Monday, March 17, 2008

Recourse of Course

In a fit of procrastination, I did a little research on the whole "recourse" issue. From what I had gathered, California is a non-recourse state. Meaning, the bank can't go after all your stuff, if your house doesn't fully satisfy the debt you owe the bank in a foreclosure.

However there appears to be an interesting twist to all this. According to the CA Franchise Tax Board, loans can become recourse if they are not made with purchase money. In other words, if you refinance your home, it is now considered to be recourse debt. The bank can get a deficiency judgement against you and go after all the goodies you bought while you weren't paying your mortgage.

So now I am wondering if all this seemingly charitable activity the banks have been reporting, "working out the terms of the loan with the borrower" is just a ruse to make the loan a recourse loan. You refinance to a lower rate, and can now "manage your payments" for a bit, and unbeknown to you, the bank now has recourse to seize the hummer you bought while being foreclosed on.

Please keep in mind this is all purely uneducated speculation on my part. But if I were a bank with a non-recourse purchase loan in California, I would do what I could to get my borrower to refinance and turn it into a recourse loan (and what do you want to make a bet, this recourse info is buried on the back of page 12 in fine print).

If I am reading all this correctly, I don't think I want to purchase with the idea of refinancing later when rates go down.

12 comments:

Mystere said...

Whoa, BT. There's no conspiracy by lenders dupliciously to cause borrowers to refi, and then to seek recourse following such borrow's default under the refi loan.

The *vast* majority of foreclosures in CA and conducted via non-judicial sale, which generally bars lenders from thereafter seeking a deficiency judgment. Lenders knowingly make this tradeoff, recognizing that it would be folly to pursue impoverished borrowers through a judicial sale, incurring the significant costs and time delay along the way, in order to seek a deficiency judgment. The borrowers typically are, after all, judgement proof.

You did mention that you're uneducated on this and speculating. So, I'll give you a mulligan on it.

Buying Time said...

Yup, just idle speculation. I have a very active imagination, and am big on conspiracy theories.

I am also speculating you are an industry insider from previous posts. You seem to have access to data that average folk do not. I don't mind you talking up the market, but full disclosure is appreciated (particularly if you make your livelihood selling RE).

(BTW - enjoying the colorful terminology...mulligans and muppets =)

Mystere said...

Well, BT, you're 0 for 2 on speculation.

No, I'm neither a realtor nor a developer, and I don't otherwise make my livlihood selling RE. If only I had a nickel for every time someone on these blogs has undertaken to cast the scarlet word of "Realtor!" on me.

I'm just a person who will challenge those that I perceive to exaggerate things. I did the same thing on the way up. It's ironic to me to see on the way down a similar kind of self-righteousness and, at times, disdain from those aghast at anyone who gives any semblance of not signing on to the party bandwagon. The groupthink I see at times along the lines of prices will drop forever and go to zero (and beyond!) and the ridicule of the misery of others that were foolish or unfortunate enough to have been caught up in the bust isn't something for which I have an affinity.

And no, I don't think of you that way; I believe you're just trying to figure things out, etc. You're barking up the wrong tree, though, with the refi/foreclosure/deficiency judgment conspiracy theory.

anon1137 said...

The English grammar police flagged this term: dupliciously.

Gwynster said...

duplicitously?

/teases 1137

BT,

I think we talked about the whole recourse/non recourse debacle a while back and patted the refi issue around. But I don't think we brought it up in the context of the new bailout programs.

I don't think there is a conspiracy afoot just because I don't think the powers that be are that bloody smart.

But if you think of the REIC setting people up in loans guaranteed to fail and where they would need to refi to save their financial skin - wow that is some kind of genius. The people who should be nerveous are the serial refiers and second and third home speculators. They should be afraid, very afraid.

ps. still waiting for Jim Wasserman to come back with an explaination of the examples of TDs back to the bank being counted at arms-length sales to investors on his blog.

sacramentia said...

recourse is a non-issue to me because I will liquidate anything of value by the time I default on a loan.

How about those mortgage rates today?

Buying Time said...

Regarding Recourse - Paul set me straight on this, informing me of the "on action rule". He is a fount of knowledge on the legal spiegal (and much more).

Regarding Mystere's profession - You have to remember, me and other buyers have had some really bad experiences. It got to the point where I didn't feel there was anyone I could turn to who would look out for my best interest hence I turned to the data (luckily there are some very smart folks on this blog who earned my trust). So I am just very very cautious regarding folks who makes money if I purchase a home. Not saying the only people bullish on the market are Realtors. And not saying al Realtors are evil. I just like to know if there is a conflict of interest.

Regarding the TDs - Gwynster I would be thrilled if we get an answer on this. In the past I don't think it really mattered cause there were so few. But now that they are plentiful, especially when compared to total sales, it could seriously compromise DQs data.

Max said...

ps. still waiting for Jim Wasserman to come back with an explaination of the examples of TDs back to the bank being counted at arms-length sales to investors on his blog.

Yeah, I think DQ's methods are somewhat questionable. If they're doing a strict tax address vs actual address comparison, they're losing all of the "live-in" investors, as well as tax/loan cheats who mask their property usage by continually forwarding their mail (Like my landlord. FYI, when you file a change-of-address, they mail a card to the old address as well. I'm on to you! :)

Where DQ fails is we don't really care if the owner thinks of himself as an investor, we only care about the market behavior of that owner. That's why I've been using the 2-year resale window as an approximation for investor determination.

duncan6894 said...

BT,

Technically, the "one action rule" is associated with the first and the second though. If a bank refi's the first and the second, the second can become recourse. If the payments aren't made, they can foreclose on the first, and get a deficiency judgment on the second.

I think.

PeonInChief said...

Whether or not a loan is recourse/non-recourse is irrelevant to the one-action rule. Even if the loan is a a recourse loan, the lender has to decide whether the do a judicial (which allows a deficiency judgment) or non-judicial (which doesn't allow a deficiency judgment) foreclosure. Most lenders choose non-judicial foreclosure because it costs less money and takes less time. A judicial foreclosure will take more than a year and cost pots in attorney's fees. In addition the foreclosee (is that a word?) has a year after the judicial foreclosure to redeem the property, so it can't be sold for a year after the judgment. And while the holder of the second mortgage could go for judicial foreclosure, the cost of the proceeding is often greater than the loan amount, so it's not worth the trouble.

PeonInChief said...

And one other thought: in a judicial foreclosure, one issue that might come up is fraud on the part of the broker and/or lender. Many lenders wouldn't want that coming up in a judicial proceeding.

Mystere said...

Y'all are incorrectly referencing California's one-action rule.

The one-action rule deters a lender from suing for an in personam judgment on a note secured by real estat prior to foreclosing on the lien encumbering the dirt. If the lender does bring the judicial in personam action first and obtains a judgment on the note before foreclosing the lien, then the lender forever is barred from foreclosing the lien (*poof* the lender just became an unsecured, rather than a secured, creditor. In essence, security first.

There are -other- laws in California that apply to the specific issue of deficiency judments.

California's anti-deficiency legislation is complex, and there are various statutes that collectively comprise an interwoven net of protection for borrowers. Most of the time, like here, people end up confusing the various legal concepts with one another and wind up, incorrectly, concluding that it's the 'once action' rule that precludes deficiency judgments.