“What does all this mean for foreclosed on borrowers, with remaining mortgage balances even after a foreclosure sale has been conducted?”
A long-standing rule in the mortgage lending industry was this when the bank has foreclosed on a mortgage loan and is unable to sell the property to cover the contract loan amount, the lender has recourse to collect on the remaining balance because debt is still owed on the mortgage loan.
In the secondary market, this is a golden rule and produces a lucrative income for lawyers eager to collect outstanding balances after mortgage foreclosure has been completed.
There are 12 Non-Recourse states which include Alaska, Arizona, Washington, Utah, Idaho, Minnesota, California, North Carolina, Connecticut, North Dakota, Texas, and Oregon. These states only allow non-recourse loans.
For Non-Recourse debt, this is a type of loan secured by collateral, which is usually property.
If the borrower defaults on the mortgage loan, the lender can seize the collateral by foreclosure but cannot seek out the borrower for any further compensation, even if the foreclosure sale does not cover the full value of the defaulted mortgage loan amount.
The U.S. Court of Appeals for the 8th Circuit recently ruled on a case that will impact every mortgage loan balance after foreclosure.
The case involved CitiMortgage, Inc. against Equity Bank, where CitiMortgage, Inc. purchased hundreds of home loans from Equity Bank, who is a regional bank operating in Kansas, Missouri, Arkansas, and Oklahoma.
Issues involved a contract dispute, with stipulations that contained specific repurchase instructions.
An agreement was outlined that if CitiMortgage, Inc. found any defects in the mortgage loans, then Equity Bank would be required to either cure the defects or repurchase the mortgage loans back.
CitiMortgage, Inc. determined that 12 mortgage loans were defective and 6 of the mortgage loans had already been foreclosed on.
Many bank foreclosure attorneys and foreclosure defense experts disagree over this ruling. Which the ruling went in favor of Equity Bank, after making their argument that “foreclosure extinguished the loan!”
Yes, this ruling opens the door to protect borrowers “after foreclosure” against remaining mortgage balances not cleared!
After this ruling has created a new cause and effect transformation of “Recourse Loans into Non-Recourse loans.”
Expect to see more fallouts over this ruling.