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Recourse mortgage debt follows borrowers

By March 24, 2010

Democrat real estate columnist

About 25 percent of all new foreclosures are the result of borrowers voluntarily walking away from their home. These people are still employed, not suffering any particular financial hardship and have money in the bank. But they are abandoning their homes and strategically defaulting on their mortgage. Their rational may be that itÕs less expense for them to rent, or their home is so far under water they donÕt want to continue throwing good money after bad.

Whatever the reason, strategic foreclosures are increasing the number of REO properties, lowering property values and it just isnÕt fair to the rest of us who continue making our mortgage payments. Yet, CaliforniaÕs out-dated foreclosure laws actually enable borrows to walk away from their mortgage, leaving lenders and subsequent taxpayers picking up the tab.

California has been one of the best places to buy a home. Historically, property values have steadily appreciated; credit and financing has been easily available and if catastrophe ever happened, the homeowner could always sell their property perhaps making a small profit while protecting their credit. Foreclosures were rare. Things have changed a bit in recent years.

One benefit to California homeowners that hasnÕt changed is the law that prohibits lenders from pursuing a homeowner for a deficiency judgment in the event of a foreclosure. All home first lien purchase loans in California are Ònon-recourse.Ó In the event of a default, the lender may only look to the mortgaged property for debt satisfaction. ThatÕs different than in other states where a defaulting borrower may be pursued personally for a deficiency judgment when the proceeds from a foreclosure sale isnÕt sufficient to satisfy the existing mortgage debt.

The foreclosure process on a home in Denver is very similar to California except for one big difference. Colorado is a ÒrecourseÓ state. If at the trustee sale auction, the selling price is short on satisfying the entire mortgage debt, interest, penalties and attorney fees, the lender can sue the borrower in court for the difference. After obtaining a judgment, the lender can collect the judgment against any other assets the debtor has or attach wages and pensions. This leaves the borrower the option of a debt negotiation plan with the lender or bankruptcy.

Lenders have always known itÕs a greater risk making home purchase loans in California and other non-recourse states like Arizona and Florida than in recourse states. The risk has been minimized by historically steady appreciation of properties and a low number of foreclosures. That may be changing.

Future interest rates may reflect regional economic stability, default rates and whether or not a state allows recourse loans. The amount of risk has always been a factor in calculating interest rates. With bonds, federal treasuries have the best rating and subsequently the lowest rate and junk bonds the highest. Mortgage borrowers with a lower credit score are charged higher interest rates. If default rates are higher in non-recourse states shouldnÕt that also be a risk factor and merit higher interest rates?

Many homeowners who have lost their homes through foreclosure and or a short sale may be in for an unpleasant surprise. The protection of non-recourse loans only extends to the original purchaser money mortgage on a primary residence. If a defaulting owner refinanced to lower their interest rate or took out a home equity or second mortgage, their lender has up to four years to obtain a deficiency judgment against them. In fact, many national collection agencies are currently vying for the opportunity to purchase defaulted debt instruments from the area lenders. Their intent is to seek personal judgments or monetary settlements with thousands of homeowners who incorrectly believed that after loosing their home the worst was over.

Between 2002 and 2006, 386,000 households in Sacramento, Placer, El Dorado and Yolo counties received $28 billion in home equity loans and lines of credit. The area ranks second nationally for delinquencies on these loans according to Oakland research firm Foresight Aaalytics. An unknown number of those loans ended in default amid 52,000 foreclosures and letÕs not forget the thousands of additional sellers who sold their home on a short sale with a second mortgage. Second mortgages, including those at the time of acquisition such as the once popular 80/20 are not exempt from the non-recourse law.

Not willing to risk the negative publicity of obtaining money judgments from thousands of area residents, lenders have been quietly selling off their second mortgages and home equity loans left over from foreclosures and short sales. A billion dollars in recourse loans has a street value of $250 million. The purchase and collection of bad recourse debt will likely be a growth industry in the region where 2.9 billion in ÒsecondsÓ are showing as delinquent on bank balance sheets.

Aggressive recourse debt collection against well off homeowners who are strategically defaulting on their mortgage, may act as a deterrent. An owner with a fat bank account and other assets may think twice about a ÒwalkawayÓ if they expect to be pursued for a judgment. Most foreclosures and short sales, however, are the result of financial hardship and immediate collection action will only add to the crowd at the bankruptcy court.

Our current law allows a creditor to obtain a judgment for recourse debt within four years. The time frame needs to be shortened to a year. It will then discourage some who can afford their mortgage payment from walking away and allow others to move on with rebuilding their financial lives without the threat of a collection agencyÕs judgment.

Ken Calhoon is a real estate broker in El Dorado Country. He can be reached at

Ken Calhoon

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