Recourse Loan or Non Recourse in California?

Asked by Outsicktoday, Victorville, CA Sun Mar 21, 2010

I purchased with 20% down, then refinanced three years later for the same amount (purchase was 217,000 after the 20% down 227,000 after the refi due to the closing costs being rolled into the new loan). No money was taken out. I have now purchased a new home and I intend to rent the current one even if I have to use Section-8 to do so. My intent is not to foreclose, but it is certainly a risk. I had a phone consultation with a local attorney and they informed me that my loan on the first home is still non-recourse. I read the loan docs and the docs refer to the refinance as a purchase money loan, and nothing is mentioned about recourse. Thoughts? I keep reading contradictory information about the lenders ability to claim recourse. I keep reading about judicial foreclosures versus trustee sales. I understand about the credit hit. I have tried everything to deal with the situation I am in regarding the first home (no mod approval, nothing). Bank of America approved both loans.

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19
Ute Ferdig, Agent, Auburn, CA
Mon Mar 22, 2010
BEST ANSWER
Outsicktoday. I doubt that anyone on Trulia can give you a better answer than what you have already received from an attorney who reviewed the refi loan documents and your lender since none of us have seen the loan documents. It sounds like you just don't want to believe that your particular refi may qualify as a non-recourse loan because you have read that refinancing will turn a purchase money loan into a recourse loan. While most refi loans are recourse loans (i.e., you are personally liable), there is nothing that says that the lender has to make a refi loan a recourse loan. For the most part, lenders will want to be able to make the loan a recourse loan because it gives them extra security. In your case, it sounds like you only have one loan and you refinanced. If B of A were to foreclose and go the trustee sale route, they can't collect a deficiency whether the loan was recourse or non-recourse. The great majority of foreclosures in CA are done via trustee sale. The bank would have to proceed by judicial foreclosure to preserve the right to pursue a deficiency judgment after the foreclosure and I doubt that they would want to go through the trouble and expense of a judicial foreclosure given your loan amount.
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Outsicktoday, Both Buyer And Seller, Victorville, CA
Wed Mar 24, 2010
My hopes are low. All I want is a renter that will pay long enough for the market to come back to even. I advertized it with a sign Monday, and showed it already Tuesday to a family that already wants it. They want to sign a lease and do a deposit. Sounds like a deal to me. I'm not trying to be a tycoon.

Then BofA comes out with the principal writedown on $45,000 homes. Big deal, that amount would not help California, Florida or Nevada, let alone the rest of the country. That amounts to less than 1,000 reductions per state. Then you have to still qualify under the HAMP guidelines.

So really I should have purchased more than I could afford, not paid and then my prinicpal could have been reduced. Instead I make my payments, purchased within my means, and agonize about renting it hoping to avoid a foreclosure.

This is why my sense of what;s right and wrong does not apply in the context of economics. The bank looks at the bottom line, in terms of what results in the most $$$$ and they do that. Emotions about what they think about their lenders, what they think is fair are not considered. Borrowers that spend time worrying about these things end up at a disadvantage.

The banks fit the bill, they qualify for the diagnosis of Anisocial Personality Disorder. All corporations do. They are designed to run that way and by law have to function that way.
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James Foy, Agent, Costa Mesa, CA
Tue Mar 23, 2010
BTW, there are tax consequences in CA for a SS.
Please read: http://blog.firsttuesdayjournal.com/2010/03/california-tax-s…
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James Foy, Agent, Costa Mesa, CA
Tue Mar 23, 2010
@Ute,
No problem.
I used to love having rentals. Not so much anymore. Mostly due to changes in the legal environment and the culture of the US. Now, we have the 3.9% capitol gains tax for the new health care bill. I feel obligated to point out some of the risks to those who don't seem to be aware of the rental environment generally, and specifically the High Desert rental market.
In addition to a family that has had rentals since 1986, acquiring rentals of my own in 1997, and having a number of professional property managers and investors in my network, I was a building inspector for the City of Hesperia from 2006-2008. During that time I worked with Code Enforcement and inspected the work of many contractors who were improving houses as part of "low income assistance" programs. It was an eye opening experience. But I'm saving the stories for my book.
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Ute Ferdig, Agent, Auburn, CA
Tue Mar 23, 2010
@ James. Thanks for the traffic forecast. When I pointed out that your Section 8 comment was off topic, I honestly thought you accidentally posted it here. I felt your post would get lost on this thread. My apologies to you for misreading the situation. My intention was not to step on your toes. Like they say, the road to hell is paved with good intentions.
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James Foy, Agent, Costa Mesa, CA
Tue Mar 23, 2010
For a real off topic thread please be advised:
Both the North and South bound I-15 will be closed in Hesperia this weekend 6am-10am between Joshua and Oak Hills road for SCE overhead powerline maintenance. That is Saturday and Sunday the 27-28.
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James Foy, Agent, Costa Mesa, CA
Tue Mar 23, 2010
@Ute
My answer wasn't for Section 8 specifically, but geared toward a previous response that was along the vein of "I don't know how you could go into foreclosure if you have a renter who pays the underlying mortgage". My response was to give an example of how quickly a paying renter can turn into a non-paying renter.
Section 8 renters may be the way to go in this economy, but there are risks. TANSTAAFL.
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Outsicktoday, Both Buyer And Seller, Victorville, CA
Tue Mar 23, 2010
I appreciate all input, knowing the rules is almost the whole battle. The morality issue to me is moot when I am dealing with banks that don't make decisions based on what's right or wrong. The emotional part of the decision is a non issue for them, so it will be that way for me too.
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Outsicktoday, Both Buyer And Seller, Victorville, CA
Tue Mar 23, 2010
Thanks UTE, that jives with what I have been advised. My atty advised that I just let it foreclose, and do not do a short sale.

Does any of that change if I rent the home out and then the renters flake and it forecloses then? I would not think so, but I understand that the bank could offer a short sale in that instance and I would refuse it.
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Ute Ferdig, Agent, Auburn, CA
Tue Mar 23, 2010
I would like to add one more thing. While a lender cannot pursue a deficiency judgment after having foreclosed by trustee sale, the anti-deficiency laws do not apply if you do a short sale with the lender instead as the CA anti-deficiency laws only apply to foreclosure sale and a short sale is not a foreclosure sale. Thus, if you do a short sale, it's not enough for the lender to approve the short sale. Unless the lender also specifies in the approval letter that the remainder of the loan is forgiven, the lender can come after you for the remainder of the loan even if the underlying loan was a purchase money non-recourse loan and the lender has 4 years from when you made your last payment to decide what they want to do. Again, whether the loan was purchase money or non-purchase money does not matter. What does matter is whether the lender agrees to forgive the remainder of the loan. However, if the loan is purchase money you may have some leverage during the short sale negotiations to convince the bank to include the forgiveness language (if that's what you want) as the lender knows that they would not be able to pursue a deficiency judgment after the trustee sale unless they do judicial foreclosure which they most likely won't. If you want a 1099 from the lender, make sure the approval letter says that you owe nothing after the short sale. Don't just believe what they tell you during the negotiations as their words are not worth anything unless they are in writing. I hope that makes sense.
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Outsicktoday, Both Buyer And Seller, Victorville, CA
Tue Mar 23, 2010
James is a good cat, he can post anyplace he wants so far as I'm concerned. He's dead on about section 8, I would only use it if I HAD to. We put the for rent sign up yesterday in the afternoon and we already have a potential renter. It seems that many people are looking for rentals in newer areas that are in good shape. That surprised me, but then the market does seem to be picking up. The number of empty homes in my area is lower than last year.
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Ute Ferdig, Agent, Auburn, CA
Mon Mar 22, 2010
@ James. It looks like you posted in the wrong place since Outsicktoday's question has nothing to do with Section 8 tenants. I hope you repost in the right place. It sounds like you have experience with Section 8 tenants.
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James Foy, Agent, Costa Mesa, CA
Mon Mar 22, 2010
This answer goes to both Out and Heidi.
The way a home can go into foreclosure in the Victor Valley with Section 8 renters is as follows:
Tenant starts acting in a manner that is damaging your property, calls code enforcement out (without first calling you for repairs, and stops making payments. You start an eviction (unlawful detainer) and they use a number of legal maneuvers to forestall the eviction.

The judges (or most often Commissioner Singer) are not particularly tolerant of non-payment here, so you'll likely prevail--I advise using a professional service these days (Fast Eviction Service in San Bernardino is reasonably priced and quite competent) and you'll get your house back in 4-6 months depending on time to get your first court date.

Then you'll hire someone or do the work yourself and spend a minimum of $500, but likely $1500 (the Apartment Owners Association states $4500 for rental turnover by the time advertising is paid) on repairs, repaint and cleaning, plus the lost rent.

Section 8 renters, in general, do not appreciate the value of money, because they don't work for it. Therefore, they do not often treat properties with "pride of ownership". They tend to be professional public assistance beneficiaries. There seems to be a network that capitalizes on the various programs out there. I closed escrow on a duplex and the renter that was in there had gotten a refrigerator from one agency, move in assistance from another, and filed for FEMA money for smoke damage to her unit before moving out with a month's worth of rent due.

There are landlords out there making money from section 8. There are good section 8 renters. But my experience in the desert has been damaged units and potential renters that use some variation of "you could get more money with Section 8 and we could split the difference". As with any rental advice, I say get a full background check, criminal and credit, and learn how to read a credit report. Get the report for each adult tenant, no exceptions. I find that people who have multiple utility account delinquencies, in addition to other collections, are the riskiest clients. Also, stating that you do criminal background searches in your ads, seriously reduces the number of applicants you get. This has been especially true since LA and SF started sending it's probationers and parolees to the Victor Valley.
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Outsicktoday, Both Buyer And Seller, Victorville, CA
Mon Mar 22, 2010
I called Bank of America and they reviewed the loan note, the note says nothing about recourse.
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Brett Dunne -…, Agent, Upland, CA
Mon Mar 22, 2010
Mr. OutSickToday:

You stated you buy and sell and therefore must know several professionals in the industry. I suggest that you obtain a referral for a contract law attorney with emphases on Real Estate. Thereby, receiving the best information available for your issue.
Most Realtors do not market loans. Most all loan contracts are different in and of themselves and a professional team of lawyers wrote them. I suggest you obtain one to aid you in interpreting yours.
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Outsicktoday, Both Buyer And Seller, Victorville, CA
Mon Mar 22, 2010
I know how to read and the loan docs say nothing about recourse. The loan is referred to as a purchase money loan throughout the documents. Bank of America also stated that the loan is a non recourse loan when I contacted them directly. BofA stated that all of their loans are typically non-recourse.

I am just concerned about the rental issue with the home. If my renters flake then I could easily lose the home. The rule that every refinance is a non-recourse loan is simply not true. If I pulled money out of the home then it would make sense.

Please qualify your statements as from an attorney or just a real estate "pro". Then don't disqualify your comments Larry by trying to sell me something.
0 votes
Hannah Flieg…, Agent, Larkspur, CA
Mon Mar 22, 2010
Hi Out,

I agree with Larry who said that your loan is a recourse loan. Typically refinanced loans are recourse. If you were to walk and allow that property to foreclose, and if your lender forecloses by Non-Judicial foreclosure, they will take the property back and may try to come after you for the balance the "recourse loan" At that time you can argue that the lender foreclosed by Non-Judicial foreclosure and has no legal right. Meaning they had their one action right exercised when they foreclosed by non-judicial foreclosure.
If the lender forecloses by judicial foreclosure, meaning they foreclose through the mortgage they can take back their collateral, the property and obtain a deficiency judgment against you at the same time. Typically in California the lenders do not foreclose through Judicial Foreclosure, it's expensive and the previous owner has the right of redemption so the lenders typically do not like this method.
In your question you mention you had a phone consultation with your attorney, therefore I the attorney did not read your loan docs (just a guess) therefore, I think they may not understand that your loan is a recourse loan. I understand you did not do an equity withdrawal refinance, you refinanced to buy down the interest rate it appears. I do think your loan is recourse.
I am still confused also, that your property is rented out but foreclosure is a risk? If the property pays for itself through a tenant then a foreclosure should not be a risk. If the property is running negative of course then this might be a risk for a foreclosure but then the question is why are you keeping the property? To me I would consider a short sale before a strategic walk away because the benefit of a short sale is that you have someone to negotiate the sale for you and a short sale will cost you nothing, it's free. This way you have an option to negotiate that recourse loan and be done with the property without worry moving forward.

You could also consider a Deed in Lieu I supposed.

Good Luck!

Hannah Fliegel
The Credit Repair Expert
415-999-9348
0 votes
Boris Aivazi…, , Glendale, CA
Mon Mar 22, 2010
It’s questionable but as much I know lender are not doing anything about it since it’s your primary residence. You also want consider tax liability, more information regarding foreclosures and short sales is available at IRS.gov; “Home Foreclosures and Cancellations”. You can also visit the California Franchise Tax Board to find out more about foreclosures and short sale tax information. It is also important that you contact your CPA or Attorney for determination of tax liability. Also visit this sites for more info.

http://www.irs.gov/newsroom/article/0,,id=174034,00.html
http://www.ftb.ca.gov/professionals/taxnews/2009/July/Articl…
Web Reference:  http://www.hud.gov
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Larry Echava…, Agent, San Diego, CA
Sun Mar 21, 2010
Well California is a Non Recourse state. If you refinanced at all since you have had this loan then chances are, that you now have a recourse loan.I know the fine print and all the changes that you may seen on the loan docs may get confusing, but this is pretty much the same for all mortgage's in California, especially Bof A since they are so federally regulated.

What are you looking to do? Can you get enough to cover your mortgage in rents every month? I know this may be getting a bit personal but are you behind any payments? The reason I ask is because you may still have an option to fix your situation, or even free yourself from the burden. If you would like to discuss more in detail your options, we would like to help. We are a "local" experienced real estate consulting firm; we help hundreds of clients in the High Desert with situations like yours every day.
If you have any questions that you need answered more in detail please feel free to contact us anytime.

Thank you.
Larry@tele2enterprises.com
Tele 2 Enterprises Inc.
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