Written by attorney Sean Sullivan Hanley

Real Estate Loans: Non-Recourse vs. Recourse

Non-Recourse and Recourse loans:

A lender of a non-recourse loan has to look only to the security (the Home or rental property) for repayment of the loan. A non-recourse lender has no remedy against the debtor (homeowner), meaning that the debtor faces no personal liability.

A lender of a recourse loan generally has to look to security first for repayment of the loan; however, if such security has been "wiped out" by Foreclosure of a senior loan (loan 2 and loan 3 in scenario 1 and loan 3 in scenario 2 above), the lender can look to the debtor for payment of the loan.

The following are examples of a non-recourse loan, which is a loan a buyer uses to acquire real property:

Example 1: A buyer closes escrow putting up $100,000. in cash and borrowing $400,000. from a bank to close the transaction. The $400,000. bank loan is non-recourse. The lender can only look to the security (real property) to satisfy the obligation.

In example 1 above, the home value drops to $350,000. The bank loan at that time is $390,000. The bank lender recovers the home in a foreclosure. Under no circumstance can the bank seek damages against the debtor for any deficiency between the value of the real property at the date of foreclosure and amount due to the bank.

Example 2: Another example of a non-recourse loan is when the buyer of real property purchases a home or rental property for $500,000. Buyer puts down $100,000. cash, borrows $300,000. from lender 1 and another $100,000. from lender 2. Both loans are non-recourse loans in that both were used to purchase the real property. Under no circumstances can either lender 1 or lender 2 pursue damages against the buyer if after a foreclosure the value of the real property is less than the loans against the real property.

The following are examples of a recourse loan, which is a loan secured against real propertyafter the buyer purchased the real property:

Example 1: A buyer owns a home or rental property worth $600,000., subject to a non-recourse loan of $400,000. Buyer obtains a HELOC for $100,000. six months after escrow closes.

The real property declines in value. A foreclosure occurs with bank holding the $400,000. loan acquiring real property. Since the HELOC is a recourse loan, the HELOC lender could pursue the former owner for the amount due on its loan.

Exception: There is an exception to the rule regarding a recourse loan. If the bank holding a recourse loan forecloses on its loan by using a non-judicial foreclosure process, then there is no right to any deficiency or action for damages against the buyer.

Example – Recourse Lender Using Non-Judicial Foreclosure Process: Buyer acquires property for $500,000. putting down $100,000. and borrowing $400,000. A few years later, buyer refinances its loan of $400,000. getting a lower interest rate. At this point, the original loan, which was a non-recourse loan becomes a recourse with the refinance (Be advised that SB (Senate Bill/Ca State) 1128 (May/Jun 2010) may change this). The property value declines, a foreclosure occurs by way of non-judicial foreclosure. Lender acquires the real property for less than its loan balance. Lender may not pursue the former owner for the deficiency because the lender used the non-judicial foreclosure procedure.

If the loan is non recourse, no deficiency.

If the loan is recourse, but the lender forecloses using non-judicial foreclosure, then no deficiency.

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