiency balance on a second resulting from a short sale.
      0 Votes

    • 35x35
      May, 2011
      John
      Hi. I just refinanced my 1st mortgage through the HARP program in California. Does this make my new loan non-recourse or recourse? Also, does the new law passed in 2011 in CA that does not allow lenders to collect on the difference between what you owe and what you sold the house for in a short sale apply in this case also.
      0 Votes

    • 35x35
      May, 2011
      Bill
      My guess — note that word choice — is that when a California judge is asked to decide this question, he or she will see no difference between a HARP refinance and a non-HARP refinance.

      Similarly, my guess is that a California judge will not be able to discern a legal difference in a short sale involving a HARP loan and a short sale involving a non-HARP loan.

      In other words, I do not see how California's anti-deficiency rules will treat HARP mortgages any differently from non-HARP mortgages.
      0 Votes

  • 35x35
    Feb, 2011
    Adel
    If your house is in the process of being foreclosed, can you purchase another house with your parents as co-signers on the loan?
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      If you can qualify for a loan, there is nothing improper or illegal about buying another home while in foreclosure on a current home. Because a foreclosure can result in a tax obligation or an attempt by the lender to collect on the deficiency balance, make sure that you know what you may face, so some payment that falls on you from the foreclosed home debt does not cause you to be unable to make the payment on the new home. If your parents co-sign on the new home loan, they are fully responsible for the payments, if you default and their credit rating is on the line, too.
      0 Votes

  • 35x35
    Nov, 2010
    We are in the process of a short sale of our 3 unit triplex. Chase has approved the shortsale but left in the approval letter deficiency language in it. The lawyers have not been able to get Chase to remove this language. We had a first mortgage on the place, and 3 years later re-financed the mortgage and took out cash. We are in the negative each month and can not afford the place. My question is how should be proceed? Should we sign it, and have Chase come after us for the difference or should be just go to forclosure and Chase would not be able to have any recourse. Please help. Bill
    0 Votes

    • 35x35
      Dec, 2010
      Bill
      I assume based on the context of your question that you reside in California. Chase cannot trump California's anti-deficiency law by contract if your deed of trust is subject to this law. If the loan in question was not a purchase money loan, then it is up to what you can negotiate with Chase. Talk to your lawyer about bankruptcy, and if this is a viable option for you then explain this to the Chase negotiator.
      0 Votes

  • 35x35
    Sep, 2010
    Bill
    I do not know the answer to this question. The California statute is unclear on this issue, which leaves the courts to decide the matter. I am not aware that any have (readers please chime in below with a citation). Were I your attorney, I would argue the statute applies to you because you resided in the home for more than two years after purchase. Consult with an attorney in California who has experience in real property. He or she will take the time to learn more about the facts in your situation, and will research the main issue more thoroughly.
    0 Votes

  • 35x35
    Sep, 2010
    Lauren
    "In California purchase money loans made on your home (note: not second home or investment properties) are non-recourse." I have a question about this statement. We have a 2nd on a condo (both 1st and 2nd are purchase money loans) we bought as a primary residence 5 years ago. We moved out when our family outgrew it, but couldn't sell at the time since it had loast so much value. We were forced to turn it into a rental. Does it matter that it is a rental now? It was out primary home when we negotiated and got the loan(s) I want to know if by moving out 2.5 years ago if the 2nd non-recourse loan would now have changed to a recourse loan?
    0 Votes

  • 35x35
    Apr, 2010
    Bill
    Courts generally apply the law of the situs of the property. In other words, if you buy land in State X and a case arises from that land, State X law applies regardless if you are a State Y resident. It is my understanding that Illinois is a recourse state, but consult with an attorney licensed in Illinois to be certain.
    0 Votes

  • 35x35
    Apr, 2010
    Anthony
    A California buyer buys property in Illinois, takes two purchase money mortgages and never refinances... are these loans non-recourse under CA law? Or do they go according to IL law and are recourse?
    1 Votes

  • 35x35
    Apr, 2010
    Bill
    I see bankruptcy in your future whether you choose option 1 or 2. Whether the holder of the senior deed of trust (or mortgage) hits you with a $29,000 deficiency judgment or a $290,000 deficiency judgment will be meaningless if you have no assets and qualify for a Chapter 7. Both will be discharged and you will owe zero. Of course, that assumes you do qualify, and I urge you to consult with your attorney on this matter.
    0 Votes

  • 35x35
    Apr, 2010
    Jeff
    Hi Bill, We are in the process for a short sale in Northern CA. I have a recourse loan since i bought the house in may 2005 (480k 80/20) and refinanced it 18 months after and took 20k from it. now the B of A approved the short sale but gave me 2 options. 1) no deficiency and pay 29k for 1st loan and 9k for 2nd loan. 2) 1st loan will have a deficiency notice and able to chase me if needed and 2nd loan forgiven by paying 9k. I cant do both since I dont have the money. My buyer is willing to pay the 2nd loan (of 9k) but im stuck on the first loan for a deficiency notice. I spoke to atty and told me that to try to negoiate futher and I did, but the investor is only willing to go down to 20k for the 1st loan. I was also told by my atty that if I choose to do short sale and choose option 2, they might be able to chase me for a higher amount (even if I file for bankruptcy) (which is the 1st loan) and if I do forclosure, they will only chase me for my second loan which is much lower. I am very confused on what to do, do you have any input? We are leaning towards forclosure but not sure if this would be the best way.
    0 Votes

  • 35x35
    Apr, 2010
    Bill
    If both loans were purchase-money loans and were never refinanced, then you have non-recourse loans. If the loans are non-recourse you can walk away from the property and assuming the foreclosure results in a deficiency balance, the banks holding the junior and senior deeds of trust cannot sue you for the deficiency. However, if one or both of your deeds of trust were not purchase money loans or were refinanced, then the bank can receive a deficiency judgment. The key question for you is determine if the loans are non-recourse.
    0 Votes

  • 35x35
    Apr, 2010
    Ned
    Hi Bill, I have an 80/20 loan on my home in CA that I purchased in late 2005. It has never been refinanced (althought the 1st did a remodification a couple of years back to avoid an increased interest rate from a 2 year ARM) and are the original purchase loans. I believe both loans are owned by the same bank. My wife and I no longer want the house and I'd like to know if I can just walk away without being liable for the 1st and 2nd. The creditor keeps calling me wanting to set up a type of forebearance agreement. But, it seems if both loans are non-recourse that maybe I should just let them foreclose?
    0 Votes

  • 35x35
    Apr, 2010
    Bill
    Your question dances around whether the new set of loans was a refinance. Was the new set of loans a refinance? If yes, then you converted your purchase money, non-recourse loan into a recourse loan. If there was a transaction where you and the other owner sold the property to a strawman buyer, who then sold the property to you, then you have an argument for the second set of loans being non-recourse.
    0 Votes

  • 35x35
    Apr, 2010
    Patrick
    I purchased a condo in California with another person with a 1st and 2nd loan. The loan was paid off and a new 1st and 2nd were taken out in just my name. Does this clasify as a non-recourse turning into a recourse?
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    That is very interesting information. Thank you for sharing it.
    0 Votes

  • 35x35
    Mar, 2010
    Miguel
    I have just confirmed with GMAC that the loan before and after Loan Modification is Non Recourse Loan. I need to ask if this should be mentioned in any mortgage paper I had signed or if it is due to CA law. Anyway, Thanks for the reply.
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    I am unaware of any case law indicating whether a modified loan is recourse or non-recourse in California. I would argue that because the parties to the loan are the same, the property is unchanged, only the principal is altered, the purpose and intent of §580(b) is not violated by allowing a modified loan to be subject to the rule. However, I am not a appellate or supreme court judge, and my opinion and $3 gets you a cup of coffee. Readers, if you know of any case law regarding this issue please share it here.
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    I am unclear on the chain of events you described. A refinanced loan is not covered by California's anti-deficiency laws. It is unclear to me if modified loans are or are not. Read Is My HELOC a Recourse or Non-Recourse Loan in California? for an exploration of California's anti-deficiency laws.
    0 Votes

  • 35x35
    Mar, 2010
    Miguel
    We had Loan Modification and Short Refi in 2009. We are located in CA and we came across your web site during the research on 1099-C and recourse/non recourse subject, and the impact on income tax. And I am little bit confused and I would appreciate for help to understand it. 1. So when we bought the home in CA, that was 30ys fixed rate, for state CA it is Non Recourse Loan by law. Correct? 2. With he modified loan, we had a new mortgage based on FHA loan's terms, and the difference of amount of home value that was decreased and initial mortgage was written off by the loan company (GMAC). And in the note it doesn't mention either as Recourse or Non Recourse, but the 1099-C was issues with the box #5 as Yes (which I found out it meas Recourse Type). 3. If it is Recourse, does this mean that later in the future we have to pay back the amount that is shown in 1099-C or amount that was writen off by loan company? I would appreciate for your help, the research had started due to imapct on CA State Income tax but more research I do more questions I have wiht more concern when everything is alrady done.. Thanks again.
    0 Votes

  • 35x35
    Mar, 2010
    Miguel
    Hi, the loan is not HLOC. This is the seq: 1. Bought home in 2005 with 30ys fix rate with GMAC, home located in CA. 2. In 2009, due to decrease of home value for more than 50%, I had Loan Modification with the same lender GMAC, for which GMAC has written off the difference between home value and initial loan. 3. As a result, we had modified loan based on the new home value. Now should this be Non Recourse or Recourse, here is where I am confused. The loan's note doesn't specify as such. Thanks again.
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    Read Is My HELOC a Recourse or Non-Recourse Loan in California? for an exploration of California's anti-deficiency laws. Whether the loans are serviced by one or two banks is immaterial to an anti-deficiency analysis.
    0 Votes

  • 35x35
    Feb, 2010
    Mike
    I have a HELOC taken out (home in CA) at the time of purchase to buy our house. We have not refinanced, but did take a loan on the equity line. As I understand it - our HELOC is non recourse in CA as it was to taken to purchase the home making it a "purchase money" loan. Does the loan we took affect the non recourse nature? More speciffically, if we foreclose - can the lender seek judgement on the HELOC? Another point - the same lender owns the first and second - if that matters.
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    Read Is My HELOC a Recourse or Non-Recourse Loan in California? for an exploration of California's anti-deficiency laws. I am not aware of any requirement in California law that lenders must disclose that refinancing removes the consumer's anti-deficiency protection.
    0 Votes

  • 35x35
    Feb, 2010
    JohnH
    I purchased a home in 2003 in California as my primary residence. It is a condominium project. I took out a loan with Wells Fargo Bank and two years later they solicited me to refinance at a lower rate. I did so. I did not take any money out and the lender stayed the same. In your opinion did I turn the loan into a recourse loan?? Don't they have some obligation to disclose that?? Thanks for your answer. JohnH.
    0 Votes

  • 35x35
    Jan, 2010
    Bill
    You are not quite accurate when you write "a non-judicial foreclosure precludes any deficiency judgment." Oh, were it so that California law was so simple. Alas, it is not. The fact that the document says "deficiency balance" on it does not tell me that a deficiency balance is allowed or not allowed under that contract. Contracts can be negotiated. Take the short sale contract to an attorney who has experience with real estate law or contracts, and ask him or her to review the contract.
    0 Votes

  • 35x35
    Jan, 2010
    Frank
    I'm in the process of a short sale in California. The first lender(non-recourse) has agreed to give the 2nd lender (recourse loan) 10%. However, the 2nd lender has added "deficiency balance" to the release forms. Will Chase (2nd lender) be able to file a judgement against me? Will an acceptance of 10% by Chase automatically release me from further actions despite what they write in the release contract and have me sign? I am researching my options and have found that a non-judicial foreclosure precludes any deficiency judgment. Does that mean it's better for me to let the property foreclose? This is all very stressful. I would greatly appreciate your help in this matter. Thank You.
    0 Votes

  • 35x35
    Jan, 2010
    Bill
    No, it would take an especially hard-nosed judge to require that you be tossed out of the foreclosed residence by the sheriff before you would be considered a resident elsewhere. If you have some documentation to show that you changed your residence after the foreclosure process is underway then your place of residence should not be an issue.
    0 Votes

  • 35x35
    Jan, 2010
    Pam
    We had a vacation/retirement home when we purchased our current primary home in Nov 2004. Both homes are located in California. I have lost my job and now upside down on my primary residence. We did a 80% 5/1 libor loan with 20% of our own money down. If we let this home go into foreclosure and move into our retirement home, is this a nonrecourse loan. I know that in order for a nonrecourse loan, it has to be the primary. Do I give up the primary status if I move to my other home while home is going through foreclosure?
    0 Votes

  • 35x35
    Oct, 2009
    Bill
    My answer assumes the property is in California, based on the context of your question. If you are asking about a property outside of California, then disregard the following because California's rules are irrelevant to you. First, please read Is My HELOC a Recourse or Non-Recourse Loan in California? Walk through the article I mentioned to see if the mortgage in question is a a) "purchase money" loan, b) for a primary residence, c) not refinanced. Second, it is my understanding that by definition a short sale forgives the deficiency balance. If this is not so, then the lender is using its own definition of short sale. Also by definition, a short sale is a voluntary agreement in which the borrower agrees to maintain and sell the property in exchange for the creditor not foreclosing. I should not be surprised to learn that different mortgage companies are writing their own short sale rules. Third, I believe your central questions are, "Can creditors require debtors to waive their non-recourse rights?" and "Can non-recourse rights be waived legally?" I have not been able to determine if these questions have been litigated in California.
    0 Votes

  • 35x35
    Oct, 2009
    Joel
    Hi Bill, i am in the process of short sale and got the approval for both banks. My primary lender Bankunited will issue a 1099C while 2ndary lender BOA will proceed with $80,000 collections besides the $18,200 they will get from this short sale. I started escrow this week. I never refinanced. How can i fight off this collection? If this is a law, why do banks still pursue deficiency? What proof do i need to show the bank that this is a non recourse loan so they will not pursue collection of deficieny?
    0 Votes

  • 35x35
    Sep, 2009
    Bill
    Cal. Code Civ. Proc. § 580b reads in part, "No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser." (Emphasis added.) I read 580b to limit non-recourse loans to primary residences, and not investment properties. For more analysis of this issue, see Is My HELOC a Recourse or Non-Recourse Loan in California?.
    0 Votes

  • 35x35
    Sep, 2009
    joey
    Investment property purchase money & seconds in CA are recourse or non-recourse loans?
    0 Votes

  • 35x35
    Sep, 2009
    Bill
    Under California law, a lender cannot pursue a borrower for a deficiency balance resulting from a first mortgage used to purchase a primary residence. (Cal. Code Civ. Proc. § 580b) 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. Second mortgages may or may not be recourse loans under California law. If the second mortgage was taken out at the time of sale and was used as purchase money loan then it is a non-recourse loan. However, if the second mortgage was financed after the initial purchase of the property and is on a second deed, then Section 580b does not apply. To your question, if the home equity line of credit (HELOC) was not used as a purchase money loan used to buy the property, then it is considered a recourse loan under California law.
    0 Votes

  • 35x35
    Sep, 2009
    Jenny
    We purchased a home in 2004, then took out a HELOC in 2006. The property is now foreclosed, located in CA. Would the HELOC be considered a recourse or non recourse in your opinion?
    0 Votes

  • 35x35
    Jul, 2009
    Bill
    Your note is subject to the laws of your state, unless otherwise permitted and articulated in your contract. It's possible the lender didn't bother to spell-out the recourse/no-recourse terms because they are well defined in your state, although I would find that unusual because this is such a key condition. Given that you are in foreclosure, calling your creditor and expecting accurate legal advice about this matter may be too much to ask. Either look at your state government's Web site for your recourse rules, or ask an attorney in your state who specializes in property issues.
    0 Votes

  • 35x35
    Jul, 2009
    James
    I also refinanced my second into a better rate, received no cash out proceeds. The home was lost in foreclosure. I have reviewed the note in full and see no language regarding recourse beyond foreclosure yet the lender did sale the loan to a collection agent. Wouldn't the note have listed the collection terms open to the lender?
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    Probably so. To be non-recourse, the loan needs to be a purchase money loan, meaning the first loan that you took out to buy the home. The moment you refinance any of the purchase money loans, you turn the loan to a recourse loan.
    0 Votes

  • 35x35
    Feb, 2009
    judi
    I purchased my home in 2005 with a subprime loan. In 2006 I refinanced to a fixed rate and had to pay $8000 in prepayment penalty. I added that penalty to my loan and paid the closing cost out of my pocket. Is this consider a recourse loan? I was told by a few people that this was consider a recourse loan.
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    No, bankruptcy will protect you from creditor action. What I meant to say was that when a loan turns recoursable, the lender might pursue aggressive collection tactics that might make you consider filing for bankruptcy.
    0 Votes

  • 35x35
    Feb, 2009
    Randy
    In regards to the recourse HELOC, you say, "the lender will chase you into bankruptcy collecting it" Does that mean they can collect it if you do file bankruptcy on just the HELOC but not the first loan?
    1 Votes

  • 35x35
    Aug, 2008
    Bill
    These recourse laws vary from state to state, so yes, the best place to check would be on your contract. If the wording on the contract confuses you, I would suggest that you get on the phone with your mortgage lender to clarify the same.
    0 Votes

  • 35x35
    Aug, 2008
    imad
    Irefinanced my loan after 2 years (RM) to 3/27 (RM) and took $15000. out, does that make the loan recourse? how I will know if it is? Would it say in my contract?
    2 Votes