Recourse or Non Recourse -What's the Diff?
June 19, 2008
Recourse and non recourse are terms used to categorize loans. I suspect borrowers in the past may not have paid much attention to these categories.
However, in this "default episode" we are presently experiencing, these terms may take on epic proportions. So what's the difference?
A non recourse loan is one in which the investor/lender, in the event of a borrower's default, can only take back the property that was the security for the loan. In California, all purchase money deeds of trust are non recourse loans. The lender/investor is prohibited from attaching any of the borrower's other assets.
In a recourse loan, the lender/investor can take back the property. In the event that the borrower owes more than the lender/investor can recoup in the sale of the property, the borrower's other assets will be at risk. How many borrowers were aware that once a loan is refinanced it becomes a recourse loan?
Since it is expensive to go to court for a judgement, many lender/investors do not exercise this right. Some foreclosure counselors are advising short sale clients to obtain a written statement from the lender that the pay off amount satisfies the total debt owed.
It will be interesting to observe how this recourse/non recourse "default episode" plays out.
Recourse and non recourse are terms used to categorize loans. I suspect borrowers in the past may not have paid much attention to these categories.
However, in this "default episode" we are presently experiencing, these terms may take on epic proportions. So what's the difference?
A non recourse loan is one in which the investor/lender, in the event of a borrower's default, can only take back the property that was the security for the loan. In California, all purchase money deeds of trust are non recourse loans. The lender/investor is prohibited from attaching any of the borrower's other assets.
In a recourse loan, the lender/investor can take back the property. In the event that the borrower owes more than the lender/investor can recoup in the sale of the property, the borrower's other assets will be at risk. How many borrowers were aware that once a loan is refinanced it becomes a recourse loan?
Since it is expensive to go to court for a judgement, many lender/investors do not exercise this right. Some foreclosure counselors are advising short sale clients to obtain a written statement from the lender that the pay off amount satisfies the total debt owed.
It will be interesting to observe how this recourse/non recourse "default episode" plays out.
posted by shirley harry at 8:51 AM
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