Legal Question in Credit and Debt Law in California

Can I refinance my mortagage with a non-recourse loan?

I purchased my home in California in 1998 with a 30-year fixed rate mortgage, and I am still making payments on the original loan. Rates are lower now and I am considering refinancing, but have the following concerns about the possibilty of taking on more financial risk.

As I understand it, my current mortgage, because it originated when I first purchased the house in California, is a non-recourse ''money purchase'' loan, and is secured only by the house, so that if I simply had no choice but to go into foreclosure owing more than the house was worth, the lender would absorb the loss and come after my other assets or garnish wages for the balance of the loan. (Do I understand that correctly?)

Now if I refinance, is the loan secured similarly only by the property, or would my income and other assets be at risk in a foreclosure situation? Does it vary and depend upon the terms of the particular loan? What are my options? What can and should I stipulate in the new loan agreement to protect my other assets?


Asked on 4/30/02, 4:50 pm

1 Answer from Attorneys
Ken Koenen Koenen & Tokunaga, P.C.

Re: Can I refinance my mortagage with a non-recourse loan?

There are two kinds of foreclosure ... judicial and non-judicial. In a judicial foreclosure, the lender must go to court and file a lawsuit. Then they get a judgment, and can sell the house. It is an expensive and cumbersome way to go for the lender, and gives you a right of redemption after the sale.

That is why most lenders use the non-judicial foreclosure, which is known as a Trustee's sale. It is a process where the borrower is given a significant amount of time (4 months, but it actually takes about 2-3 months of non-payment before they start the proceedings) in which to bring the loan current.

Then, after the time required, they sell the property at auction. There is never a deficiency judgment available to a lender under a "Purchase Money" loan. That means the lender CANNOT go after your other assets.

Also, if there is a non-judicial foreclosure, the lender is not allowed a deficiency judgment, even if it is not a purchase money loan.

Where you need to be careful is where there is a first and second loan. If the first forecloses, the second can still proceed against the borrower for the balance, unless the first and the second are the same lender.

The bottom line is, if you are able to reduce your interest rate, you should go ahead with the refinance. However, do not take any cash out. Keep your equity in the house. Too many people use their house to pay their bills or get a new toy, and that is what gets them in trouble.

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Answered on 4/30/02, 5:32 pm


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