Somewhere in the curriculum, there is a mention that Commerical MBS is backed by non-recourse loans whereas Residential MBS is backed by recourse loans. I was under the impression that home loans are non-recourse as well, wherein the borrower is not personally liable for losses… - all that the lender can do is seize the home and auction it. If the sale price is not sufficient to cover the loan balance, the loss is borne by the lender. The home owner can walk away scot free. what type of ‘recourse’ does the lender have in a home loan scenario.
It depends on the loan & the state the loan is offered… In California, the “purchase money” loan is non-recourse. The borrower can walk away from the house not owing a dime. However, if the borrower takes out a second loan or borrows more than the home value, they could still owe if they walk away.
No wonder jingle mail happens then. In the UK if you default owing more than the value, the bank can and will chase you until you go bankrupt.
Yes… people laugh at the speculators in california but what they did was very smart. Heads I win, tails you lose!
I don’t know how you define “scot free” but it’s not a rosy picture. By that time, the borrower will have foreclosed on a property, and the default absolutely demolishes your credit. And as far as not being out any money, well technically if you have defaulted then chances are you didn’t put any money down (or hardly any) and if that was the case then you were paying PMI out the a$$. PMI covers that gap between the accepted bid at auction and the mortgage balance. So, techinically the lender doesn’t bear the loss because the monthly PMI premium has paid for coverage, and technically the mortgage insurance company bears the loss. That is what has happened and that is why the secondary market for mortgage loans no longer offers 100% loans because lenders won’t loan it if the MI company won’t back it. If you think what they did was smart, I question your ethics. The “speculators” penalty is shoddy credit (unless they chose bankruptcy…doubtful) and this is not enough. There are two risks involved in the secondary mortgage market: credit risk and prepayment risk. Because of what they did, credit risk is huge now and that’s a big reason why we are in this position of a tightening of credit.
… you still owe the government though… and they will go after you 
Even if you get the lender to accept a short sale (where they take the loss), you get to pay the taxes on the forgiven portion… pretty sure they consider the amount forgiven (difference bt sale price and mortgage balance) as ordinary income… can result in a nice tax bill. Taxt debt is the only variety that can land you in jail- so thats not too rosy either.
> If you think what they did was smart, I question > your ethics. This is Nash theorm at work. I am an ethical renter; one of my contact is an unethical homeowner who walked away with 180k gain. He took HELOC 180k and invested in his home country. When the home price went down by 200k, he told the bank of his inability to pay and to to take the house and sell it - bank preferred to work with him, instead of taking the foreclosure path. they sold the house at 200k loss. Entered into a new agreement with the Bank to pay peanut $100 per month for many years… he is happy, Bank is happy (perception of collection in progress). His credit score is down by 100+ points. summary: in US, Residential MBS IS Non-recourse - all they can do is destroy the credit history. No jail term, lawsuit, bankruptcy, attaching assets. Sigh.
akanska Wrote: ------------------------------------------------------- >you get to pay the taxes on the forgiven portion… Not true - he has already moved the money out of the country; so, considered as money spent already.
busy_people Wrote: ------------------------------------------------------- > akanska Wrote: > -------------------------------------------------- > ----- > >you get to pay the taxes on the forgiven > portion… > > Not true - he has already moved the money out of > the country; so, considered as money spent > already. that statement makes no sense- just because he laundered the money out of the country doesn’t mean he is free of his tax bill. It’s called tax evasion and can land you time in federal prison. Thats like saying if you steal a car and dive it to mexico, you don’t have any legal issues. They had put a bill in the house to allow people to avoid this tax penalty on owners for short sales. Lame.
shouldn’t truly non-recourse mean no impact on credit? or does the industry ding your credit but the bank cannot come after you for the gap amount? how does it work in the commercial sector as it relates to credit rating impact when a non-recourse commerical RE loan borrower walks away