Can the lender of a collateralised loan take more than the collateral upon default?
<p>Recently, Park Hotels &amp; Resorts has pulled out of the San Francisco market, but - assuming I've understood correctly - instead of selling their properties there for pennies and taking the loss on the mortgages(?) on them, they have chosen to default on the debt and leave it to the lender.</p>
<blockquote>
<p>“This past week we made the very difficult, but necessary decision to stop debt service payments on our San Francisco CMBS loan,”</p>
<p>June 05, 2023 (GLOBE NEWSWIRE) -- Park Hotels &amp; Resorts Inc. (“Park” or the “Company”) (NYSE:PK) today announced that, starting in June, it ceased making payments toward the $725 million non-recourse CMBS loan which is scheduled to mature in November 2023, and is secured by two of its San Francisco hotels—the 1,921-room Hilton San Francisco Union Square and the 1,024-room Parc 55 San Francisco. The Company intends to work in good faith with the loan’s servicers to determine the most effective path forward, which is expected to result in ultimate removal of these hotels from its portfolio.</p>
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<p>-- Globe Newswire - <a href="https://archive.ph/M4yl6" rel="nofollow noreferrer">https://archive.ph/M4yl6</a></p>
<p>In a discussion on social media which I won't source for reasons of good taste, I read the following:</p>
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<p>I'm pretty sure the bank could go after the owner for any difference between the unpaid loan balance and what they're able to sell it for. The question is, would something like this force them to write down on their GAAP financials the value of any other loans they've extended. Meaning maybe they won't.</p>
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<p>I don't know what the second and third sentences mean, but the first one gave me the title question - in the case where a loan is taken out like a mortgage, whereby the collateral is the property, and there are big red letters on the offer contract stating &quot;your home may be repossessed if you fail to make payments&quot;, can the lender upon selling the repossessed property at a loss still hold that debt against you and get the money off you somehow?</p>
<p>My initial thoughts are &quot;no, they can't, the reason for the loan being collateralised was specifically to cover delinquency, it's their dang fault for making a bad bet on the market,&quot; but that's directly contravened by the above social media post.</p>
<p>Upon reading <a href="https://law.stackexchange.com/a/67040/33864">this</a> answer, it appears the terms I'm looking for are &quot;recourse&quot; and &quot;non-recourse&quot;, but I'm still unclear:</p>
<blockquote>
<p>The default rule is that security interests in assets <strong>other than real property</strong> is a recourse debt</p>
<p>[...]</p>
<p>In the case of secured debts in real property, most states mirror the personal property rule (which is very close to Uniform since every state, territory and district in the U.S. had adopted Article 9 of the Uniform Commercial Code governing security interests in property other than real estate). But in a few states (including California), security interests in owner occupied residential real estate (a.k.a. mortgages, liens, encumbrances, or deeds of trust) are truly, or in practice are, effectively non-recourse.</p>
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<p>Which I may be misreading, but it sounds like California (of interest here) would be expected to be a special case for some reason.</p>
<p>EDIT:  I read the social media thread further and found the following from the same poster:</p>
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<p>I was wrong. Virtually all big commercial loans of the scale we're talking here are &quot;nonrecourse,&quot; meaning the lender takes the building but has no further right of action action against the borrower. <strong>This is unlike home mortgages</strong>, or even most small business loans.</p>
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<p>From this it sounds like the poster is mistaken, as home mortgages are also non-recourse according to the above linked LSE post...  But maybe I'm getting confused with jurisdictions and it's different because Park are headquartered in Washington DC...</p>
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<p>This exact situation involves a large corporation headquartered in Washington DC, a lender headquartered in Florida, property in California, and the question is being asked by some dingus in England with nothing more than a passing interest in America and no line of credit larger than a small house in the countryside, so answers relating to all jurisdictions would be fascinating, especially those of England.</p>

<blockquote>
<p>I'm pretty sure the bank could go after the owner for any difference
between the unpaid loan balance and what they're able to sell it for.</p>
</blockquote>
<p>Incorrect. The news report states &quot;it ceased making payments toward the $725 million <strong>non-recourse</strong> CMBS loan&quot;.</p>
<p>The term &quot;non-recourse&quot; means that the bank can't go after the owner and is limited to recovering its debt from the collateral.</p>
<p>The term &quot;recourse&quot; means that the bank can go after the owner in a lawsuit for amounts still owed after the collateral is applied to the debt.</p>
<blockquote>
<p>The question is, would something like this force them to write down on
their GAAP financials the value of any other loans they've extended.</p>
</blockquote>
<p>The bank extended the loan, so if the real property is worth less than the amount of the debt, the bank has to write off the balance of the debt on this secured loan. If the bank writes off the loan, it gets a tax deduction in the amount of the write off, however. The written off debt is also taxable income to Park Hotels &amp; Resorts Inc. to the extent that the company as a whole is not insolvent.</p>
<p>In California, the &quot;default rule&quot; is that the owner occupied residential mortgages are non-recourse loans, but that loans secured by personal property and other mortgages are recourse loans. Unlike California and about four other states, owner occupied residential mortgages in other U.S. states are also recourse by default.</p>
<p>A non-recourse loan on a mortgage of a hotel is not the default rule (even in California) and is contrary to usual commercial practice. Park Hotels &amp; Resorts Inc., in this case, obtained an extraordinarily favorable deal with CMBS (normally it would be a recourse loan with personal guarantees from all related companies and from multiple top executives and investors of the borrower), perhaps in exchange for a higher interest rate than it might otherwise have secured.</p>
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<p>answers relating to all jurisdictions would be fascinating, especially
those of England.</p>
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<p>The way that real estate in financed in England is so profoundly different from U.S. practice that it isn't really possible to even analogize to this situation in California.</p>
<p>For reasons related to tax laws, the structure of English mortgage laws, English insolvency laws, and the way that customary commercial real estate financial deals have evolved over time in England, the kind of deal that was struck between Park Hotels &amp; Resorts Inc. and CMBS in this case would have been structured completely differently if it had been done in England. It might be legal to do the same deal in England, but that isn't what firms trying to achieve the same objectives would actually have done.</p>
<p>I know only enough about how real estate finance in handled in England in deals like this to know that it is completely different from how it is handled in the U.S. I am not familiar enough with real estate finance practices there to know how it would actually be done there.</p>

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