Eighth Circuit issues confused ruling turning recourse mortgages into non-recourse mortgages

In a surprising development, the Eighth Circuit has held that mortgage debts are extinguished by foreclosure. CitiMortgage, Inc. v. Equity Bank, 2019 WL 5778343 (8th Cir. 2019). While some states, like California, generally prohibit deficiency judgments (claims against borrowers when the foreclosure sale does not garner enough to pay off the debt), most states allow lawsuits against the borrower to get an order to pay the rest of the debt agreed to by the original note. The promise to repay the loan is embodied in the "note" and the right to foreclose is embodied in a separate agreement (the "mortgage" or "deed of trust") and the contractual obligation usually persists after foreclosure unless either state law or the contract language provide otherwise. The Eight Circuit ignored these traditional distinctions in CitiMortgage, and decided that the foreclosure ended both the contractual obligation and the lien on the property.


The case involve the sale of 500 loans from Equity Bank to CitiMortgage with a repurchase obligation on Equity Bank to buy back loans that did not comply with Equity Bank's representations and warranties. CitiMortgage did demand that Equity Bank repurchase some of its loans, although 6 of them had already been foreclosed. One would think that this would mean that Equity Bank would get a credit for the amount CitiMortgage obtained on foreclosure and pay back the difference between the initial loan and the amount already recovered by CitiMortgage on foreclosure. That is what the dissenting judge urged. But the Eighth Circuit held, instead that foreclosure had extinguished the repurchase obligation entirely, not a result one would expect.