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Which states have non-recourse mortgages?


By Patrick   Follow   Tue, 30 Oct 2012, 1:51am PDT   6,548 views   20 comments
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"Non-recourse" means the bank cannot come after your personal assets when you default on your mortgage. They can take only the house, unless you refinanced and gave up your non-recourse status.

Here's an initial list of non-recourse states I found:

Alaska
Arizona
California
Connecticut
Florida
Idaho
Minnesota
North Carolina
North Dakota
Texas
Utah
Washington

Is this correct? If so, then most states seem to be recourse states.

Comments 1-20 of 20     Last »

CaptainShuddup   Tue, 30 Oct 2012, 2:53am PDT   Share   Quote   Permalink   Like   Dislike     Comment 1

The lady that did our title search and stamps, told us the terms on our mortgage was one of the best she ever saw. Of course this was in the height of the "My God somebody do something!" phase of financial reform climate. She advised us not to ever refi. She said the odds that all of the provisions that was included in our mortgage to protect us, would not be included in a refi.

No Late Fees
Rate may never increase regardless of payment history
Non recourse
Just straight up either make the payments or get foreclosed. Which also had a more than fair amount months being late, before they can foreclose.

BayArea   Tue, 30 Oct 2012, 4:10am PDT   Share   Quote   Permalink   Like   Dislike     Comment 2

Patrick says

They can take only the house, unless you refinanced and gave up your non-recourse status.

Can someone elaborate on this? I've refinanced in CA. Refi closed on Jan 1, 2010 with Wells Fargo. Are you saying any refi in CA loses non-recourse status?

pkennedy   Tue, 30 Oct 2012, 4:20am PDT   Share   Quote   Permalink   Like   Dislike     Comment 3

Any legal professional in any state will make sure you get a non recourse action I'm sure. If not, bankruptcy will get rid of it. I'm sure negotiating and/or having a lawyer involved will ensure you get the necessary protection as well. A simple "We're short selling this, you're accepting it as full payment mr bank, will you accept?"

curious2   Tue, 30 Oct 2012, 4:21am PDT   Share   Quote   Permalink   Like   Dislike     Comment 4

California can be complicated:

http://www.avvo.com/legal-guides/ugc/california-residential-foreclosures--how-to-determine-whether-your-loan-is-non-recourse-or-you-will

Also in some states the lender has a choice between quick non-recourse foreclosure and full recourse contract litigation. A rational self-interested lender would choose quick non-recourse foreclosure against a person who has no other assets besides the house, or full recourse litigation against a person who has other assets that can be seized. A sprawling TBTF bank, which is by definition too big to manage, will do whatever is in the interests of the individual executives and independent contractors making the decision, e.g. an aggressive foreclosure mill that profits from foreclosures will choose that route, and who knows if there might be kickbacks to the executives.

There can also be tax implications:

https://www.ftb.ca.gov/professionals/taxnews/2009/July/Article_9.shtml

Also, in short sales, some lenders may try to sneak in a clause making the borrower personally liable. Borrower beware.

EBGuy   Tue, 30 Oct 2012, 4:30am PDT   Share   Quote   Permalink   Like   Dislike     Comment 5

Are you saying any refi in CA loses non-recourse status?
Short answer: Yes (although some will contest this if its with the same lender).
But as curious2 pointed out, banks will almost always chose non-judicial foreclosure proceedings in CA. Because of the one action rule, banks can't come back for a deficiency judgement. Note that this does NOT apply to unsecured seconds or HELOCs.
I've never (in my limited experience) seen a SFH that has gone the judicial foreclosure route. So practically speaking, the mortgage will effectively be foreclosed like it is non-recourse.

IANAL. YMMV.

BayArea   Tue, 30 Oct 2012, 6:19am PDT   Share   Quote   Permalink   Like   Dislike     Comment 6

Interesting... ya, I don't think contract litigation would be too favorable for the banks in this case.

Regarding the refi, I just spoke to someone at the IRS who indicated that typically a normal refi won't change the recourse status *unless* it's a cash-out refi (equity line of credit).

I'm still not completely clear on how this plays a role when it comes to income tax of the debt relief. I guess that's where the Debt Forgiveness Act comes that I will have to read up on further.

lostand confused   Tue, 30 Oct 2012, 6:40am PDT   Share   Quote   Permalink   Like   Dislike     Comment 7

I also heard that if you have a HELOC loan in CA, the bank can come after you for that portion of the loan?

BayArea   Tue, 30 Oct 2012, 10:33am PDT   Share   Quote   Permalink   Like   Dislike     Comment 8

lostand confused says

I also heard that if you have a HELOC loan in CA, the bank can come after you for that portion of the loan?

Apparently it depends...

The Professor   Tue, 30 Oct 2012, 11:45am PDT   Share   Quote   Permalink   Like (1)   Dislike     Comment 9

There is a special place for HELOC abusers.

rootvg   Tue, 30 Oct 2012, 12:54pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 10

lostand confused says

I also heard that if you have a HELOC loan in CA, the bank can come after you for that portion of the loan?

That is my understanding.

You'd better never walk away from a house in Ohio. Those bastards will chase you to the end of the earth.

Dan8267   Tue, 30 Oct 2012, 3:39pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 11

Patrick says

Is this correct? If so, then most states seem to be recourse states.

Most states are recourse states, but your list is a bit off. Florida is definitely a recourse state as many fool buyers are finding out.

http://loans.org/mortgage/questions/difference-recourse-states

http://www.bookofjoe.com/2011/11/strategic-default-and-nonrecourse-states.html

Dan8267   Tue, 30 Oct 2012, 3:42pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 12

So, Patrick's list - Florida + Oregon.

E-man   Tue, 30 Oct 2012, 4:05pm PDT   Share   Quote   Permalink   Like (1)   Dislike     Comment 13

Bay Area,

Non-recourse means the bank cannot sue you and go after your assets regardless how much you're worth. Also, there is no tax consequences. If your house is short sold or foreclosed, you're not on the hook for the difference/deficiency.

IIRC, the answer above from the IRS agent is correct provided it was a refinance with no cash-out.

Recourse means the lender can sue you & go after your assets if you're a high networth individual. Also, you're on the hook for the deficiency, and there is tax consequences. Say you owed $500k on the house & it was sold for $300k. The IRS will consider you have $200k of earned income for that tax year not including your salary yet. This is not the case for a non-recourse loan. 2007 Debt Forgiveness Act was intended to forgive this "not" earned income as indicated above. You still get a 1099 from your lender for $200k, but it's not a taxable event.

That's how I remember it when I read it in 2008. I'm not a CPA, but I know a little bit about the IRS tax code.

SkyPirate   Wed, 31 Oct 2012, 1:39am PDT   Share   Quote   Permalink   Like   Dislike     Comment 14

Interesting. I thought the majority of states were non-recourse but clearly it's the opposite.

Now the real question: When will banks start pursuing recourse? There is probably some statue of limitations and the wave of foreclosures have been going on for years... if they have any intention of doing this, shouldn't we start to see this now? They could even sell the claim to collections agencies.

Dan8267   Fri, 2 Nov 2012, 2:20pm PDT   Share   Quote   Permalink   Like   Dislike     Comment 15

SkyPirate says

Interesting. I thought the majority of states were non-recourse but clearly it's the opposite.

I don't think the vast majority of people even knew about non-recourse states before the bubble burst. Now that people know about them, the knowledge of that risk is going to decrease demand for housing especially on leverage.

iwog   Fri, 2 Nov 2012, 3:31pm PDT   Share   Quote   Permalink   Like (1)   Dislike     Comment 16

BayArea says

Can someone elaborate on this? I've refinanced in CA. Refi closed on Jan 1, 2010 with Wells Fargo. Are you saying any refi in CA loses non-recourse status?

California has an anti-deficiency statute for all liens against real property. The bank cannot collect the balance of the loan after a foreclosure.

Robe   Sat, 2 Feb 2013, 8:36am PST   Share   Quote   Permalink   Like (2)   Dislike     Comment 17

I had two houses foreclosed in Texas in 2008 through bankruptcy judgements. Chase bank has been pursuing the second mortgage promisory notes past the statue of limitations period. Does this mean losing my nonrecoarse status makes me vulnerable to a forever deficiency judgement the bank has sold to collectors.?

TechGromit   Sat, 2 Feb 2013, 9:06am PST   Share   Quote   Permalink   Like   Dislike     Comment 18

E-man says

Also, there is no tax consequences. If your house is short sold or foreclosed, you're not on the hook for the difference/deficiency.

You might not be on the hook for the money the bank lent you, but your still on the hook for taxes on the "forgiven" debt.

E-man says

Also, there is no tax consequences.

Maybe state taxes, but state laws do not extend to the federal level. So expect to pay federal taxes on forgiven debt. There was a temporary wavier issued by congress on forgiven debt, but this has since expired.

E-man   Sun, 3 Feb 2013, 1:48am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 19

@TechGromit,

The debt forgiveness was extended to 12/31/2013 so no federal taxes to pay. I believe the states will follow. Regardless, it's a huge tax bill that the underwater home loaners don't have to pay. That's a huge monkey off their back. That's the beautiful thing about this country, our system will always give people a second chance, then 3rd, then 4th..........

Cheers.

TechGromit   Sun, 3 Feb 2013, 8:32am PST   Share   Quote   Permalink   Like   Dislike     Comment 20

E-man says

That's the beautiful thing about this country, our system will always give people a second chance, then 3rd, then 4th..........

I guess dodging obligations is no longer immoral, but perfectly legal too.

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