Refinancing Can Cause Legal Pain Later
by Dean Harris

"Non Recourse" versus "Recourse" loans.  

As of the date this article was written, refinanced mortgages give lenders the legal right to attach your accounts and other assets if you then lose the home to events such as foreclosure or short sale.

You are right to wonder whether your refinancing option looks too good to be true for several reasons.  The most important yet most overlooked problem with a refinance?  When your new loan pays off your original first mortgage you are giving up the valuable protection of a "non-recourse" loan, also known as a "purchase money" mortgage.  This is more fully explained in some of the paragraphs below.

The most obvious and attractive reason many homeowners choose to refinance is to lower their monthly payment which is usually lower because of a new lower interest rate.  An original adjustable rate loan can suddenly adjust so much higher that the monthly payment can quickly become overwhelming and begs to be refinanced.  

Whether a new loan's rate is fixed or adjustable, owners can also experience high closing costs and hidden fees.   Speaking of hidden disadvantages, what exactly are "recourse" loans?

No one expects foreclosure but huge numbers of homeowners are now facing the loss of their home.  If you, as an owner, had refinanced your original first mortgage, you now have a recourse loan.  After the refinance, if a situation keeps you from paying the balance on the loan, such as a foreclosure or a short sale, then, at almost any point in the future, that refinance lender can attach your bank accounts, personal assets and even your paycheck to satisfy the lender's definition of what it considers the full value of the property.

IMPORTANT "RECOURSE" UPDATE - June 2010 through August 2010

In an effort to keep banks from what many describe as "unjust enrichment" at the expense of homeowners trapped in inflated mortgage loans attached to homes with nosediving values, the State of California's Senate and Assembly passed a new law (SB 1178) that grants "Non Recourse" status to refinanced mortgage loans as well.

One very important exception:  If the refinanced loan included "cash out" (cash to the borrower as well as a refinance) then these new "non recourse" protections will not apply.

Now that the State Assembly has signed the bill (August 19th) it goes to Governor Schwarzenegger's desk, where it will either be signed or vetoed.  I will update this article with any results or changes in circumstances.

Some say homeowners should not be encouraged to default.  They say this new law could make it easier to simply ignore the mortgage contract.

As you can see, strong arguments can be made for and against this new legislation.  If signed, it will become law on June 1, 2011.

Comments?  Email me: dean@deanshomes.com