Nov 2nd, 2009
In my last Blog article, I wrote about how lenders and collection agencies are falsely claiming that modifying an acquisition loan makes it recourse. Under California Civil Code Sec. 580b, loans made to enable a borrower to acquire (purchase) a 1-4 unit property in which the borrower resides are non-recourse. This means if the lender forecloses, they cannot get a money judgment against the borrower for any deficiency between the amount owed and the foreclosure sale price. Several lenders are now similarly claiming that a Home Equity Line of Credit (“HELOC”) is recourse even if it was used to purchase the home. This is a trickier question?
By its nature, a HELOC is a cross between a home loan and a credit card secured by the property. You get the funds up fron to purchase the property like any acquisition home loan. Then, as the HELOC gets paid down, you can draw out money again up to the original amount of the HELOC like you would with a credit card. On one hand, if it is used to purchase the property, it certainly would appear to have all the characteristics of a purchase money acquisition loan and therefore should be non-recourse. However, since additional credit draws would be in effect new loan amounts not purchase money, these would reasonably be recourse loans. Lenders would have us believe that this additional loan ability makes the entire HELOC a recourse loan.
For most home purchasers using two loans, the reason was that the first loan would be 80% and thus mortgage insurance would not be required. The 2nd loan filled in the gap between the 1st loan and the Buyer’s down payment, typically 10-15% of the purchase price. Since these are both necessary for the Buyer to purchase the home, these are purchase money acquisition debt and would be non-recourse (assuming 1-4 unit, owner-occupied). For the Buyer, the title of the 2nd loan would not seemingly matter. Whether the lender called it a Home Loan, Home Equity Loan, or Home Equity Line of Credit would not make a difference to a Buyer who needed the loan to purchase the home.
As stated in the 1976 case of Union Bank v Wendland, “The antideficiency statutes indicate a legislative intent to limit strictly the right to recover deficiency judgments….the purpose of that antideficiency statute is to discourage the overvaluing of the security, and the risk of inadequate security because of overvaluation is placed on the purchase money mortgagee.“ Since the lender is placing a value on the property at the time of acquisition and is making a loan secured by the value of the property at that time, the anti-deficiency protection of Sec. 580b should apply to the HELOC just as it would apply to any other acquisition loan. The only difference between the HELOC and any other loan is that the lender allows the borrower to take money back out up to the original secured amount. And unlike a credit card, the debt is secured. So arguably, even further draws back to the original amount could be non-recourse as well. As the court said in the Union Bank case, “…. the protections of the anti-deficiency statutes can not be avoided because of some clever paper shuffling on the part of the lender. To allow such is a circumvention of the anti-deficiency statutes.”
Can a lender get around this by having a provision in the loan documents stating that the loan will always be recourse? That is unclear. Court’s do not excuse a borrower from not reading and understanding their loan documents before they sign. But, given the very unequal bargaining position of the parties, I expect that the Court’s would lean in favor of application of 580b. We’ll have to wait and see how these cases turn out, if indeed any such cases are actually filed.
Of course, none of the above is going to stop unethical lenders and collection agencies from threatening and scaring borrowers into paying money on non-recourse debt.
If you have specific questions about your loans, liability, foreclosure, or any legal issue, feel free to contact me at email@example.com or call us at (916) 966-2260 for a phone or personal appointment. Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/.