Legal Question in Real Estate Law in California

Re: recourse and non-recourse loan

Whether recourse can be had to the borrower, either by suit on the loan itself or for a deficiency after a foreclosure on the collateral, is determined more by statute than by anything in the loan documents.

I assume we are talking about financing on an owner-occupied dwelling. If it is a commercial loan or property, or a rental, the law is somewhat to very different.

A residential lender generally must exhaust the collateral first. Usually this is by exercising the power of sale in the deed of trust, and if the lender does this, it cannot go after a deficiency and must be satisfied with the results of the sale unless it has an additional ground for suit such as loan-application fraud or waste.

Occasionally a lender will choose to sue in court for foreclosure rather than use the private trustee sale route. This is more time-consuming and expensive, and lenders usually don't elect these so-called judicial foreclosures unless they sense that the borrower has a lot of assets that could be used to satisfy a deficiency judgment, or are otherwise upset with the borrower.

Borrowers are most at risk of a lender seeking and getting recourse against their other assets when the loan is not purchase money, when the property was not owner-occupied, when there was "cash out" as with an HELOC, and when the lender thinks the borrower has other assets. Each factor adds some to the risk.

Another area of risk is when a junior lender loses its collateral due to a foreclosure by a senior lender. These so-called "sold-out junior" lenders are not subject to the collateral-first rules because their collateral has become worthless through no fault of their own, and the law gives them the right to proceed directly against the creditor.

Possibly your situation is one where your mortgage loan will turn out to be non-recourse and your HELOC lender will have recourse. This is not uncommon. The principles outlined above are a rough guide to assessing your risks, and every situation is a little different.