Courts, Legal Basics

questions & answers

Question: Are purchase money mortgages limited to no recourse notes?

Answer:

Purchase money mortgages are completely different from non recourse notes. A purchase money mortgage, typically obtained by an individual consumer, is a pledge of property, usually a home, as security for a loan for the money to pay for the property, as opposed to a refinancing or a home equity loan.

This distinction is important because Arizona has a law which states that, in the case of a purchase money mortgage, if the homeowner cannot pay the debt, the creditor can take the home in a foreclosure but cannot go after the homeowner's other property to satisfy any deficiency. For example, a homeowner obtained a purchase money mortgage of $300,000 for his home and now cannot make the mortgage payments and the creditor forecloses on the house. However, because of the current difficult market conditions, the creditor can only sell the house for $200,000. Because of the anti-deficiency law, the creditor cannot go after the debtor's other property for the deficiency of $100,000.

A non recourse note is a type of promissory note, typically used by business people. A promissory note is a contract in which one party promises to pay a sum of money to another party. Promissory notes can be bought and sold and may be secured by deeds of trust. These notes can be used for part of the purchase price of property, usually in commercial transactions. A non recourse note is endorsed with the words "without recourse" or similar words when the original holder of the note sells to another party.

 This means that, if the person who originally made the promise to pay, fails to do so, the buyer of the note cannot go after the seller to make good on the note. Thus, although purchase money mortgages and non recourse notes are completely different concepts, both can operate to limit liability. A homeowner who has a purchase money mortgage can lose his home in a foreclosure but, in Arizona, the creditor cannot take the homeowner's other property if there is a deficiency. Similarly, the seller of a non recourse note is not liable to the buyer if the person who originally promised to pay fails to do so.