As awful as it is to lose your home, it’s at least a relief to put your largest financial strain behind you, right?
Former homeowners may remain obligated if there’s a difference between what they owed on their mortgage and what the bank could auction it off for. And these “deficiency judgments” are time bombs that can go off years after borrowers lose their houses.
It can even happen to people who got their bank to approve them selling their home at a loss.
Vanessa Corey, for instance, short sold her Virginia house in 2008. She and her husband built the house in 2004, but setbacks made it impossible for the real estate agent to keep her house. So she negotiated the short sale and thought that was the end of it.
“My understanding was that the deficiency was negotiated away,” she said. “Then, last November, I got a letter from a lawyer telling me I owed my lender $65K. I had to declare bankruptcy. There was no way I could pay it.”
Many homeowners are now in the same situation. And not just those who took out bigger loans than they could pay off or who did so called “liar loans” where they didn’t have to verify their income.
Due to plummeting house values, borrowers who promptly 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 now to have large deficiencies with houses not worth the balances owed,” said Don Lampe, a North Carolina real estate attorney.
Lenders largely refused to comment. Although Correy’s lender, BB&T indicated that it was pursuing more deficiency judgments.
“They follow the rise and fall of foreclosures,” said the spokeswoman, who would not discuss Corey’s account.
The question is, can they come after you?
Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there’s a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could come back to haunt them later on.
“Once they have a judgment, they can pursue you anywhere,” said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. “They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail.”
As far as foreclosure is concerned, lenders can pursue deficiencies in over 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.
Some states, such as California, are “non-recourse” and don’t allow deficiency judgments. But, even there, if the original loan was refinanced, some or all of it may be subject to claims.
Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.
But even when lenders are willing, many borrowers may not be aware that they have to ask for release. Therefore, if you are pursuing a short sale, be certain your attorney asks the bank to release you from any further obligation.
“People shouldn’t have a false sense of security that a deficiency judgment may not be later sought,” Zaretsky said.
He anticipates many will be filed over the next few years, based on the fact that the banks have sold many of these accounts to collection agencies and other third parties, at discount.
“The parties who bought those notes wouldn’t have paid money for them unless they had the intention of acting,” Zaretsky said.