Recourse and Non-Recourse Loans in Relation to HUD 223(f) Financing
If you're an investor looking to purchase or refinance a multifamily property, it's essential to understand the status of a loan's recourse provision before making any important financial decisions. If a loan is full-recourse, it means that if a borrower fails to pay back the loan, the lender can go after a borrower's personal assets in order to compensate for their losses. In comparison, non-recourse loans, like the HUD 223(f) loan, only permit the lender to repossess the property itself in the case of a borrower default.
HUD 223(f) Loans and "Bad Boy" Carve outs
While HUD 223(f) loans are non-recourse, they do have a standard exception for "bad boy" carve outs. This means that if a borrower commits certain bad acts, such as providing a lender with fraudulent tax returns or other financial statements, and then defaults on the loan, the loan becomes full-recourse. This permits the lender to seek personal liability against the borrower in order to get their money back. In addition to simple fraud, other examples of "bad boy" activities include waste, bankruptcy, misappropriation, attempting to get subordinate financing behind the lender's back, and violating a loan's special purpose entity (SPE) provisions.