How do I know if it's a recouse loan or not?

[spj3210]

How do I know if our second loan is a "recourse" loan or not?

I'm sorry if this is a very obvious question.

We're in Michigan and have an 80/20 loan, originated in 2006 when we bought the house. The 20 percent is not a line of credit - they offered that but we declined and went with 30yr fixed on that one, the other is a 7-year ARM, both are interest only option payments.

I've been reading here and had no idea that even after the first lender forecloses on you that the other lender could go after you.. so now I am very anxious to find out if that is a possibility w/our 20% loan. Thanks!

[The Professor]

For Michigan residents, classifying debt as either recourse or non-recourse may not be as important as it is here in California and other Western states. Please outline the facts of your situation, including answering the following questions, so that we can provide a fair analysis of your situation.

1. What is the current fair market value of your home?
2. Provide information on each of your loans, including the lender, current balance, and whether or not the loans were created at the time you purchased your residence.
3. In what state is the residence located (I expect the answer to be Michigan but would like confirmation)?

Daniel

[spj3210]

Professor Shays, thank you so much for your reply! Here is the info you asked about:

1) Fair market (does that mean what it could sell for today? if so..) is probably ~110-120k. We owe $160k.

2) Loans - 80/20 Countrywide/GMAC. 128k owed to CW/32k owed to GMAC. Both created when we purchased the home. Both are interest-only option loans. The 80% is a 7-year ARM and the 20% is a 30yr fixed. Bought house in Feb. 2006.

3) Home is in Michigan.

Thanks again for any info or advice!

[The Professor]

The information provided below was obtained by doing a Google search with the key words being "Michigan Foreclosure Laws." It isn't what I suspect you want to hear. My sense is that the holder of the first loan will proceed to foreclose and the holder of the second loan will do nothing until after the foreclosure has been completed. Then expect the holder of the second loan to take aggressive creditor action that will include suing you and seeking to collect.

Your defense to collection, if applicable, centers upon the inability to pay. It may be necessary, given what your financial condition might be, to consider talking to a bankruptcy lawyer at this point, at least to gain an understanding of what options you have. Since your State does not seem to have the sort of anti-deficiency legislation in place like we do here in California, unfortunately your options are limited.

Take care,

Daniel

[spj3210]

Thanks so much for your reply! YES, that is a major bummer. This seems to be one aspect of foreclosure that I was not prepared for. Bummer...

Professor Shays, I asked this question as part of my post on the CW loan mod forum but got no responses - I am interested in your thoughts - do you think Pres. Obama will do anything to help homeowners facing foreclosure or etc.? Sometimes I wonder if we should hold out on doing anything to see if he'll have any homeowner bailout or somehow get the H4H program working or etc. Any thoughts?

[The Professor]

What becomes increasingly clear is something people like you and me are unwilling to accept. That is the politics of this Country are designed to protect those willing to purchase political capital through the campaign donation process. In other words, expect Congress and the White House, irrespective of who happens to be in power, to come to the aid of those who put them in their seats. While we vote, don't kid yourself into thinking that we get them elected. It takes money to do that. Until meaningful campaign reform becomes a reality, we are a long ways from having a voice in the decision making process.

My belief is no meaningful aid will arrive in time to fix the problem many who visit this forum face. Lenders cannot be expected to provide relief in terms of loan principal reductions. Borrowers cannot expect market conditions to change in a manner that will bring their home above water (in terms of having equity). That is why I so strongly advocate consideration be given to the viability of simply looking into stop making payments and live in your home as long as possible, providing time to save money for the requisite moving and rental costs for a new residence.

Take care,

Daniel

[spj3210]

Originally Posted by Professor Shays

My sense is that the holder of the first loan will proceed to foreclose and the holder of the second loan will do nothing until after the foreclosure has been completed. Then expect the holder of the second loan to take aggressive creditor action that will include suing you and seeking to collect.

Hi again Professor Shays! Have been struggling with this question still b/c I don't think I initially read/thought this through.

So, Michigan doesn't protect against deficiency judgments, so that is a risk I am taking with both loans, right?

As for the 20% loan, like you said about the second loan holder taking aggressive creditor action, is this b/c you believe my second loan is a recourse loan, or because of the possibility of deficiency judgements in Michigan?

I am confused b/c of two things: 1) Everything I'm reading is saying purchase loans, which both of my loans were/are, are typically non-recouse loans. Then second, recourse or non-recourse aside, any lender can seek a deficiency judgment in Michigan but 2) I've read that this is highly unlikely (obviously I don't expect you to speculate on that for our specific situation).

But so basically are you expecting the 20% loan to seek creditor action b/c it is a recourse loan whereas the 80% probably is non-recourse, or b/c of deficiency judgments which either lender could do but second is more likely b/c first bank got the house. ? Hope that makes sense.

Thanks!

[The Professor]

Using the facts that you've provided, you indicate that the present fair market value of your home is no more than $120K. You further indicate that the balance owed on the first loan is $128K. So basically what you are saying is that the second loan is from a practical standpoint an unsecured loan since there is no equity above the $128K owed on the first loan.

What I've suggested is the first loan will foreclose, thus erasing both your interest in the home and the interest the second loan lender had. As a result of that foreclosure you still owe on your second loan but it is truly unsecured, meaning they no longer have a lien on your home. At that point I suspect they will go after you personally, file a lawsuit, obtain a judgment, and seek normal post-judgment collection remedies (e.g. wage garnishments, attachments, etc.).

As I mentioned there is no anti-deficiency legislation in Michigan like what we have here in California. So you don't have the purchase money loan protection we have and you remain personally liable (your debt to the holder of the second loan is recourse in nature).

I suspect the same is true with the holder of the first loan but they probably won't go to the trouble of obtaining a deficiency judgment because they have to establish the amount of the deficiency which is sometimes challenging and given that it may not be that much it may not be worth the trouble of going through the court process associated with determining its amount.

Daniel

[spj3210]

OK, thanks, I think I understand. So my second loan becomes recourse in nature after the first loan forecloses, b/c it is no longer a secured loan? The fact that it was used as purchase money is irrelevant at that point then.

I think in the thread that is titled something like "Recourse or not?" you said that recourse or not only has to do with anti-deficiency judgment laws. So it's like one in the same then. Michigan doesn't have those protections so in Michigan there's really no such thing as recourse or non-recourse loans. Do I have this right?

THANKS! This is all so confusing and I'm just trying to figure out how anyone with a job and an 80/20 loan would ever be able to afford/justify walking away from a Michigan home since their wages would still be garnished to pay for that other loan.

[The Professor]

What makes is "recourse" is that your home is in Michigan. The determining factor is that there isn't a law in Michigan that makes secured loans on residences non-recourse. California on the other hand has such a law. Some other Western states have similar laws.

So don't confuse the foreclosure as triggering a change from recourse to non-recourse. Your two loans are both "recourse" because there is no anti-deficiency law in Michigan. Sorry, but that is simply the way it is.

Daniel

[spj3210]

OK, yes I definitely get it now. I think it got confusing b/c a lot of people here are wondering if their loans are recourse or non-recourse based on some sort of terms of the loan or whether it was purchase money or etc., but really none of that is relevant in a state like Michigan. Very good to know (although not great to hear!) Michigan needs better laws.. that is a bummer! I just don't get how anyone here can afford to foreclose given these circumstances.. yet foreclosures are everywhere here. Thanks again for your help!