When homeowners acquire their residence and enter into a mortgage, the lender in real estate transactions has what is known as a recourse loan. The loan is secured by the signatures of the buyers and collateralized by the real property acquired. If a bank should, at some point in the future, be required to foreclose because of the non-payment of the obligation, the bank has, in New York what is known as “an election of remedies”. This election allows a bank to sue on the note or to sue on the mortgage. Suing on the mortgage means a foreclosure action. Suing on the note means pursuing a client’s liquid assets, such as bank accounts, securities brokerage accounts and other money equivalents. If after a foreclosure action the proceeds of sale do not satisfy the indebtedness, the borrowers remain liable for the deficiency.
Realtors are not often given an opportunity to be involved in non-recourse mortgages. A non-recourse mortgage is a mortgage indebtedness secured by the pledge of the real property but for which the borrower is not personally liable. If the borrower defaults, the lender can foreclose but the lender’s recovery is limited to the collateral. Such loans are sometimes issued in commercial transactions. In the current environment, it has become more and more difficult to obtain a non-recourse loan. Nevertheless, Realtors should be familiar with the nuances of non-recourse debt, particularly when engaging in a commercial or investment property transaction.
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