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Anyone who has an AZ Deed of Trust plese help!

Discussion in 'Deed in Lieu of Foreclosure - Do You Need Help to ' started by byeAZ, Mar 21, 2009.

  1. byeAZ

    byeAZ LoanSafe Member

    I have the Arizona Deed of Trust. The footer of the document prints AZ-Single Family-Fannie Mac/Freddie Mac UNIFORM INSTRUMENT. I found the same version from Freddiemac web site. Does it mean it is just a standard Deed of Trust or should I pay special attention to it? Do I need a lawyer to review it? Please help!
  2. dealingwithHomeEq

    dealingwithHomeEq Fighting Homeowner

    My deed of trust has the same footer as yours. I think it's just a standard conforming form because I checked with Freddie and Fannie and neither owns it. You can e-mail or call Freddie and Fannie and they will tell you if they own it.
  3. byeAZ

    byeAZ LoanSafe Member


    Thank you for the info. I found the same version of Deed of Trust from the web site of Freddimac. I am just wondering if I need to pay any special attention on those terms if I go with foreclosure. I don't wanna be trapped by any special terms imposed by the lender.
  4. LeavingAZ

    LeavingAZ LoanSafe Member

    What special terms are you talking about? I don't get how this would affect any foreclosure process in Arizona. Can you explain please? TIA
  5. LeavingAZ

    LeavingAZ LoanSafe Member

  6. dealingwithHomeEq

    dealingwithHomeEq Fighting Homeowner


    Here is a really long--but excellent--law review, specifically concerning the purported non-recourse nature of the standard Fannie Mae ("FM") loan documents. It is definitely worth struggling through if you expect to be in a position where you (or your attorney) will have to make the argument that your loan is non-recourse, even though the conventional opinion based on state law would find that it is actually recourse (e.g., Calif. refi or non-purchase money HELOC). You could almost use this review as a practice guide to writing a motion to dismiss a deficiency lawsuit.

    The paragraph the author refers to in the FM note (para. 10) is actually numbered as 11 in my note (I have a Form 3520), but the language is all in there.


    Copyright (c) 2008 California Western School of Law
    California Western Law Review

    Fall, 2008

    45 Cal. W. L. Rev. 35

    LENGTH: 18356 words

    Article: Fannie Mae/Freddie Mac Home Mortgage Documents Interpreted as Nonrecourse Debt (with poetic comments lifted from Carl Sandburg)

    NAME: John Mixon*

    BIO: * Law Alumni Professor of Law, University of Houston Law Center. The author thanks Lauren E. Schroeder, Reference/Research Librarian at the Law Center; student research assistant Karen Gross; Houston real estate attorneys Kim Yelton, Charles Jacobus, and Marvin Nathan; Law Center Professors Aaron Bruhl, Richard Dole, Barbara Evans, Julie Hill, and Ron Turner; and a number of real estate and lending professionals who provided information that was used, at their request, without attribution. The author acknowledges the research method described in George Lefcoe, Land Development Law 713 (1974), "informed gossip, the chief empirical tool of lawyers, legislators and law professors."

    I. Lawyers (but not home mortgage borrowers) Know the Difference Between Recourse and Nonrecourse Debt

    The Lawyers, Bob, know too much.

    They are chums of the books of old John Marshall.

    They know it all, what a dead hand wrote,

    A stiff dead hand and its knuckles crumbling,

    The bones of the fingers a thin white ash.

    The lawyers know

    a dead man's thought too well. n1

    Lawyers know there are two types of mortgage obligations: recourse and nonrecourse. n2 Recourse promissory notes impose [*36] personal liability on borrowers for the total amount borrowed. n3 The mortgage pledges the land (for present purposes, a personal residence) as security. n4 If the borrower defaults, the lender can foreclose, have the land sold, and apply the proceeds to reduce the debt. n5 But the note obliges the borrower to repay the borrowed amount in full and he or she is personally liable for deficiency if foreclosure sale proceeds do not satisfy the debt. n6

    The deficiency can be reduced to judgment and recorded in county records, where it hovers over the debtor for ten or more years. n7 The judgment has the practical effect of disabling the debtor from participating in the normal credit market, authorizing seizure and sale of all non-exempt assets, n8 and, where allowed, subjecting wages to garnishment. n9

    Nonrecourse obligations also pledge the land, which can be sold at foreclosure and its proceeds applied to the debt, but, in contrast, impose no personal liability for deficiency after foreclosure except claims for waste and foreclosure costs. n10 Nonrecourse obligations (and [*37] limited recourse obligations) are common in commercial transactions, but not in home purchase mortgage transactions. n11

    Virtually all home purchase mortgage lenders use standard documents that are commonly thought to impose recourse liability on home purchase mortgagors n12 except where limited or excluded by state law. n13
    A. Recourse Mortgage Notes Assign the Formal Risk of Market Decline to Borrowers

    When the lawyers are through

    What is there left, Bob?

    Can a mouse nibble at it

    And find enough to fasten a tooth in? n14

    [*38] The matter of deficiencies after foreclosure is important. A congressional report estimates that subprime mortgages alone will generate two million foreclosures. n15 House values in some parts of the United States have dropped dramatically, and many distressed owners find it virtually impossible to sell at prices anywhere near their mortgage debt. n16 If two million foreclosures produce an average of twenty thousand dollars deficiency each, the lingering liability could total forty billion dollars. Even if actual judgments or collection efforts reach only one-tenth of that amount, n17 four billion dollars is still a big hit on that part of society that has just been through financial disaster and is least able to pay. Moreover, the liability is formal, but not real. The borrowers will not pay because they have few, if any, assets to attach in satisfaction of the judgment. The only recovery in most cases will be the pittance professional bill collectors extract.

    The subprime meltdown has illustrated an indisputable fact: home mortgage lenders and secondary market purchasers, not borrowers, bear the unassignable cost of a market crash in real estate. It is appropriate that they do. As allies and enablers of the professional housing industry, lenders advertise their services, promote the values of home ownership, and create an image that they know what they are doing and that they are worthy of trust. n18 Their profit comes from [*39] lending to borrowers who know little about the details of land finance. Lenders, not borrowers, make the biggest investment when they provide up to 100% of the home purchase price. When the housing market goes up, n19 lenders and housing providers profit by lending more money and selling more houses. When the market goes down, mortgages go into default, foreclosures occur, and lenders and housing providers lose.

    Lenders cannot really shift foreclosure losses to borrowers because borrowers, as a class, do not have the financial capability to bear them. In a general economic decline, borrowers lose their down payments, good credit histories, and the security of the places they live. Deficiency judgments and aggressive debt collection after foreclosure do not transfer that loss; they make the loss greater. Deficiency exposure after home mortgage foreclosure is haphazard. n20 Some mortgage lenders forgo pursuit of deficiency because judgments are not worth the hassle. n21 The Federal Housing Administration [*40] (FHA) n22 and U.S.

    Department of Veterans Affairs (VA) n23 have policies of substantial forbearance and waiver of deficiencies. Freddie Mac currently does not pursue collection on hardship homeowner foreclosures, but it does pursue investors. n24 Various private lenders and private mortgage insurance companies pursue deficiencies aggressively where not limited by state law. n25 While some states [*41] disable mortgage insurers from suing homeowners for deficiency, n26 other states prohibit home mortgage deficiencies entirely n27 or use market value n28 instead of foreclosure bid to calculate loss. n29 Furthermore, some states provide time-consuming statutory redemption after foreclosure that encourages lenders to forgo or bargain away deficiency liability in exchange for speedy liquidation. n30

    There seems to be no nationwide organizing principle to explain industry practices that are applied haphazardly from jurisdiction to jurisdiction, arbitrarily capturing one borrower in the deficiency net while letting others go. That may be about to change. Subprime [*42] failures may soon override lenders' current tendency to forbear in particular markets. When banks and mortgage insurance companies begin to fail, receivers and trustees will pursue all assets available to the failed institution, including deficiencies after foreclosure of home mortgage notes. n31

    There is a reasonable way to eliminate the haphazard application and magnification of inevitable deficiency loss: insulate home mortgage borrowers from deficiencies after foreclosure by reading mortgage documents anew and interpreting them as nonrecourse. This interpretation is based on a fundamental contract principle: contract obligation is based on consent. n32 If borrowers have not consented to lingering liability after foreclosure, then it should not be imposed.
    B. Home Mortgage Borrowers Do Not Understand Recourse Liability and Deficiency After Foreclosure

    In the heels of the higgling lawyers, Bob,

    Too many slippery ifs and buts and howevers,

    Too much hereinbefore provided whereas

    Too many doors to go in and out of n33

    I begin with an outright declaration that virtually no home mortgage borrower who has not had (1) extensive professional training, or (2) prior experience as a foreclosed borrower, understands that home mortgages include the potential of a hovering judgment lien after foreclosure. This lack of understanding makes any pretense of consent pure rationalization. Law acts in complicity with lenders to [*43] commit virtual fraud when it imposes this consequence on home buyers without full disclosure and real, intelligent consent. n34

    Most people understand that if they do not repay money borrowed to buy a refrigerator, car, house, or any other consumer good, the creditor will "repossess" the property and their credit will suffer. But a limited survey of friends and acquaintances, all college and professional school graduates, revealed that only the lawyers among them understood the potential for deficiency judgments after foreclosure, even though all were home owners. n35 This discovery prompted me to do a more formal survey of an evening section of third-semester law students to see whether my hypothesis was correct. n36

    [*44] An open-ended questionnaire asked students to describe what they thought would likely happen in three successive time periods if they borrowed $ 200,000 to buy a house, but became disabled after one year and could not make monthly payments. The primary purpose of the question was to see whether answers indicated any general awareness of lingering liability after foreclosure.

    Only four of the forty-seven respondents clearly identified continuing liability for deficiency as something they would connect with foreclosure. Later inquiry revealed that six additional students understood the prospect of deficiency liability, but did not think to record it on the open-ended questionnaire. The remainder of the class indicated they regarded the debt as satisfied by foreclosure, which forty out of forty-seven identified as a likely event. Eighteen specified that their credit would be harmed. What was surprising was that twenty-seven students, more than half, identified personal bankruptcy as an acceptable strategy to satisfy the debt. It is not clear what necessity they thought would drive them to bankruptcy, but they were clearly ready to take the cleansing bath.

    A specific question asked whether the FHA or private mortgage insurance would have any effect on their answers. Of twenty-eight respondents, fifteen believed that mortgage insurance would protect them from loss, n37 while thirteen understood that mortgage insurance policies protect lenders, not borrowers. A second round of multiple-choice questions reinforced that deficiency liability did not come into their contemplation. n38

    [*45] I concluded that my hypothesis was true: layspeakers, even those who have bought houses and endured two semesters of law study, do not understand the nature of recourse home mortgage debt and they do not associate foreclosure with lingering liability; n39 lawspeakers, by contrast, do. Lawyers understand that contract law treats parties categorically either as competent or not competent. Unless underage n40 or mentally deficient, n41 these supposedly autonomous, rational borrowers are responsible for knowing or learning the content and legal effect of even the most complex agreements they sign. n42 Apart from relieving defrauded parties from their contracts and providing timid supervision of unconscionable contracts, law takes little account for the fact that lenders are advised by professionals with perfect information and perfect understanding of the content and legal consequences of recourse mortgage debt. Furthermore, lenders package nonnegotiable mortgage terms in complex, lengthy, and intimidating documents that only a professional can understand.

    How can the law hold borrowers to obligations they did not understand, and that are not understood in the borrower's general community? Do judges really think people consent to such liability by signing mortgage documents, or is deficiency liability simply imposed [*46] through raw and arbitrary power that instinctively, but unconsciously, favors lenders?
    C. Home Mortgage Borrowers Neither Consent Nor Manifest Consent to Recourse Liability for Deficiency After Foreclosure

    Why is there always a secret singing

    When a lawyer cashes in?

    Why does a hearse horse snicker

    Hauling a lawyer away? n43

    As defined by common usage (and by the dictionary), assent implies personal agreement after thoughtful consideration. n44 But this lay notion of subjective consent does not determine legal obligation. Contract doctrine long ago adopted a rule that holds people to what reasonable third parties would infer from their actions. n45 This policy protects the reliance interest of both contracting parties, who obviously cannot see inside the heads of others and must therefore respond to appearances of, or apparent, consent.

    The "objective" theory of contract imposes obligation on parties who manifest assent to a contract. n46 The manifested assent rule tells us that signing a mortgage and note implies consent to lingering deficiency liability if an observer would infer that understanding from the words in the documentation and the transaction itself. n47 Here is [*47] where law fudges. Law does not admit it, but the meaning (this time a meaning constructed by the observer) is still subjective. A truly "objective" observer would infer assent only if parties used language that transcends (is common to) both the lay and legal community. This is a language set of allspeak that contains both layspeak and lawspeak. But if there is no allspeak, and lay observers and law observers speak different languages; there is no single "objective" interpretation or "meaning" that can be assigned to the manifestations.

    The necessary conclusion is that, when we look for a hypothetical observer, we find two types: lay observers and law observers. We must choose one over the other to determine whether signing the note and mortgage manifested assent to recourse obligation.

    1. Lay Observers Interpret Home Mortgage Loans as Nonrecourse

    The lay interpretation of the mortgage transaction would mirror the lay community's understanding that home mortgagors assent to "repossession" and credit score reduction if they cannot make their payments, but not more. A lay observer therefore infers neither consent nor manifested assent by a borrower to the hovering judgment for deficiency after foreclosure. However, the issue cannot be so simply dismissed because the legal system unquestionably holds recourse debt mortgagors liable for deficiency, absent state law restriction.

    2. Law Imposes Recourse Obligation on Home Mortgage Borrowers

    If the community interpretation of obligation is not authoritative, does law impose deficiency liability by simple authoritarian will? Not necessarily. An alternative assent analysis would hold that the lay mortgagor blindly agreed to whatever law imposes if he or she submits voluntarily to the transaction itself. But this analysis circles back to whether the borrower assented to recourse debt, on the one hand, or nonrecourse debt on the other. The legal consequences are different for the two transactions. Thus, even by lawspeak, the inquiry is led back to the different interpretations by lay and law observers.

    Traditionally, lawspeak interprets the transaction and its documentation as manifesting the borrower's assent to both [*48] foreclosure and deficiency, with the result that borrowers are bound legally and, by some observers, even morally. n48 This is fair enough if the mortgagor is a member of the lawspeak community; for example, a professional land developer who certainly knows the difference between recourse and nonrecourse financing. But it is not at all clear that the lawspeak interpretation should bind a lay mortgagor who is not a member of that community. n49

    3. Trade Usage Analogy Implies that Layspeak, not Lawspeak, Should Govern Liability

    To a lay mortgagor, liability imposed by lawspeak is as obscure and unknowable as if it were a foreign language. In analogous situations, the Uniform Commercial Code (UCC) n50 and contract law n51 acknowledge that words can have special trade meanings that bind members of the trade, but not people outside the trade. n52 This implies that the meaning to be applied to the mortgage transaction should be that of the community at large, and not the trade usage (lawspeak), [*49] unless the borrower is a member of the lawspeak community. By contrast, an investor who used home mortgage financing to buy property to "flip" or rent has entered the lawspeak arena and can reasonably be held to its interpretations.

    4. Law Holds Lay Parties Responsible for Learning the Lawspeak Meaning of Contract Terms

    Lenders and lawyers have an answer to the trade usage analogy: if the mortgagor does not totally understand all of the terms of the deal, then he or she is responsible for seeking professional help to explain them. n53 This assignment of responsibility assumes the mortgagor is an autonomous, free will agent with reasoning power to comprehend not only what he or she does not understand, but also that he or she does not understand.

    In reality, if a mortgagor asked a lawyer for representation in a home mortgage transaction, the lawyer would check the closing figures, check the interest rate, and look at the documents to see whether they fit the standard practice forms. But not many real estate lawyers would advise the client about the very basic fact of deficiency liability in event of default. n54

    5. Law Wrongly Assumes People Act Autonomously in an Objectivist World

    The notion that mortgagors should understand the transaction well enough to know when to seek expert advice assumes that both borrowers and lenders function in an objectivist world of stable categories of fact that can be comprehended by any observer. n55 If such a world does not exist, and if all human understanding is personal and subjective, limited to what goes on inside individual brains, then the underlying logic of that proposition crumbles. This article adopts the latter assumptions, supported by current linguistic and brain science, and rejects the objectivist position that knowledge of a stable, coherent reality is accessible to everybody who looks. n56 Even if the standard for personal responsibility is expanded to include what is known within the borrower's community, recourse liability on home mortgage loans is still not known or consented to for the reason that the borrower's own community does not so understand it.

    6. Recourse Liability Is Imposed by Fiat, Not Consent

    An admission that deficiency liability is based on raw, authoritarian power would suggest that law and lenders have simply ganged up on unsuspecting borrowers. Accordingly, lawspeakers will retreat to their consent model and read the promissory note and mortgage as a logical and grammatically correct statement that the mortgagor absolutely undertook to repay the entire debt or submit to deficiency. Lawspeakers will say the borrower's consent to the transaction itself invoked the full traditional legal obligation of recourse liability.

    This exercise produces a satisfactory justification in lawspeak. But if layspeak, the language of the community, reads the documents [*51] differently, the document is ambiguous. n57 Special rules then apply that justify, if not compel, application of the lay meaning-nonrecourse debt. n58

    II. A Fresh Look at Mortgage Documentation Justifies Interpreting Home Mortgage Debt as Nonrecourse.

    As a prediction, any judge would dismiss a borrower's defense to deficiency based on lack of consent. But what would happen, even in lawspeak, if the transaction and the documents were looked at anew? The answers may be surprising.

    A. Standard Mortgage Documents Are Confusing and Ambiguous

    The language problem is not lack of formalistic disclosure of the terms of the home loan itself. n59 Virtually all home mortgage transactions provide borrowers with disclosure statements that spell [*52] out the full terms of their loans in layspeak. n60 But the consequence of lingering liability after foreclosure, which can be far worse than a misstated interest rate, is not disclosed (and perhaps cannot be disclosed meaningfully). n61 Even the standard documents prescribed by secondary market purchasers with close affiliation with the federal government n62 are misleading and subject to interpretation as nonrecourse obligation, as judged by both lawspeak and layspeak. These documents dominate the field, and their uniform covenants apply throughout the United States' mortgage market.

    B. Fannie Mae/Freddie Mac Documents Can Be Interpreted as Recourse or Nonrecourse

    Fannie Mae's standard real estate security forms consist of two documents: a promissory note and a security instrument, discussed herein in its form as a Deed of Trust. These mortgage forms are drafted to fit requirements of secondary market purchasers with close ties to federal monetary and housing policy and carry uniform covenants that apply virtually throughout the United States. n63 One must therefore assume the forms carry some credibility. What the forms do not contain is information about recourse debt sufficient to inform a lay observer (or even a law observer outside the specialty) of the full consequence of default.

    1. In Lawspeak, Fannie Mae/Freddie Mac Home Mortgage Debt Is Recourse, with Deficiency Liability n64

    In paragraph one, the Promissory Note (FM Note) contains an unconditional promise that the borrower will repay the principal amount borrowed, plus interest. It also states that if, at maturity, amounts are still owed, the borrower will pay those amounts. The FM Note is made to the order of the lender, it is in writing, and it is signed by the maker.

    Accepting (for the moment) lawspeak's assessment that the promise to repay the debt is unconditional, the FM Note appears to satisfy the formal requirements of recourse obligation and negotiability. n65 Accordingly, a secondary market purchaser who takes [*54] delivery of the note before maturity, for value, without notice, and by endorsement expects to qualify as a holder in due course who is entitled to enforce the obligation fully without regard to personal defenses to payment. n66 If that were the entire transaction, there would be no question but that the maker of the note was obligated to repay the entire amount, at least by lawspeak. But that is not all the FM Note says. Paragraph ten states:

    In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust, or Security Deed (the "Security Instrument'), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this Note.

    As interpreted by lawspeakers, the security instrument simply adds a pledge of the land to the obligation imposed in the note ("in addition to"), and does not diminish, replace, or require the lender to forego the absolute obligation stated in the note. n68 To a lawspeaker, the words "in addition to" would refer to the mortgage document n69 without incorporating it by reference, which would impair negotiability. n70

    2. In Layspeak, Fannie Mae/Freddie Mac Home Mortgage Debt Is Nonrecourse, With No Liability for Deficiency

    Now consider the same language from the standpoint of a layspeaker, with the ultimate question "to what did the borrower manifest assent?"
    The words "in addition to" appear to combine the promissory note and the mortgage and make them one. Just as one plus one produces a single referent "two," the note "in addition to" the mortgage combines the two documents into a single agreement. n71 This lay reading would impair negotiability and negate the privileged holder in due course status. n72 As developed below, reading the two documents together implies nonrecourse debt.

    Apart from the favored position the law gives to negotiable instruments, the words would probably incorporate the mortgage by reference, even in lawspeak. The reference is sufficient to make the two documents contemporaneous agreements for Statute of Frauds n73 and parol evidence rule purposes, n74 and to some extent they must be read as one. The mortgage file that contains both documents is likely to be in the physical custody or legal control of the secondary market purchaser who is therefore on notice of the existence and terms of both. n75

    [*56] To the lay reader, "in addition to" implies that the note and the deed of trust are of equal dignity, and the pledge of land acts as the performance equivalent of enforcing the promise. The FM Note states "the Deed of Trust ... protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this Note." n76

    This provision specifically anticipates the potential of nonpayment and implies that foreclosure sale perfectly "protects the Note Holder from losses which might result if the borrower does not keep the promises which I make in this Note." n77 Even if a lawspeaker quibbled about this interpretation, it is hard not to accept it as a possible and reasonable one. Consider a contract whereby:

    I promise to deliver a cow named Rose to a buyer, and in addition, if I do not deliver that cow, then to protect the buyer from possible losses which might result if I do not keep that promise, the buyer can pick out and take any cow in my pasture.

    It would appear to a layspeaker and, even to most lawspeakers, that the two performances are alternative, not cumulative. If I default, the promissee can pick a cow from my pasture. That is an alternative performance, and I do not owe another cow. The obligation has been satisfied.

    If we can read the promissory note to say the borrower will pay as provided in the note, or, in the alternative, the lender can do what the deed of trust provides, we must read the deed of trust closely to see what it says to a lay reader.

    3. The Note and Security Instrument Read as Contemporaneous Documents, Reinforce Layspeak Interpretation as Nonrecourse n78

    In paragraph one, the Deed of Trust refers to the Note and restates the borrower's obligations. n79 It does not negate the lay reader's alternative performance interpretation. Instead, it states:

    This Security Instrument secures to Lender: (i) the repayment of the Loan, and all renewals, extensions and modifications of the Note; and (ii) the performance of Borrower's covenants and agreements under this Security Instrument and the Note. For this purpose, Borrower [conveys the land to the Trustee] ... . n80

    To lawspeakers, the word "secures" is associated with an entire activity of pledging property as collateral that can be sold on default, with proceeds applied to the debt without discharging the debt beyond the proceeds realized. n81

    To layspeakers, the word "secures" can have an entirely different meaning. Webster's II College Dictionary n82 defines "secure" in verb transitive form as:

    1. To guard from danger, harm, or risk of loss. 2. To make tight or firm : FASTEN. 3. To make certain : GUARANTEE. 4. To make a pledge on (e.g., a loan). 5. To gain possession of : ACQUIRE. 6. To bring about : EFFECT.

    As an objective observer, the layspeaker must acknowledge that the deed of trust secures protection to the lender (not the borrower). But what does the security instrument "secure" to the lender?

    a. Guards the Lender From Risk of Loss

    By definition one in Webster's II College Dictionary, the instrument itself (and the rights created) guards the lender from danger, harm, or risk of loss. By definition three, the instrument makes the lender certain of protection by guaranteeing repayment of the loan. These interpretations imply that the pledge itself guards the lender from risk of loss, guarantees repayment, and makes performance certain. If the Deed of Trust guarantees performance, the lender has no need for deficiency, the pledge operates as an alternative performance of the note's obligation, and the borrower is released if the lender takes the property. n83 The dictionary definition of the word "guarantee" nowhere suggests that a guarantor will seek recovery against the borrower. n84

    b. Pledge

    The word "pledge" in meaning four is defined by Webster's as "pawn." n85 In layspeak, as in lawspeak, the word "pawn" commonly negates both the obligation to repay and the existence of a debt. This reasonable interpretation reinforces the lay understanding that home mortgage debt is nonrecourse. Moreover, the fact that the mortgage document may be, and often is, called a "deed" (of trust) can imply in layspeak that the house has been conveyed, but will be returned if the debt is paid. The release provision of paragraph twenty-three is consistent with this layspeak interpretation. n86 The dictionary definition does not even hint at a recourse outcome.

    c. But Not By Lawspeak

    Real estate lawyers and lenders will blanche and fume at the lay reading. Yet, it is as reasonable as the lawspeak reading, and it undoubtedly reflects the intent and understanding of borrowers. If law imposes a different outcome by applying lawspeak to an ambiguous document, it does so by fiat, n87 not by consent.

    4. Failure to Disclose That Mortgage Insurance Does Not Protect Borrowers Amounts to Concealment

    Paragraph ten of the Kentucky Deed of Trust refers at length to mortgage insurance, and states: "Mortgage Insurance reimburses Lender (or any entity that purchases the Note) for certain losses it may incur if Borrower does not repay the Loan as agreed. Borrower is not a party to the Mortgage Insurance." n88

    Lawyers and lenders know that mortgage insurance is paid for by the borrower, but its purpose is to entice the lender to lend to this borrower with little money down. n89 Mortgage insurance policies ordinarily claim a right of subrogation to pursue the borrower for deficiency for payments made to the lender under the policy. n90 This is likely to be stated clearly in the policy itself. But our focus is not on what the mortgage insurance policy says. Instead, we focus on what the security instrument says.

    [*60] Everything is understood in context. n91 The word "insurance" comes wrapped in context. n92 The lender knows mortgage insurance ordinarily protects only the lender, n93 but this may not be what the context says to a borrower. n94 To a lay borrower, the word "insurance" means protection, which is also its dictionary definition. Merriam Webster's online dictionary defines "insurance" as "coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril;" and also "a means of guaranteeing protection or safety." n95

    The contextual understanding for an ordinary layspeaker is that insurance protects the person who pays the policy premium. That is the case with fire insurance, auto insurance, liability insurance, life [*61] insurance connected with a loan, n96 and the like. In this context, the mere term "mortgage insurance" is bound to generate unjustified expectations that the borrower who pays the premium is somehow protected by the policy. n97 What is the policy for, if not to pay the mortgage if the borrower is disabled or loses a job?

    A closer look at the mortgage insurance provision reinforces the borrower's notion that the lender will not seek deficiency when it states, "Mortgage Insurance reimburses Lender ... for ... losses it may incur if Borrower does not repay the Loan as agreed." n98 This clear and simple statement implies there is nothing left of the obligation if the lender is reimbursed for losses it may incur if the borrower does not pay.

    Likewise, there is no hint that the mortgage insurer will turn on the borrower and demand payment of deficiency by way of subrogation. n99
    What about the statement: "Borrower is not a party to the Mortgage Insurance"? n100 First, it may not be true. If "party" means "in privity," then the borrower is a party by the English definition as providing consideration for the insurer's promise. n101 The lender may be the one that is not privy if mortgage insurance is considered as a standalone contract.The lender can collect on the policy, but as a third party beneficiary, and not as one who provided consideration for the promises contained in the insurance contract. n102 Saying the borrower [*62] is not a party to the contract does not imply, even in lawspeak, that the borrower cannot benefit as third-party beneficiary. n103

    What is inexcusable is that the documentation conceals its denial of benefits to the borrower behind lawspeak. The drafter of the mortgage undoubtedly intended that the borrower get no benefit from mortgage insurance. But stating the exclusion in lawspeak is a poor excuse for a simple statement that the borrower pays the premium but gets no benefit other than satisfying the lender's condition for making the loan. Second, and even more crucial, why would the document not state clearly that, in event of default, the mortgage insurer may turn on the borrower and sue for deficiency, even though the borrower paid his or her premium? n104 If the documents were drafted by an entity with less affiliation with the U.S. Government, one might think a common crook had undertaken to defraud, mislead, or conceal the truth from the borrower.

    5. Failure to Disclose the Prospect of Deficiency Liability After Foreclosure Amounts to Concealment n105

    Given the difference between recourse and nonrecourse consequences, one would expect that a recourse mortgage document would at least use the term deficiency somewhere in the text or spell out the activity that creates it. The fact that the paradigm Security Instrument never uses the terms "recourse," "deficiency," or "liability after foreclosure" is not just misleading, it is outright deceptive. For [*63] example, paragraph eleven n106 allows the lender to apply funds from a total taking or insured loss against the debt. But it does not state in clear terms that the borrower remains liable for the debt if the proceeds are inadequate to satisfy it.

    Instead, the paragraph states that the excess, if any, will be paid to borrower. n107 Failure to state what happens if the proceeds of sale are not sufficient to pay the debt or produce a surplus comes close to active concealment.

    Paragraph twenty-two describes the lender's right to have the property sold at foreclosure by the trustee. Nowhere does it state that the borrower remains liable for deficiency if the proceeds of sale are not sufficient to satisfy the debt. Instead, it optimistically states, "trustee shall apply the proceeds of the sale in the following order: (a) to all expenses of the sale ... ; (b) to all sums secured by this Security Instrument; and (c) any excess to the person or persons legally entitled to it." n108

    This is a crucial paragraph. It is the logical place for the document to state clearly that if the proceeds of sale are not sufficient to satisfy the debt, the borrower remains liable and subject to judgment for deficiency. But it does not say that. A lawyer or lender reading the paragraph with a contextual understanding of mortgage law does not even pause to note the absence of the critical warning, but a layspeaker or even a lawyer whose practice does not include real estate would not infer liability for deficiency. Without that inference there is no consent. An observer would not infer recourse liability. Deficiency liability is therefore imposed by fiat, not by consent given after full disclosure.

    California n109 and Arizona n110 prohibit or limit deficiency judgments against homeowners. The critical paragraphs of the California Security Instrument are identical to those examined herein, so virtually the same words create a nonrecourse loan in California [*64] and a recourse loan in Texas. Of course, the California statute makes the difference, but a layspeak interpretation of identical documentation as nonrecourse is reasonable.

    It is an overstatement to say that lenders commit intentional fraud by not revealing the full consequences of default. But the documents are intentionally chosen by the lender, they are misleading in that they conceal a critical fact, and the borrower presumably relies on what they say.

    I do not suggest that lay mortgagors read the loan documents with a high degree of care, nor that, even if they did, they would comprehend the full lay meaning of the words. Even more to the point, it would do the borrower no good to read the documents because loan terms and documents are offered on a "take-it-or-leave-it" basis. But the "take-it-or-leave-it" lender should be held to the same terms it imposes on borrowers. n111 A reasonable lay reader and a reasonable law reader could easily interpret the documents as providing (1) that the borrower promises to pay the debt, and (2) if the borrower defaults, then (3) the lender can foreclose and have the property sold to the highest bidder, with any excess going to the mortgagor. And that is the end of it. There is no continuing liability, no deficiency, no lingering judgment, and no need for bankruptcy. n112

    The documents, standing alone, are not at all instructive as to the consequences of default. But surely, one might think, that with access to the Internet, all of those dangers can be discovered with the click of a mouse. However, one should not count on it. A net searcher who knows to search "deficiency" can find some references. But just searching websites that are maintained by lenders, n113 loan guarantors and insurers, Mortgage Insurance Companies of America (MICA), n114 [*65] VA, n115 HUD n116 and FHA, n117 secondary market purchasers, Fannie Mae, n118 Freddie Mac, n119 and Ginnie Mae, n120 does not give quick access to the downside of foreclosure. Instead, these sites offer helpful hints about avoiding foreclosure, debt counseling, and similar trivia. They tout home ownership as a good thing. But where is the bad news? If it is there, I could not find it by a reasonable search.

    6. Full Disclosure Could Shield Lenders from Legal Responsibility for Concealing Recourse Obligation

    Words that make sense only in lawspeak do not and cannot enable lay brains to stumble toward rational decisions that take into account all of the downside of recourse liability. Disclosures, even if made, are ineffective to educate borrowers as to the consequences of recourse debt. n121 Nevertheless, disclosures (particularly those written in [*66] lawspeak) have an obvious strategic function of protecting lenders from claims of fraud. That function might prompt a rational lender to disclose the consequences of recourse liability; but there is not even a lawspeak disclosure in the standard mortgage documentation. At best, disclosure is partial and the most important part of all may be left out.

    C. Fannie Mae/Freddie Mac Promissory Note and Security Instrument Are Ambiguous

    1. How Should Ambiguity Be Addressed?

    a. The Drafter May or May Not Have Intended to Impose Recourse Liability

    Lenders may or may not n122 intend to impose liability for deficiency after foreclosure, but absent statutory limitations, the standard mortgage transaction is widely assumed to impose recourse obligation with liability for deficiency after foreclosure. Accordingly, if we live in an objectivist, modern world in which reality is apparent and available to all of us, and if the content of the documents is tested by the "intent of the author," the documents may impose liability for deficiency after foreclosure. But the world of human understanding is not objectivist, and the intent of the author is not controlling when a reader interprets a text.
    b. Read Textually, the Documents do Not Impose Recourse Liability

    Postmodern literary theory n123 may not be worth much in ordinary legal discourse, n124 but it undeniably has something to say about a [*67] mortgagor's understanding of the deficiency question, and it is consistent with today's cognitive science.

    We know only what our individual brains can understand by way of interpretation. n125 The brain has some inherent capabilities, but everything we assume to understand has to be interpreted in the light of past private experience that has been recorded in our neural memory. n126 All thought is physical and occurs within the body's neural system, mostly inside the skull. n127 We can never know reality as truth; all we think we know is belief. n128 Unless the potential of lingering liability is somehow lodged inside the borrower's brain, it simply has not been taken into account.

    There is no mental "I" separate and apart from the physical brain, that acts as Descartes' thinker. n129 Likewise, there is no transcendental reason that enables us to expand our knowledge of reality by reasoning from one abstract or foundational proposition to another. n130 The lay mind may contain two schemas for loans-a payday loan and a pledge at the pawnshop. Reason does not say the obligation to pay a mortgage debt is like a promise to repay a payday loan, and not like a pledge of a guitar at the pawnshop. Failure to repay the payday loan may result in legal action, physical injury, or midnight phone calls; failure to redeem the pledged guitar means the pawnshop owner will keep it and sell it to somebody else. There is no necessary logic that says the mortgage promise is more like one of these familiar transactions than the other.
    [*68] When a reader (a mortgagor) is presented with a mortgage and note to sign, the text is all there is. n131 The author of the text, if not "dead" as popularly referenced in postmodern literary theory, n132 is at least not accessible to the reader. The author's intent therefore does not produce the reader's interpretation. The text is all law ordinarily takes into account, for example, applying a parol evidence rule to limit consideration to the written document, but admitting extraneous evidence to resolve meaning when an instrument is ambiguous. n133 The text of the mortgage documents nowhere commands deficiency liability after foreclosure.

    Meaning attaches, not just to texts, but also to context. n134 The home mortgage transaction itself is an event with far greater meaning than the words in the documents, the written texts. Probably few, if any, people in the lender's own office have read the documents all the way through, and even fewer understand the lawspeak consequences of the words. It is the activity of borrowing, lending, signing documents, making payments, defaulting, and foreclosing that lenders and lawyers understand. As judged by their behavior, many, perhaps most lenders do not expect the loans to be treated as recourse debt. To the extent borrowers know about this practice, their expectations that foreclosure is the end of their obligations are reinforced.

    Decisions are not a product of pure reason. n135 Decisions are, instead, the result of fairly messy neural competition within the brain to find a fit between incoming data and an appropriate cognitive [*69] model, schema, or meme to classify them for possible action. n136 Imbedded schemas, such as "home ownership is a good investment with tax benefits," may engage other parts of the brain and prompt motor neurons to fire, thereby producing a call to a real estate agent. The entire homebuilding industry combines with the mortgage lending industry to build those neural patterns within the minds of their customers. Their joint prosperity depends more on implanting mental images than on customers making rational choices based on economic balancing of alternatives.

    This is why home mortgage borrowers neither understand, expect, nor consent to lingering liability for deficiencies after foreclosure. For that matter, neither does the lender's loan closer who did not go to law school and understands only the origination and not the foreclosure process. Neither the language used in the mortgage documents nor the nature of the transaction itself carries lawspeak's recourse consequences into the minds of borrowers or creates the mental association in the language of the ordinary borrower. That consequence is inferred only by lawspeakers.
    The difference between a robber and a lender armed with a deficiency judgment is the rule of law, which defines both. Is there not a reservoir of justice in legal rules that can be called upon to prevent law from being used as a total fraud?

    2. Traditional Legal Doctrine Justifies Nonrecourse Interpretation

    There is one unambiguous provision that is understood in both layspeak and lawspeak; if the borrower defaults, the lender can foreclose and have the property sold. Ambiguity exists as to whether [*70] foreclosure and loss of the house extinguishes the debt. If the obligation is nonrecourse, the debt is paid; if it is recourse, it remains owing. There is no common language or common understanding that determines the issue.
    a. Extrinsic Evidence Can Be Admitted to Explain Ambiguous Documents n137

    A standard way of resolving contract ambiguity is to ask whether one party understood that the other had a different meaning for the terms. If so, then the knowledge is treated as a fault basis for choosing the meaning of the mistaken party. n138 The borrower did not even know about the alternative meaning and is free from sin. The lender, however, is a member of both the lawspeak community and the layspeak community. At the office, the lender speaks lawspeak. At the corner grocery, the lender speaks layspeak. When the lender writes a letter to his or her mother, he or she uses Webster's Dictionary, not Black's Law Dictionary. As a layspeaker as well as lawspeaker, the lender either knew or should have known that the borrower did not understand the lingering liability consequences of the transaction enough to have consented to them. n139

    [*71] If the document is ambiguous, a question of fact is raised, namely "what was the intent of the parties?" However, the answer is not clear. n140 If in fact lenders do not pursue deficiencies in the vast majority of transactions, it is reasonable to say that lenders as well as borrowers did not intend such consequences, at least as judged by their behavior. n141 At a minimum, the lender knew or should have known of the borrower's understanding - or lack of understanding. That being the case, courts should adopt the borrower's meaning and declare the debt nonrecourse as a matter of law unless the lender can prove otherwise.

    b. Recourse Obligation Is Unconscionable, Absent Disclosure and Negotiation n142

    The seventeen pages of Fannie Mae's Security Instrument are procedurally unconscionable n143 in that they are written in lawspeak that is confusing, misleading, and unintelligible to the borrower. Mortgage documents are unquestionably contracts of adhesion. The lender possesses overpowering financial power and legal knowledge. The borrower has no choice other than to accept the deal or be left out of the home market entirely.

    The lender's failure to reveal the full consequences of default and to refuse to negotiate on that point is substantively unconscionable. Recourse liability is an unexpected and harsh penalty for default [*72] unless it is revealed and negotiated. n144 The burden of recourse liability on the borrower far outweighs the benefit to the lender. Given their behavior, most lenders do not intend to enforce their contract right to deficiency. They expect, instead, to acquire power they can exercise over the borrower if they choose. This grant of arbitrary power is itself unconscionable unless connected with some real economic interest.
    Lenders bear the unavoidable risk of market decline, and any attempt to pass it off to the average home mortgage borrower is simply unconscionable, unless the assignment of risk is clearly negotiated, bargained for, and understood by the borrower. n145

    3. Nonrecourse Status Does Not Impair Negotiability

    Recourse liability and negotiability are separate, but related, concepts. Purchasers of negotiable home mortgage notes can claim holder in due course n146 protection from personal defense advanced by the borrower that lessens the apparent obligation on the note, n147 whether the note is recourse or nonrecourse. n148 Nonrecourse status simply limits the payment to a particular source (the land). n149

    The Fannie Mae Note may be nonnegotiable as well as nonrecourse. Uniform Commercial Code section 3-104(a)(3)(ii) [*73] preserves negotiability even though the note contains "an authorization or power to the holder to ... realize on or dispose of collateral ... ." The traditional analysis of real estate mortgage notes is that the mortgage acts simply as collateral. n150 But if the Fannie Mae Note's "in addition to" reference to the security instrument requires the two documents to be read together, n151 the multiple additional provisions in the security instrument render the note nonnegotiable.

    A secondary market purchaser may claim that the appearance of the note as recourse obligation may make it such in the hands of a holder in due course. But to be a holder in due course the purchaser must, in addition to the technical requirements, buy in good faith and without notice that the maker (borrower) had a defense. n152 Secondary market purchasers undoubtedly acquire possession or control of the entire file associated with the home mortgage loans they buy. n153 Therefore, they have access to the security instrument and note that, as interpreted in layspeak, are misleading, ambiguous, and nonrecourse. Consequently, secondary market purchasers have notice that the obligation itself is nonrecourse, or at least ambiguous as to personal liability. n154
    [*74] Uniform Commercial Code section 3-305(a)(1)(iii) preserves a defense of fraud (fraud in the factum) as against a holder in due course if the obligor was induced to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms. n155 The case made herein does not fit the classic definition of fraud in the factum as, for example, having a blind person sign a check represented to be a laundry ticket. But it does fall in the same category from the standpoint of an objective observer. Fraud in the factum involves such deceit when the maker does not know or have an opportunity to know its essential terms. The maker of a home mortgage note may know that he or she is signing a note and may understand the remedy of foreclosure. But a note can still be recourse or nonrecourse, and the essential fact of recourse liability is not revealed in the documentation, but is concealed by the lender's own documentation. Concealment deprives the maker of the opportunity to know this essential character of the note, providing the borrower a real defense as to the recourse aspect of the note, though not to the lien on the property.

    III. Reality, Policy, and Justice Support Nonrecourse Treatment

    It would be unrealistic to think that the truths revealed herein will cause courts to declare that a much-used set of mortgage documents [*75] decide that this particular Security Instrument is nonrecourse, then it would have far-reaching consequences, considering the similarity of home purchase mortgage documents.
    A. Basic Mortgage Law Would Be Unaffected by Holding the Fannie Mae/Freddie Mac Documents Nonrecourse

    The cash value of declaring the Fannie Mae Security Instrument nonrecourse may be substantial if losses on subprime mortgages generate serious efforts to impose liability after foreclosure on home purchasers. Recasting, in particular, subprime home mortgage documents as nonrecourse provides a rough measure of justice by imposing the market loss on the bad guys. n156 The loss from this financial debacle has already been taken at the investment end, with banks and Wall Street firms writing off billions of dollars in losses. n157 Recasting specific mortgage documents affects the obligations created by these culpable market participants, but, since background mortgage law stays unchanged, borrowers and lenders remain free to create recourse liability. n158 Not all lenders are guilty of the excesses and frauds committed by some subprime lenders. Holding home mortgage notes nonrecourse would undoubtedly hurt some innocent lenders and benefit some crooked borrowers. But law needs to be right in more cases than it is wrong. On balance, nonrecourse treatment is justified because in the ordinary, honest borrower's case, he or she did not bargain for recourse liability, and the lender did not reveal the consequence. When borrower fraud is a serious issue, the lender is likely to have a tort action to litigate liability and damages.

    B. Deficiency Liability After Home Mortgage Foreclosure Is Inefficient

    1. As Measured by Traditional Economic Theory

    Economists undertake to apply scientific method to analyze market activity in terms of efficiency-a net increase in individual satisfactions, which is implicitly assumed to be a good thing n159 or, per Richard Posner, an increase in overall wealth. n160 Economists construct hypothetical models of behavior that postulate both borrowers and lenders as rational maximizers of their own utility in an amoral market. n161

    Rationality implies the borrower is competent and has enough information to commit to the obligation. n162

    Fraud is inefficient in that it misleads market participants into making irrational choices. n163 Documentary concealment of the consequences of default and foreclosure has the same effect as fraud, [*77] in that borrowers cannot accurately measure the exchange value of the loan and therefore, cannot make a rational decision. n164 If lenders get the advantage of recourse liability without full disclosure, there is not only a lack of incentive to disclose, there is incentive to avoid calling borrowers' attention to the downside of default. Lenders' advertisements and websites bear this out.

    Judged as wealth maximization n165, there is a net wealth loss if the gain to the lender from deficiency collections is smaller than the loss to the borrower, or if the borrower chooses bankruptcy to wipe out the debt. The loss to individual borrowers probably exceeds gains to the lender when collection costs, market exclusion, lawyers' fees, and demoralization are taken into account. Thus, deficiency liability flunks the wealth maximization test.

    If the market offered a choice, risk averse borrowers who were willing to pay additional interest or settle for a lower loan-to-value ratio would logically bargain for nonrecourse debt. n166 Willing lenders [*78] would assess the nonrecourse borrower's credit and property value more carefully because the lender, not the borrower, would clearly bear the risk of market downturn. This is what happens in the commercial real estate market, where all participants understand the difference between recourse and nonrecourse obligations and are in a position to bargain to efficient outcomes. n167 But this is not the case in the home loan market, n168 where loans that are expressly nonrecourse are virtually unknown.
    In a purely rational home mortgage market, lenders would offer two rates: lower rates to home buyers who agree to recourse financing, and higher rates to those who bargain for nonrecourse financing. The home mortgage finance market does not do this, perhaps because having two types of loans would increase the complexity of transactions without producing much gain. Contrary to rational economic assumption, mortgage rates in California, where purchase mortgages are nonrecourse by statute, do not appear to be dramatically different from rates in states that permit deficiencies after foreclosure. n169

    The influence of Fannie Mae and Freddie Mac in secondary mortgage finance may have discouraged development of alternative mortgage types, particularly with respect to recourse and nonrecourse liability. n170 A market apologist would assert that having a single [*79] nonnegotiable set of documents is efficient, in that it eliminates wasteful bargaining over terms. n171 It does this, however, at the cost of depriving borrowers of true, intelligent choice.

    Lenders may argue that nonrecourse home loans pose a moral hazard that borrowers would walk away from home mortgage obligations whenever house values drop below mortgage debt. Despite some evidence to support the proposition, borrowers have other reasons for not walking away from their homes, notably that they would probably pay the same amount in rent if they lost the mortgaged house. In addition, if lenders do not ordinarily pursue deficiencies, or if borrowers do not know about deficiency liability, there is no reason to think that fear of deficiency will prompt borrowers to stretch their budgets to perform. Economic theory would hold that, if nonrecourse loans resulted in higher defaults, lenders would either raise rates or restrict funds in the area. n172 Neither seems to have happened in California where home purchase loans are nonrecourse. n173

    [*80] A rational lender who forecloses recourse mortgage debt by judicial procedure would obtain a deficiency judgment if the additional cost in time and fees is minimal and if the judgment has some value. But this gain is nullified if the time value of money makes alternative arrangements such as negotiated settlement more profitable. Particularly where foreclosure produces a right to statutory redemption, lenders may forego deficiency and bargain for a voluntary conveyance to speed up liquidation. Unfortunately, securitization makes such individual bargaining problematic and removes this theoretically efficient outcome. n174

    A rational lender who forecloses nonjudicially would assess whether the value of likely collections outweighs the cost of the judicial procedure required to obtain a judgment lien against the borrower and the costs of continuing pursuit. For some lenders, public perceptions of overreaching may be viewed as a cost. A rational lender might, in lieu of judicial action, sell the claim to a debt collection entity at a substantial discount or use collection agents who will threaten legal action, but file suit only if the prospect of collection outweighs the cost of suit. Recourse liability may be worth a few pennies to such lenders and to private mortgage insurers, but there is little social advantage in encouraging collection tactics that impose external costs of abuse that are not taken into account by the industry.

    Bankruptcy offers a way out for borrowers when deficiency liability becomes unbearable. This unattractive, expensive, inefficient option destroys any benefit lenders derive from recourse liability. n175 [*81] Unless lawyers' fees are counted as generating positive utility instead of wasted transaction costs, the overall loss from recourse liability appears to outweigh any efficiency gains when bankruptcy is considered a viable option.

    Continuing liability after foreclosure shifts the risk of market decline from lender to borrower. An efficiency analysis justifies this shift only if borrowers consented to it at the time of contract, something they simply did not do.

    2. As Measured by Behavioral Economics

    Behavioral economics is less rigidly formulaic, and probably more realistic in its assessment of human economic behavior. n176 Applying what is called "bounded rationality," behavioral economists acknowledge the limited cognitive abilities that constrain human problem solving. n177

    "Bounded willpower" implies people sometimes make decisions against their long-term interest. n178 These acknowledgments considerably weaken the notion that borrowers are so rational that they obtain information they do not know they need, weigh all consequences of their decisions, and reach a conclusion based on rational self-interest. The behavioral concept of "bounded self-interest" implies humans are often willing to sacrifice their own interests to help others. n179 At the risk of humanizing government institutions, FHA's and particularly VA's forbearance policies seem to be based on bounded self-interest. n180

    C. Uniform Law Proposals Would Eliminate Deficiency Liability Following Home Mortgage Foreclosure

    The idea of eliminating deficiency judgments following home mortgage foreclosures is not a radical dream hatched by a single law professor. n181

    Several states now prohibit or restrict deficiency collection on home mortgages. n182 Section 511(b) of a proposed Uniform Land Security Interest Act would eliminate liability for deficiency after foreclosure of a mortgage on property bought for individual use as a personal residence. n183 The new Uniform Nonjudicial Foreclosure Act shelters home mortgage debtors except in cases of fraud. n184 These Acts, though not currently adopted, n185 imply that when home mortgage recourse liability is considered anew, it is found wanting. The attractive thing about holding the predominant mortgage form nonrecourse is it could provide a large-scale test of the concept without radically changing mortgage law itself. If it works, then the idea can spread. If it does not work, basic mortgage law is unaffected and recourse documents can be drafted (more artfully than the current Fannie Mae form).

    D. Trust as a Public Good Is Reinforced by Holding Home Mortgages Nonrecourse

    Many demoralized borrowers facing foreclosure do not understand that legal representation might be useful if they could afford it, and they would not know to ask about recourse debt consequences. Except for personal injury claims with substantial medical or earnings loss, most ordinary citizens are better off taking what an economics-driven market offers than undertaking a legal contest. This reality leaves powerful market participants as judges of their own case. Life is full of examples of abuse; for example, insurance companies that delay and deny legitimate casualty payments or, deny health coverage and let insureds die, and Internet sales that unilaterally impose unconscionable terms on downloads.
    Trust is a serious casualty when concentrated market power is placed in the hands of such private interests, especially when it is exercised unfairly.

    E. Trust is a Public Good

    Francis Fukuyama makes a convincing case that trust is a public good. n186 A nation with high trust in its institutions supports industrial and financial development that is impossible where trust is lacking. n187 For example, people trust Swiss banks, not Kenyan banks; and capital accumulation is possible in Europe, but not Africa. Continued betrayal of trust by lenders, insurance companies, and the legal system will eventually damage any nation's fundamental economy, respect for law, and community morality itself. n188

    [*84] Mortgage lenders present themselves to the consuming public as business entities worthy of trust, and borrowers tend to trust them. n189 Lenders ordinarily trust borrowers to repay. Citizens trust the legal system to be fair. Trust must be mutual to maintain the public good.

    When mortgage documents hide the downside of a home mortgage transaction in a foreign language and impose the burden of recourse liability on borrowers that vastly outweighs benefit to the lender, trust is sacrificed along with fairness. The subprime mess came from violation of trust. Many subprime borrowers trusted lenders to provide loans that were fairly priced and not designed for default. A fair number of lenders broke trust with borrowers by predatory practices and they broke trust with financial markets through outright fraud as they offered their defective mortgage-backed securities around the world. n190 Some borrowers were party to the fraud, and the entire securitization debacle reduced trust in financial institutions at an international level.

    Who is to police the trust obligation? Legislators are captives of the interests that are causing the problem. Courts are too conservative to act boldly, claiming that legislatures are the proper body to make corrective rules. Lenders have been so schooled in neoclassical economic theory that morality does not stand in the way of employing legal strategies to bilk people who know little and have little choice, [*85] but are treated as hard-bargaining, rational market participants. n191 A call for return to some sort of conventional morality may assume too much - that there ever was a moral structure that reined in pure greed. n192

    IV. Concluding Thoughts

    The first part of this article pulled a number out of the air and suggested that deficiency liability from subprime foreclosures might run forty billion dollars. The subprime issues are far more complex than deficiency judgments vel non, and nonrecourse characterization of home mortgages may be more significant for prime borrowers who have more assets at risk than subprime borrowers. But as the dominoes fall on the real estate finance and sales industries, receivers and trustees in bankruptcy may be obliged to pursue all potential assets to satisfy creditors. n193 So what is to be done?

    Preserving trust as a public good requires that the entire legal system, courts as well as legislatures, increase supervision over unbalanced transactions to be sure the transaction itself is fair. Law may be described as an autopoietic n194 system that moves through time, reinforces practices that replicate from day to day, changes [*86] incrementally, and moves on. It is the system itself that is wrong about recourse liability in home mortgage transactions. Those individuals who participate in the game of law from time to time as lawyers, judges, legislators, borrowers, and lenders, are for the most part decent, moral human beings who play their roles honestly and competently. They do not choose to be oppressive, fraudulent, or cruel. Few people who work in the lenders' offices know what the documents say or mean in lawspeak. Few judges think or look beyond the traditional rule when entering judgment.

    Few real estate lawyers challenge it, knowing the challenge is likely to fail.
    A single court's declaration that standard mortgage documents are ambiguous or misleading on account of concealment will not avert forty billion dollars worth of misery. Abstract rules of law do not have much effect on real people's lives if they have to be researched, argued, and applied in individual lawsuits where expensive lawyers have to represent individual borrowers in cases where the amount in controversy may not equal the lawyer's fee.

    Lenders are not going to give up their ten cents worth of deficiency advantage, no matter how many dollars it costs hapless borrowers. Some sort of automatic class protection is indicated. Public choice theory paints a dismal picture of legislative (in)action in a world where lenders can use their political and economic power to convince legislators to leave current rules intact. n195 Retroactive legislation that changes the legal relations of parties may invoke constitutional problems. The Uniform Acts that would prospectively eliminate personal liability for deficiency after home mortgage foreclosure have not been widely adopted, n196 and few states have [*87] followed the lead of the antideficiency states in recent years. n197 The beauty of the common law is that a decision can be made that departs from the past with the assertion that the law itself has not changed, but the application to the particular case produces an unexpected result. The law of recourse obligation would remain the same.

    But the particular documents would simply be interpreted as nonrecourse. To have substantial effect on lenders, a class action would be required.
    Class action lawsuits brought on behalf of borrowers would be problematic, but possible. Some class actions against predatory lenders have been brought and settled short of trial. n198 To accomplish institutional change, such suits should not stop with settlement, however tempting the terms might be for attorneys seeking to pay their own rent.

    In particular, any settlement that sets aside money for disclosure n199 or "education" for borrowers is useless. n200 The [*88] limitations of the human brain are such that we might as well burn the money as add another disclosure statement at closing. n201 A successful class action against the major secondary market purchasers and mortgage insurers for declaratory judgment that standard mortgage documents are nonrecourse might establish a nationwide rule of law that would be honored as to other mortgagees and secondary market purchasers. The burden is on lawyers and judges to change the system.

    This article ends with a call for individual trial judges to declare that the most familiar mortgage documents create nonrecourse debt, thereby forcing appellate courts to face the issue whether home mortgage deficiencies are based on consent or fiat. n202 If fiat, it is unfair and should be nullified. Today, the liability is fiat, pure and simple. Carl Sandburg gets the last word:

    The work of a bricklayer goes to the blue.

    The knack of a mason outlasts a moon.

    The hands of a plasterer hold a room together.

    The land of a farmer wishes him back again.

    Singers of songs and dreamers of plays

    Build a house no wind blows over.

    The lawyers - tell me why a hearse horse snickers

    hauling a lawyer's bones. n203

    Carl Sandburg (1878-1967)

    [footnotes omitted]
  7. byeAZ

    byeAZ LoanSafe Member

    I went over my Deed of Trust which is the same version that I found in Freddiemac web site. I didn't see any alarming terms. However, I just want to double check with the guys who have the AZ Deed of Trust. If all have the same version (the footer of which prints AZ-Single Family-Fannie Mae/Freddie Mac UNIFORM INSTRUMENT) then I guess mine is just a standard Deed of Trust then no worry.

    Thank you for the reply.
  8. byeAZ

    byeAZ LoanSafe Member


    My Dee of Trust is Form 3003. But it is not a Fannie Mae loan. The lender just directly used that document. This is the link to my Deed of Trust. <cite>www.freddiemac.com/uniform/doc/3003-ArizonaDeedofTrust.doc.

    I have only first loan and didn't refinance and all money are the purchase money for my house which is a regular single family home that resides on a lot less than 2.5 acres.
    </cite><!-- google_ad_section_end -->
  9. byeAZ

    byeAZ LoanSafe Member

    Leaving AZ,

    Did you have a lawyer to review your document before going for foreclosure? Is that helpful? I talked to a lawyer and told him my situation. He said my loan is a non-recourse loan and shouldn't worry about deficiency judgement. Some other lawyers wanted me to pay 500 dollars to review my document. What is your expeirence? Thanks.
  10. LeavingAZ

    LeavingAZ LoanSafe Member

    My loan was 100%, no down purchase money only.
    No refis or heloc's. My mortgage company is CitiMortgage, but I believe my loan has been sold to Fannie Mae. I don't know if they've sold it simply because I'm a month away from foreclosure. My lawyer said that my loan was non recourse, because of Arizona foreclosure laws. I don't think it matters who owns your loan, as long as you're not shooting for a refi or loan mod. I believe that the Arizona laws apply to all of us and unless you wanna buy a house in the next 7 years, then you should worry about Fannie and Freddie.
  11. byeAZ

    byeAZ LoanSafe Member


    Thanks for the info.
  12. LeavingAZ

    LeavingAZ LoanSafe Member

    You're welcome. Prof Shays says it doesn't matter who owns your loan. This doesn't change the non recourse nature of our loan/state.
  13. ProfessorShays

    ProfessorShays LoanSafe Member

    I narrowed my discussion to loans where ownership changed to Fannie Mae. While the same would be true with regard to most situations where a loan's ownership interest changed, I can't say it is true with all. For example, a VA guaranteed loan created prior to March 2, 1988 has continuing liability to the veteran after foreclosure even if it was purchase money, for an amount equal to the Veterans' Administration payout on their guarantee.

    Yes, I recognize this example is a bit old, but there may be others out there I don't know about. Hence the reason for this reply.

  14. LeavingAZ

    LeavingAZ LoanSafe Member

    Oh yea, except VA loans. My friend's husband is in the Air Force and she won't foreclose 'cause they have a VA loan here in AZ. AZ laws don't apply to VA loans.
  15. byeAZ

    byeAZ LoanSafe Member

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