Tuesday, August 18, 2015

Mortgage Loans: Recourse versus Non-Recourse and Foreclosure Related Deficiency Judgments

Mortgage Loans: Recourse versus Non-Recourse and Foreclosure-Related
Deficiency Judgments

As attorneys who handle real estate loan closings, mortgage loan disputes, mortgage loan loss mitigation matters, and foreclosure cases, we are frequently asked questions about recourse versus non-recourse loans, foreclosure-related deficiency balances and related legal judgments, and similar issues. The intent of this short article is to provide some information on these topics from our perspective, keeping in mind that our primary jurisdictions of practice are North Carolina and South Carolina (we also practice in FL, GA, OH, and TN).

Recourse mortgage loans versus non-recourse mortgage loans

Although the terms “recourse mortgage loan” and “non-recourse mortgage loan” are not commonly used in North Carolina, they are common nationwide and are often misused and misunderstood. A recourse loan is one which allows the lender (or whomever later acquires the loan) to foreclose upon violation of the loan terms (assuming that a valid deed of trust or similar is in place) and also allows the creditor the additional recourse of pursuing monetary damages from the borrower and any guarantors, etc. if the foreclosure sale proceeds are not enough to cover what is owed to the creditor.

In contrast, a non-recourse mortgage loan is one in which the creditor does not have the right to pursue the borrower and any other potentially obligated parties for monetary damages. Rather the creditor is limited to foreclosing on the property that serves as collateral for the loan (again assuming that a valid deed of trust or similar is in place).

Regardless of which side you are on, lender or borrower, it is absolutely crucial that you know exactly which type of loan is being contemplated or has been entered into. Recourse loans are more common in residential lending as compared to commercial lending, but not so much that any assumptions should ever be made.

Deficiencies and deficiency judgments

A “deficiency” in the mortgage loan context is related to the concept of recourse versus non-recourse mortgage loans. If the net proceeds from a foreclosure sale are not enough to make the creditor whole, and if the loan was a recourse loan, the creditor would typically be entitled to – or entitled to further seek – monetary damages from the borrower, any guarantors, etc.

The amount that the creditor believes it is legally entitled to still recover is typically called the deficiency. The creditor – whether by a separate, post-foreclosure civil lawsuit (the typical process in North Carolina) or by way of the foreclosure litigation itself (South Carolina) – can seek a judgment which states that it is entitled to that amount. This is typically referred to as a “deficiency judgment”.

We regularly assist clients in matters involving, or potentially involving, deficiencies and deficiency judgments. It’s fundamentally important to understand when the creditor may be able to seek the same, and whether doing so is going to make economic sense; sometimes spending $20,000.00 to possibly recover $50,000.00 simply isn’t worth if it some compromise can be reached. Both creditors and debtors may have good reasons to resolve such issues via settlement, but litigation always looms if not.