Posted by Frugal on 31st August 2007
At this time of home prices falling, and possibly not being able to roll over/refinance the home loan, it is important to revisit this older post of mine: Deficiency Judgment: Think Again Before You Walk Away from last year
To the current homeowners: think again before you send the keys to the bank and walk away from the house. Do you think that when the housing prices fall, you can simply walk away from all the loans? Well, if you didn’t know, I am going to explain it to you. There are loans that you can walk away, and there are loans that you cannot. It’s called a recourse or a non-recourse loan.
A non-recourse loan means that there is no other recourse available to the lenders besides taking back the home. A typical non-recourse loan is a home loan for purchase. If the house falls below the balance of the purchase loan, the buyer can walk away from the house without any serious consequences (maybe except a big blemish on the credit report). On the other hand, a recourse loan means that the homeowner is personally liable for any “deficiency” when the lenders cannot recover the loan amount by selling off the house. A typical recourse loan is a home equity loan or a line of credit from home equity. As far as I could research, I don’t think a refinanced home loan is definitely a recourse loan. But I’m almost certain that a cash-out refinanced loan is recourse loan. As far as the legal language is concerned, a refinanced loan obviously is not a loan made for purchase.
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Again chances of judicial foreclosures are “usually” small. But you just don’t know what a badly hurt banker will do with a mounting losses on his back, especially with more and more home loan defaults. If it means that it will reduce his losses, he might as well create an off-the-book company to specially deal with lengthy foreclosure process with more money recovered.