What happens next after your lender takes possession of your home in a foreclosure or short sale? It depends if your mortgage is a non-recourse or recourse debt. Under a non-recourse mortgage, the lender is generally refrained from taking any action after seizing the property. A recourse mortgage, on the other hand, allows the lender to seek legal action to recover what you owe if the sales proceeds are not enough to cover the entire loan balance.
Whether you are personally liable to the loan and the extent of the lender’s actions depend on the state where you live. Among these states, exact regulations vary on recourse and non-recourse debts.
Deficiency Balance and Non-Recourse or Recourse Debt
After you ultimately defaulted on your loan, the lender will foreclose on the property. In cases when the sales proceeds won’t be enough to pay off your outstanding balance, you incur a deficiency balance. At this juncture, the lender’s actions will take a different turn under a non-recourse or recourse debt.
Scenario 1: Non-Recourse Debt
If your mortgage is non-recourse, your lender will sell your home and use the funds from the sale to pay down your debt. It can’t do anything to recover any deficiency from you. But not all mortgages on non-recourse states are conferred a non-recourse status.
Generally, the non-recourse status is given to mortgages used to purchase the home or first mortgages. If you take out a new mortgage to refinance, do a cash-out transaction, or a home equity line of credit, thus called second mortgages, their status would be a recourse debt.
Notwithstanding the lender’s inability to recover the deficiency balance in non-recourse states, some of these states allow lenders to collect a portion of the deficiency balance, subject to limitations. For example, a non-recourse state may permit the lender to collect the difference between the home’s current market value and the mortgage’s outstanding balance.
Scenario 2: Recourse Debt
If you have a recourse debt, your lender can pursue legal remedies to collect the deficiency balance and costs, if any. The process is called deficiency judgment and the amount can be recovered in the form of:
- They can put your account into collections. It’s either your loan is sold to a third party collections agent or transferred to your lender’s internal collections department.
- They can seek a wage garnishment. This is when a portion of your monthly pay is deducted to go towards your debt until it is fully repaid, pursuant to a court order.
- They can levy your bank accounts or assets. Subject to a deficiency judgment, the lender can seize any of your property, even if it’s not pledged to the loan, whose sales proceeds will be applied to your debt.
Still, non-recourse states put limits to what actions a lender can pursue to collect any amount owing. Some non-recourse states adopt a one-action or foreclosure first policy. Do note that each state has its own rules on non-judicial and judicial foreclosures. And that states can differ in classifying a foreclosure or short sale as one action.
Of Recourse and Non-Recourse States
States can’t easily be categorized as recourse or non-recourse states. An OLR Research report in 2010, as revised in 2011, recognized that almost all states allow for deficiency judgments with many states putting in place conditions for those judgments and the maximum amount lenders can recover from borrowers.
Per the study, these 10 states are generally classified as non-recourse states for residential mortgages based on NCLC data. They are Alaska, Arizona, California, Hawaii, Minnesota, Montana, North Dakota, Oklahoma, Oregon, Washington, and Nevada for mortgages obtained on or after 1 October 2009, according to the report.