Deficiency Judgments & Strategic Defaults

It’s painful to lose your house to foreclosure, but many feel a relief to put that biggest financial burden behind them. Former homeowners will be hearing a lot about “deficiency judgments” this year because even if your bank  approves you to sell your home for less than it is worth, you could still be left on the hook. Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances — like unemployment or a job transfer — can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.

After the banks foreclose, it’s very common to have large deficiencies with houses not worth the balances owed. Whether banks can and will pursue deficiency judgments against you depends on many factors, including what state you live in and whether there’s a second mortgage or other liens. There are a whole host of details to be aware of which is why we spend so much time with each client before pursuing the negotiations for them.

Some states don’t allow deficiency judgments. But, even if the original loan was refinanced, or a HELOC was taken out after the original purchase, some or all of it may be subject to claims. Deficiency judgments on short sales and deeds-in-lieu are becoming much more common. In these cases, extinguishing the debt is often a matter of negotiating with the bank. Negotiating is what we do best. It is vital to have an experienced negotiator on your side. There are so many factors involved such as the size of the loan, whether there is a first mortgage only, or a second, and the timing of origination and amount of the second.

Banks have sold many of these accounts to collection agencies and other third parties, at discount so they will be going after their loses. Do not make the mistake of thinking the bank is your friend, or that they’ll do you any favors, they will not.

What can be scary is that the judgments don’t have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

It doesn’t have to be a large amount of debt for a lender or collection agency to come after borrowers. Some borrowers have reported getting served a  judgment 2, 3, even 4 years later in some states. Even if they released title once the transaction was closed doesn’t mean it’s done. Releasing title does not necessarily end the debt. It’s complicated because of variations in state law. Here in Arizona there are two parts – one is the Note and the other component is the Deed of Trust that secures the property. Not all states are like AZ.

Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.

Strategic defaults is the new term we’ll all hear more about in 2010 and 2011. Sometimes lenders go after borrowers walking away from their homes if they have other assets. Remember, by law, you cannot benefit from a short sale. Banks are pulling credit reports to see if it’s a strategic default. In other words, If you’re behind on all your other payments, you’re okay. But if you’re not, they’ll come after you. Because they know that you’re late on the the mortgage but are choosing to pay other obligations.
If borrowers have any doubts about their risks, they should seek legal advice. We have General Counsel that can answer all your questions so that you can mitigate your risk. Contact us if you have any questions.

2 thoughts on “Deficiency Judgments & Strategic Defaults

  1. Good insight into what we can expect in the next few years, if you think you are done with the property when you close escrow, think again!! Use professionals to help protect your future earnings and assets, close the deal correctly.

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