Eighth Circuit Court ruling makes loans disappear

Standard

The decision could make significant changes in the secondary market

foreclosure

I refer you to this article from Bloomberg that led me to read the Eighth Circuit Court of Appeals case decided last month, CityMortgage, Inc. v. Equity Bank, N.A.*.

In South Carolina and most other states, the bank has the power to pursue the borrower personally if it can’t sell the property that is subject to a mortgage for the full amount of the loan after a foreclosure. There are a handful of “non-recourse” states where it is not possible to pursue the borrower personally. But this case was decided under Missouri law, and Missouri is not one of those unusual states.

The article makes a point that’s news to me: non-recourse mortgages are standard in most countries other than the United States.

The case involved a repurchase demand under an agreement between CityMortgage and Equity Bank. Twelve loans were involved, six that had been foreclosed and six that had not. The surprising ruling relates to the six mortgage foreclosures. The Eighth Circuit affirmed the lower court, which had held that the six loans that had been foreclosed no longer existed.

The dissent got it right, however, by stating that the loans were not “liquidated” or “extinguished” by the mortgage foreclosures. The dissent states the obvious: a mortgage is a security interest in real property that serves as collateral for the borrower’s loan. When the mortgage is foreclosed, the underlying promissory note survives and the borrower continues to be liable for the resulting deficiency (absent further action such as a new agreement or a discharge in bankruptcy.)

The article correctly states that the Eighth Circuit transformed recourse loans into non-recourse loans by its ruling. The article also states that non-recourse loans may lead to higher interest rates and larger swings in housing prices.  Purchasers on the secondary market won’t pay as much for non-recourse loans, and, for that reason, this case could have a significant impact on the secondary market if other circuits follow the lead of the Eighth Circuit.

* No. 18-1312 (8th Cir. 2019)

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