This article examines the income and profit reporting when, on the sale of real estate, the sales price is less than the balance due on loans encumbering the property and the loans are paid off at a discount.

 

Discount reported as income or in price

 

A homeowner purchased his residence for $450,000, with a down payment of $50,000. The remaining $400,000 of the purchase price was funded by a fixed-rate, purchase-assist loan. 

The homeowner’s cost basis in the residence is $450,000, plus transactional costs of acquisition. The cost basis will be subtracted from the price realized to set the profit or loss taken by the homeowner on a resale or other disposition of the residence by foreclosure or a deed-in-lieu. 

The residence was purchased at the peak of the previous real estate boom. Due to the cyclical decline in real estate values since then, the homeowner’s residence is now worth $300,000. However, while the monthly mortgage payments have remained the same, the homeowner’s income has declined. All of the household’s disposable income is now consumed by payments on the loan and the owner can no longer afford to make those payments. 

Editor’s note — The same impact on a household’s disposable income occurs for those homeowners who experience an increase in the dollar amount of monthly installments on an ARM loan, but their pay raises are of normal, lesser annual increases.

The loan balance is now $389,608.88, an amount far in excess of the current market value of the property. 

The homeowner lists the residence with a broker in an attempt to sell it and get out from under the excess debt. Also, any purchase agreement entered into will be subject to the lender’s approval. 

The broker taking the listing understands that because the fair market value of the residence is below the outstanding debt encumbering it, he must, as additional effort to close a sale of the property, negotiate with the lender for a discount on a loan payoff demand, called a short payoff. If the lender agrees to accept a short payoff by discounting the payoff amount, the property will have gone through a “short sale” process. 

The tax issue when the homeowner reports the sale becomes whether: 

·     the discount is added to the sales price paid by the buyer (together equaling the loan amount) to establish the price realized on the sale, thus eliminating any discharge-of- indebtedness income; or


·     the discount is reported as discharge-of-indebtedness income, limiting the price realized to the price paid by the buyer.


The short sale and discount

 

A short sale is a sale of property in which the amount of the net proceeds is less than the principal balance owed on the loan of record and the lender accepts the seller’s net proceeds from the sale in full satisfaction of the loan. 

The difference between the principal balance on the loan and the lesser amount of the net sale proceeds accepted by the lender as payment in full is called a discount, or more commonly, a short payoff. 

If the broker is unable to negotiate a short payoff (discount) with the lender, the seller will make no further payments. Thus, the lender will be forced to foreclose for its failure to arrange a pre-foreclosure compromise. Some lenders will require the seller to default on payments before they will consider a discount and accommodate a short sale. A default is the first step in an owner’s exercise of the “put option” he holds, which is inherent to all trust deed loans and allows the owner can force the lender to buy the property. 

The broker’s ability to successfully negotiate a short payoff with the lender depends in part on the type of loan that encumbers the seller’s property. 

If the loan is an FHA-insured loan on an owner-occupied, single family residence, the lender may only accept a short payoff if the owner qualifies for FHA pre-foreclosure sale treatment. To qualify, the homeowner must be in default on at least three months’ payments, in addition to other requirements. [HUD Mortgagee Letter 94-45] 

Likewise, if the loan is a conventional loan covered by private mortgage insurance (PMI), the lender’s willingness to negotiate a short payoff will be influenced by the lender’s ability to negotiate the settlement of a claim with the private mortgage insurer for the lender’s loss on the short payoff. 

The short sale coordinator hustle

 

Later, before a buyer is located, a homeowner receives an advertisement soliciting owners who are in foreclosure on a loan that exceeds their property’s fair market value. The principal balance owed on the homeowner’s loan amount is $400,000, and his real estate’s FMV is $300,000. The original purchase price, and thus the owner’s cost basis, is $450,000. [See Figure 1] 

The ad implies the homeowner will incur taxes at ordinary income tax rates on the amount of debt forgiven by the lender as a discount on the sale or foreclosure of property, called discharge-of-indebtedness income by the Internal Revenue Service (IRS). 

The ad states that if the homeowner transfers title to the company offering the service, the owner will avoid the tax liability resulting from income generated by the discount given by the lender on a short sale. 

For a fee of $1,000 upward to 1% of the loan amount, the service provider, who we will call a coordinator, claims it will relieve the homeowner of the adverse tax consequences from the purported discharge-of-indebtedness income brought about by a discount. The coordinator offers to take title to the real estate and either: 

·     complete or arrange a short sale of the property themselves; or

 

·     allow the lender to foreclose against the coordinator for nonpayment of installments.

 

After reading the ad, the homeowner is led to believe he will be taxed on the sale of his residence if it is sold for a price less than the loan amount and the lender accepts the sales proceeds as payment in full on the loan. In that case, the discount received on the loan would require the owner to report the discharge of indebtedness as ordinary income and pay state and federal taxes. 

The homeowner believes paying the fee of around $4,000 and transferring title to the coordinator is preferable to incurring a tax liability on the $100,000 discharge-of-indebtedness income ($400,000 loan balance minus $300,000 sales proceeds). 

Does the advertisement correctly represent the homeowner’s tax reporting and tax liability exposure from a short sale handled by a coordinator who takes title? 

No! The short sale of real estate encumbered by a nonrecourse loan does not trigger the reporting of ordinary income for the discounted and discharged portion of the loan. The discount on a nonrecourse loan is considered part of the price realized by the homeowner on the sale, in addition to the price paid by the buyer. 

When a nonrecourse loan is fully satisfied by a discounted payoff on the sale of the encumbered property, the principal amount of the loan is reported as the price realized on the sale. The sale and loan payoff activities are merged and treated as though the property had been sold to the lender for the amount of the loan balance, the put option held by all trust deed borrowers. [Revenue Regulations §1.1001-2(a)(i)] 

Taxwise, the homeowner will also incur and report no profit on the short sale (or foreclosure) since his cost basis is greater than the principal amount of the nonrecourse loan. Here, the unpaid principal amount of the nonrecourse loan, not the lesser price paid by the buyer, becomes the price realized and reported to establish any profit or loss on the sale. [Commissioner of Internal Revenue v. Tufts (1983) 461 US 300] 

In this example, the homeowner will incur a personal loss on the sale of $50,000. The homeowner’s profit or loss from the sale of his residence is calculated by subtracting the owner’s cost basis in the home, $450,000, from the price realized on the sale, the loan balance of $400,000. 

The fair market value paid by the buyer for the real estate is not used to calculate the seller’s reportable profit or loss on a short sale when the real estate is over-encumbered with a nonrecourse loan. 

Here, the sale involved the owner’s personal residence, a capital asset. Thus, a capital loss is incurred since the owner’s cost basis is greater than the price realized (loan amount) on the short sale of his residence. However, the loss is personal, and cannot be used as an offset to shelter other income from being taxed. [IRC §165(c)] 

Trustee’s foreclosure sale on a nonrecourse loan

 

Consider an investor whose depreciated cost basis in a property is $1,250,000. The real estate is encumbered by a $1,800,000 first trust deed loan that is nonrecourse since the note evidencing the loan contains an exculpatory clause, eliminating personal liability for repayment of the loan. Thus, the property’s fair market value is of no concern when reporting the investor’s income, profit or loss on a short sale since the price realized and reported on a short sale is the loan amount. 

Due to market conditions, the value of the investor’s real estate has fallen below the principal amount owed on the note. As a result, the investor exercises his right to default on the note and trust deed and return the property to the lender. This is called a put option since it requires the lender to buy the property through foreclosure when the borrower decides to stop making payments. Ultimately, the real estate is acquired by the lender at a trustee’s foreclosure sale. 

Taxwise, the investor will report a profit of $550,000 on the sale, not discharge-of-indebtedness income, whether or not the real estate is sold at the trustee’s sale for a full credit bid or on an underbid. The portion of the investor’s profit attributable to depreciation deductions he has taken, called unrecaptured gain, will be taxed at a 25% rate. The portion of the profit classified as long-term capital gains will be taxed at a 15% rate. 

A foreclosure sale is considered a voluntary sale of real estate since the property is sold under an agreement that was set out in the terms of the trust deed in the event the investor exercises his option to default. Thus, the profit or loss on the foreclosure sale must be reported, no matter if the price realized is based on the bid (in the case of a recourse loan) or the debt amount (in the case of a nonrecourse loan). [Helvering v. Hammel (1941) 311 US 504; Electro-Chemical Engraving Co. v.Commissioner of Internal Revenue (1941) 311 US 513] 

Now consider the same foreclosure sale on the real estate encumbered by a principal balance of $1,800,000 on the nonrecourse loan. The highest bid is $1,400,000 so the fair market value of the real estate is considered to be the $1,400,000 bid amount. However, the fair market value of the real estate is less than the principal balance on the nonrecourse debt, resulting in a $400,000 loan discount since the lender’s loss is uncollectible. Here, the price realized by the investor for the purpose of reporting profit or loss is $1,800,000, the principal amount of the nonrecourse debt. [Tufts, supra] 

Deed-in-lieu

 

Lenders in a pre-foreclosure workout occasionally accept an owner’s deed-in-lieu for the property that secures their loan. The deed-in-lieu is given in exchange for the lender’s cancellation of the note. Typically, the principal balance on the loan is greater than the value of the real estate when the lender accepts a deed-in-lieu. 

When a trust deed note evidences a nonrecourse debt, the owner must report his profit or loss on a deed-in-lieu conveyance the same as he would report profit or loss on a conventional sale or a foreclosure sale, since all three are considered dispositions by the IRS. 

The owner reports any profit or loss (price minus basis) on a deed- in-lieu conveyance based on the amount of the debt as the price realized. The IRS is not concerned with the discount or valuation the lender gives the property when the loan is a nonrecourse debt. [Rogers v. Commissioner of Internal Revenue (9th Cir. 1939) 103 F2d 790] 

Short payoff, but no sale

 

Consider an owner whose real estate is encumbered by a trust deed securing a recourse loan taken over by the owner when he purchased the property. The trust deed lender offers the owner the opportunity to prepay the loan at a discount. This opportunity arises during periods of high mortgage rates when an old fixed rate loan bearing interest at a drastically lower rate remains on the lender’s books (a situation that exists when mortgage money is tight, as occurred during the early and late 1980s). 

No sale of the real estate is involved since the owner will retain the property. 

The owner accepts the offer and the lender receives an amount equal to 90% of the unpaid principal balance in full satisfaction of the debt, a discount of 10%. 

Does the discount result in discharge-of-indebtedness income, requiring the owner to report the amount as ordinary income? 

Yes! Since the owner retained ownership of the property after the payoff, he must report discharge-of-indebtedness income in the amount of the discount. The discharge-of-indebtedness income is reported as income generated by the property, as though the amount was received as rent. 

Taxwise, the amount of the discount received on prepayment of a loan when the owner retains ownership of the real estate is considered discharge-of-indebtedness income on both recourse and nonrecourse notes. Thus, the payoff of the loan at a discount does not give rise to a profit or loss since the owner did not sell the property. [Revenue Ruling 82-202] 

Now consider a seller who carries back a note and trust deed on the sale of his property. Later, the carryback seller is in need of cash and offers the owner a discount on the remaining balance if he will prepay the carryback note. 

The owner accepts the seller’s offer and pays off the carryback note at a discount. 

Is the amount of the discount on the carryback note considered income from the discharge of indebtedness, as is the case for a discount on a money loan? 

No! The discharged amount of the carryback note becomes a reduction in the purchase price paid to the seller on the installment sale, since: 

·     the owner was not in Chapter 11 bankruptcy;

 

·     the owner was not insolvent; and

 

·     the discount would have been discharge-of-indebtedness income if the carryback note had been a money loan. [IRC §108(e)(5)]

 

Thus, the owner’s basis in the property is reduced by the amount of the discount on the payoff of the carryback note, equivalent to a purchase price reduction on the installment sale. On the owner’s resale of the property, the reduced basis will be subtracted from the price he receives, resulting in a greater profit on the resale equal to the amount of the discount. The discount is taxed at the 15% capital gains rate as profit, instead of the maximum 35% rate (in 2006) for ordinary income that is applied to the discharge of indebtedness on a loan discount. 

Deed-in-lieu to carryback seller

 

Consider an owner of real estate that is encumbered by a carryback note he executed in favor of the prior owner. The current fair market value of the property is now less than the principal balance of the note. 

The owner decides to stop making installment payments on the note and offers to give the seller a deed-in-lieu of foreclosure as full satisfaction of the carryback debt and cancellation of the note. The seller accepts the deed-in-lieu of foreclosure as satisfaction for the debt and cancels the note. 

The owner now wants to report the price realized on his deed-in- lieu transaction as the property’s current fair market value, not the note amount. Reporting the sales price at its market value will reduce the amount of profit he must report. Again, the profit or loss on a deed-in-lieu conveyance is calculated by subtracting the cost basis from the price realized. 

However, the canceled carryback note evidenced a nonrecourse debt. Thus, the price realized on the conveyance is the principal balance on the carryback note, not the property’s fair market value. For discounts on the cancellation of nonrecourse debt, no discharge-of-indebtedness income exists since the price realized is the amount of the debt and the discount is part of the price realized. [Tufts, supra] 

Unless the owner’s cost basis was reduced by depreciation or capital loss deductions, the basis is set primarily by the price the owner paid for the property and should exceed the amount of the carryback note that is canceled. Thus, a capital loss will be taken by the owner on the deed-in-lieu transaction. 

Recourse paper

 

The preferential tax reporting available for a discounted payoff of a nonrecourse loan is not allowed on short sales of real estate involving recourse loans. The discount on a recourse loan is not part of the price realized on the sale and the owner is not entitled to the 15% to 25% profit tax rates on that discount. He is instead taxed up to the maximum ordinary income rate (35% in 2006). 

When a short sale occurs on real estate encumbered by a recourse loan, the seller incurs a tax liability at ordinary income rates on the discount, which is discharge-of-indebtedness income. Conversely, when a nonrecourse debt is discounted on a short sale, the seller’s tax liability, if any, is on any profit taken on the price realized. That price is set as the principal amount of the loan, without concern for the discount or the property’s fair market value. 

For example, an owner’s property is encumbered by a $400,000 trust deed loan. The loan is a recourse debt that exposes the owner to a deficiency judgment if the value of the secured real estate becomes less than the amount of the debt. The real estate is now worth only $300,000, $100,000 less than the loan amount, which is the deficiency. However, the owner’s cost basis in the real estate is $450,000. 

The owner sells the real estate on a short sale. The net amount the buyer pays for the real estate is $300,000. The lender accepts the net proceeds from the sale in full satisfaction as a short payoff of the recourse note. The remaining unpaid balance of $100,000 is forgiven by cancellation of the note since the lender does not judicially foreclose to pursue a deficiency judgment. 

The owner’s tax consequences, calculated based on both the sale of the property and the discount of the recourse loan, include: 

·     a capital loss of $150,000 ($300,000 price received minus $450,000 owner’s basis); and

 

·     discharge-of-indebtedness income of $100,000 ($400,000 loan amount minus $300,000 price realized), reported as ordinary income.

 

Here, if the capital loss is on the sale of a business, rental or investment property, the loss offsets the ordinary income generated by the discharge of indebtedness. However, had the owner’s basis in this example been lower, the capital loss would be a lesser amount. Thus, a point can be reached where the capital loss is insufficient to offset the discharge-of-indebtedness income, the mortgage-over-basis dilemna. 

Homeowners’ recourse loans

 

Occasionally, a homeowner obtains an equity loan or refinances the existing loans encumbering his residence. Equity loans and refinancing are always recourse loans since the net proceeds do not themselves finance the purchase or improvement of the residence occupied by the owner. 

Again, on the sale of the owner’s personal residence when the remaining cost basis is greater than the sales price, the resulting capital loss is a personal loss. Since it is not a loss within an income category, it cannot be written off to offset the taxation of other income. 

Ironically, when a discount on a recourse loan is paid off on the short sale of a personal residence, it results in taxable discharge-of-indebtedness income. This income, however, produced by the short sale of the personal residence, cannot be offset by the capital loss produced by the same personal residence since the loss is classified as personal. [Vukasovich v. Commissioner of Internal Revenue (9th Cir. 1986) 790 F2d 1409; IRC §165(c)] 

Foreclosure on a recourse loan

 

Whether real estate encumbered by a recourse loan is lost to the lender in a foreclosure sale or the property is sold by a conventional sale, an owner has disposed of the property and will experience the same tax consequences in both situations. 

Consider a judicial foreclosure sale of real estate encumbered by a recourse loan. The lender seeks a deficiency judgment on completion of the sale since the proceeds from the judicial foreclosure sale do not satisfy the outstanding principal balance on the loan. 

The owner reports the amount of proceeds from the judicial sale (plus the amount of any liens with priority) as the price realized on his loss of the property through foreclosure. [Aizawa v. Commissioner of Internal Revenue (1992) 99 TC 197] 

To calculate his profit or loss from the foreclosure sale, the owner subtracts his cost basis from the price realized, which is the high bid at the sale. [Rev. Regs. §§1.1001-2(a)(2), 1.1001-2(a)(4)(ii), 1.1001-2(c) Example 8] 

As long as the deficiency judgment remains unpaid, the owner will not incur any tax liability for discharge-of-indebtedness income for the amount of the judgment. However, if the lender later cancels the deficiency judgment or it is allowed to expire, the owner must then report the amount unpaid on the deficiency judgment as discharge-of-indebtedness income. 

Now consider a judicial foreclosure sale where the winning bid is an amount less than the property’s fair market value. As a result, the difference between the two amounts is a discount that the lender cannot collect. The lender will report the discount amount as discharge-of-indebtedness income. This bid-to-value difference cannot be recovered by the lender through either the amount of the bid or in a deficiency judgment. 

A deficiency judgment is limited to the difference between the property’s fair market value (which is not the bid amount unless it is at or higher than the fair market value) and the loan amount. Thus, the discount is the remainder of the loan amount not recovered by the bid or the deficiency judgment. 

In contrast, consider the same recourse loan situation, but the lender forecloses by a trustee’s sale instead. The high bid at the trustee’s sale is for an amount less than the principal amount of the recourse loan, called an underbid, the same as in the previous judicial foreclosure example. 

However, the underbid at the trustee’s sale on a recourse loan triggers tax reporting for both: 

·     a profit or loss based on the bid price paid at the foreclosure sale (plus any senior encumbrances) since it is the price realized by the owner on the sale (as in the prior judicial foreclosure sale example); and

 

·     discharge-of-indebtedness income on completion of the sale for the difference between the amount of the underbid and the loan balance (unlike in the prior judicial foreclosure sale example). [Rev. Regs. §1.1001-2(c), Example 8]

 

At a trustee’s sale on a recourse loan, the bid sets the property’s fair market value. Further, the trustee’s sale bars the lender from collecting any deficiency in the property’s value to fully satisfy the loan. Thus, the owner is released from any further liability on the recourse loan due to California anti-deficiency laws triggered by the use of a trustee, instead of a court, to foreclose. [Rev. Regs. §1.1001-2(a)(2)] 

At a trustee’s sale, the discharge-of-indebtedness income is the amount by which the recourse loan exceeds the , the high bid. 

Recourse note — deed-in-lieu

 

An owner who conveys real estate to a secured lender by a deed-in- lieu given in exchange for canceling a recourse loan, will incur the same tax liability as on a trustee’s foreclosure sale. The price agreed to by the lender on accepting a deed-in-lieu is equivalent to the highest bid at a trustee’s sale. 

For example, a recourse loan is secured by real estate that has a market value less than the outstanding principal balance on the loan. The owner conveys the real estate to the lender on a deed-in- lieu of foreclosure. 

The deed-in-lieu provisions state the fair market value of the real estate is equivalent to the principal amount of the debt canceled in exchange, a valuation negotiated by the owner and his broker. As a result, the transaction avoids any discharge-of-indebtedness income since a discount was not agreed to in the exchange. 

The owner calculates his profit or loss from the deed-in-lieu exchange by subtracting his cost basis from the loan balance since the price realized for conveying the property to the lender is set by the deed-in-lieu provision as the loan amount. [Rev. Regs. §1.1001-2(c), Example 8] 

Now consider a lender who accepts a deed-in-lieu of foreclosure on a recourse loan. The provisions state: 

·     the fair market value of the real estate is an amount less than the loan balance; and

 

·     the lender will cancel the entire outstanding balance of the recourse loan in exchange for the property.

 

The price realized, and thus used to calculate the profit or loss on the deed-in-lieu exchange is the property’s fair market value as negotiated and stated in the deed-in-lieu provisions. 

Since the recourse loan’s balance exceeds the agreed-to fair market value for the property, the owner will incur discharge-of- indebtedness income for the difference, in addition to any profit or loss on the price realized. [Gehl v. Commissioner of Internal Revenue (1994) 102 TC 784] 

Thus, when a deed-in-lieu is given to cancel recourse financing and the amount of the debt exceeds the agreed-to fair market value, the tax reporting results are as follows: 

·     profit or loss is the difference of the agreed-to fair market value minus the owner’s cost basis; and

 

·     income due to the discharge of indebtedness is the difference of the debt minus the agreed-to fair market value. [Rev. Regs. 1.1001-2(c), Example 8; Rev. Rul. 90-16]

 

Attempted avoidance of discharge-of-indebtedness income

 

Consider a parcel of real estate encumbered by a recourse loan that has a principal balance greater than the owner’s cost basis in the property, a situation called mortgage-over-basis. Convinced he will incur discharge-of-indebtedness income, the owner decides to transfer title to a short sale coordinator in order to avoid paying taxes on the income. The coordinator takes title on payment of a fee by the owner. 

After he has taken title, the coordinator does not perform any activities that would indicate he intends to become the owner- operator of the real estate, such as: 

·     escrowing the transaction;

 

·     ordering beneficiary statements;

 

·     assuming the loan;

 

·     obtaining title insurance;

 

·     obtaining hazard insurance;

 

·     maintaining the property;

 

·     making payments on the trust deed loans; and

 

·     placing utilities in the coordinator’s name.

 

Also, the owner makes no transfer disclosures that are generally required of a sale. 

The agreed-to sales price for the conveyance to the coordinator is the principal balance of the recourse loan, even though that amount exceeds the real estate’s fair market value. 

The owner reports a profit or loss on the “sale” to the coordinator by subtracting his cost basis from the balance due on the loan, the price realized as agreed to by the owner and the coordinator. Since the owner’s cost basis in the property is greater than the balance due on the loan, a loss is incurred on the sale. 

While holding title, the coordinator does not make payments on the recourse loan. Further, the owner remains in possession but does not pay rent. 

The real estate is ultimately sold at a trustee’s sale on an underbid, at an amount less than the outstanding principal balance due on the loan. On completion of the trustee’s sale, the institutional lender files: 

·     a 1099-A to report the price paid under the successful bid at the foreclosure sale; and

 

·     a separate 1098 information return to report the discharge-of- indebtedness income due to the discount resulting from the underbid. [IRC §§6050J; 6050P]

 

The 1099-A includes: 

·     identification of the borrower (considered the owner since the coordinator did not assume responsibility for the loan);

 

·     the amount of the loan at the time of the foreclosure; and

 

·     the amount of the loan satisfied by the bid at the foreclosure sale. [IRC §6050J(c)]

 

On any underbid, institutional lenders are required to report borrowers to the IRS by filing a 1098 information return for any discharge-of-indebtedness income they have received. Here, the lender sends a copy of the 1098 to the owner, but not to the coordinator. [IRC §6050P(a),(d)] 

Thus, the owner appears to the IRS as having received discharge-of- indebtedness income, which reduces the amount of profit and increases the amount of ordinary income the owner must report. 

Even though the owner did not hold title to the real estate at the time of the foreclosure sale, a reporting conflict arises for the owner since he transferred the property to the coordinator, in an attempt to avoid discharge-of-indebtedness income. 

In this example, the conveyance of the real estate by sale to the coordinator was a sham transaction. The coordinator had no intention of acting as the owner and operator of the real estate. 

In addition, the owner’s payment of a fee to the coordinator for taking title and performing services for the owner most likely created an agency. In this case, the IRS considers the coordinator an agent of the owner. The coordinator merely holds title to the real estate while handling settlement negotiations with the owner’s lender or locating a buyer before a foreclosure sale occurs. 

Since the owner has already reported a loss from the sham sale of the real estate to the coordinator, he is called on by the IRS to amend the return for the year the loss was reported. The IRS argues the transfer of title was not a sale but a masked brokerage agreement. 

The owner must then report a profit or loss on the foreclosure sale and discharge-of-indebtedness income for cancellation of the unsatisfied loan balance. This occurred on completion of the trustee’s sale when the real estate sold for a bid in an amount less than the balance owed on the recourse note. The owner was thus released by the lender from a deficiency. 

Conveyance subject to a recourse loan

 

An owner contemplating the use of a short sale coordinator should also consider his potential liability to a lender for the deficiency in the value of the property sold to fully satisfy a recourse loan. When real estate is conveyed subject to an existing recourse debt, the owner remains exposed to liability for any deficiency in the property’s value to satisfy the recourse loan if the lender pursues collection by judicial foreclosure. [Braun v. Crew (1920) 183 C 728] 

Unless the coordinator enters into a formal assumption agreement with the owner or the lender, the coordinator will not be liable by contract to either the owner or the lender on the loan if a deficiency judgment is sought by the lender. [See first tuesday Form 431]