As published in Scotsman Guide's Residential Edition, May 2010.
Many homeowners believe that short selling their home, walking away from it or having a lender foreclose on the property would solve their financial problems. What they're not aware of, however, is that they could remain responsible for any difference between the mortgage amount owed and the price the home is sold for even after a short sale or foreclosure.
To collect this difference and minimize its losses, a lender can file a deficiency judgment against the borrowers.
Mortgage brokers should understand what deficiency judgments are and how they work. They also should know that the risks associated with deficiency judgments are of a legal nature. Brokers who aren't attorneys must advise clients facing deficiency judgments to seek competent legal advice.
As the foreclosure rate increased in recent years, so did the prevalence of deficiency judgments. With the foreclosure rate still elevated compared to historical levels -- and with property values continuing to struggle -- many lenders have streamlined deficiency-judgment filings.
Laws vary by state, but in most states lenders are allowed to file deficiency judgments against borrowers. States that do not allow these judgments from lenders or banks in most cases include the following, as of press time:
Other states do not permit them in other cases, as well.
No matter what state a person lives in, however, you should take the issue seriously.
After a judge grants a lender a deficiency judgment, the borrowers become legally liable for the mortgage amount owed. In some instances, the judge also may allow lenders to collect legal fees. To collect, lenders could go after other borrower assets, including other property, bank accounts and future wages. In extreme cases, if borrowers fail to cooperate and satisfy the judgment, they could face jail time. Retirement accounts, however, are protected, and lenders often can't touch them.
The period of time in which lenders can file for a deficiency judgment after a short sale or foreclosure sale varies. In fact, in some states, lenders can wait years to file deficiency judgments and as many as 20 years to collect the debt. Borrowers may already have started to rebuild their lives when they're notified they still owe an unpaid mortgage balance. In some cases, this can leave them with no other option than to declare bankruptcy.
In other cases, borrowers can negotiate a payment plan with the lender. If their financial situation hasn't improved, however, bankruptcy looms.
During a short sale or foreclosure, mortgage brokers' clients should read all documents from lenders carefully to see if they could be liable for any future debt. They also should hire an attorney who can request deficiency waivers from lenders. This releases borrowers from further obligations.
This article provides general information and should not be construed as legal advice. Consult a legal professional or tax adviser for specific guidance.
Jose A. Silva is vice president and co-founder of ForeclosureDump.com, an online-marketing service bringing together buyers and sellers of foreclosures, real estate owned properties and credit-distressed properties without middlemen or commissions. He has more than eight years' experience in hard equity.
He was on the board of the Florida Association of Mortgage Brokers' Miami chapter from 2004 to 2007 and was FAMB's state director from 2005 to 2007.