non-recourse – Chermack Law

The blog, Credit Slips, recently featured a post by Adam Levitin about whether mortgages should ever be non-recourse.

I agree wholeheartedly with Mr. Levitin’s post. I’d also like to add that the current mess that we have found ourselves in is an anomaly. It wasn’t normal for housing prices to increase at such a high rate, and it’s not normal for housing prices to drop at the rates at which they have currently dropped. Exotic mortgages and zero-down loans, and the idea of starter homes and getting into the market before you were “priced out forever” all contributed to this mess. For the people who bought into those ideas and now find themselves in financial distress due to job loss or health problems or any other “life happens” reasons, I am thankful that some mortgages are non-recourse. When someone is worried about “hanging on” and just making it through one of the worst economic times our country has seen, I am glad that people who have non-recourse mortgages don’t have to worry about one more stress – the stress of a deficiency judgment.

When a homeowner is worried that they might lose their house to foreclosure, they are usually also worried about whether their state is a “recourse” or “non-recourse” state. In a non-recourse state, if the funds from the sale of the mortgaged property (the house) are not enough to cover the outstanding debt (the amount the homeowner owes on the mortgage), the mortgage-holder may not have recourse against the borrower (through a deficiency judgment) after foreclosure. In a recourse state, the homeowner remains responsible for any remaining debt through a deficiency judgment.

Minnesota is generally considered to be a “non-recourse” state, although in certain situations mortgage-holders (or other creditors) may seek a deficiency judgment. Generally, if a foreclosure sale of a home is done by advertisement in Minnesota, no deficiency judgment is allowed. If, however, the homeowner has more than one mortgage on that property (a second mortgage, for example), then that mortgage-holder may sue for a deficiency judgment. In Minnesota, most foreclosure sales are done by advertisement.

Minnesota permits deficiency judgments in cases of a foreclosure by action. A foreclosure by action occurs when a lender forecloses on a property in court. This is a rare occurrence in Minnesota, but if your house is foreclosed on in this manner, it’s important to know that a deficiency judgment is permitted.

This is pretty confusing, right?

Luckily, there are some great resources available online that do a good job of explaining this in easy-to-understand language.

The blog entry “Sued – After a Foreclosure” on the Minnesota Home Ownership Center’s blog does a great job of explaining the operation of the Minnesota deficiency statute and Minnesota’s status as a “non-recourse” state.

The fact sheet “Understanding Deficiency Judgments” by the Minnesota Home Ownership Center, Volunteer Lawyers Network, and the Housing Preservation Project does an excellent job of explaining deficiency judgments in Minnesota.

NOTE: If you have a question for me, I do not check my blog comments on a regular basis (only about once per month). For a faster reply, please email me. My email address is liz@chermacklaw.com

Chermack Law

Tag Archives: non-recourse

Should Non-Recourse Mortgages Exist?

Is Minnesota a Recourse State?