The question I hear a lot is “Can the 2nd lien holder come after me for the balance owed?”. The answer is “YES” in certain situations. Let me explain. In a foreclosure situation, the lender can most definitely come after you if your lien is consider “recourse” debt vs. “non-recourse” debt. The essential difference between a recourse and non-recourse loan has to do with which assets a lender can go after if a borrower fails to repay a loan. As a matter of principle, borrowers almost always favor non-recourse loans, while lenders almost always favor recourse loans. In both types of loans, the lender is allowed to seize any assets that were used as collateral to secure the loan. In most cases, the collateral is the asset that was purchased by the loan. For example, in both recourse and non-recourse mortgages, the lender would be able to seize and sell the house to pay off the loan if the borrower defaults.
The difference comes if money is still owed after the collateral is seized and sold. In a “recourse” loan, the lender can go after the borrower’s other assets or sue to have his or her wages garnished. In a non-recourse mortgage, however, the lender is out of luck. If the asset does not sell for at least what the borrower owes, the lender must absorb the difference and walk away. You may also her the term “money purchase loan”. This is the same as “non-recourse” debt. This means this is the money you used to purchase the home. If you refinanced or have a home equity line, these loans are considered “recourse” debt.
I am starting to hear from a number of colleagues that their clients are getting letters in the mail from collectors asking to begin payment of their “recourse” debt several years after a foreclosure. I think we will start seeing a lot more of this which is why it is extremely important to understand your options with a foreclosure vs. a short sale.
Senate Bill 458 (SB458) was passed in July of last year (2011) prohibiting lenders from a deficiency judgement against the first or second lien holders regardless of whether or not the debt is considered a “recourse” debt. This is a huge win for homeowners who can no longer pay their mortgage and have no other options.
For anyone considering letting their home go to foreclosure vs. a short sale, I strongly urge you to consult with an attorney and CPA. I would be glad to give recommendations if you live in the Sacramento area.
Lyon Real Estate
Serving the Greater Sacramento Area