If you had a recourse loan and defaulted on your debt, the lender can pursue the full value of the debt, even if they’ve already collected any collateral you’ve had on the loan. This can include garnishing your wages or pursuing other avenues in order to collect the debt. A non-recourse loan prohibits this practice. With a non-recourse loan, the lender can only take back the collateral used to secure the loan. This is true even if the value of the collateral doesn’t satisfy the full value of the debt.
Examples of Non-Recourse Loans
A common type of non-recourse loan is found in several U.S. states: the residential mortgage. In California, for example, the anti-deficiency statute forbids a creditor from collecting a deficiency judgment on mortgages. This makes all California mortgages non-recourse loans. Now, let’s say you purchased a house in California in 2020. At the time, the property was valued at $530,000, and your mortgage totaled $500,000. However, since then, a roof leak has caused some serious damage on the property, significantly lowering its value. Adding to your woes, let’s say you’ve also lost your job, which means you’re unable to afford either the repairs to the home or the mortgage payments. The bank has opted to foreclose on the property, although the damage that has occurred means it’s only worth $450,000. Although the lender has opted to collect your collateral (the home), due to California’s anti-deficiency statute, you aren’t personally liable for the difference between the value of the property and the entire amount of the debt you owe. This means the bank will need to absorb the $50,000 loss rather than pursue you for the remaining amount of funds you owe.
Non-Recourse Loans vs. Recourse Loans
A non-recourse loan is the opposite: The lender cannot hold you personally liable for the debt you’ve accrued. A non-recourse loan is generally secured by collateral. However, in the event that the value of the collateral is not enough to clear your debt, the lender is still unable to seek additional compensation for the residual balance of the loan.
