What is a deficiency judgment and should defaulted owners live in fear of receiving one?
From Wikipedia:
A deficiency judgment is an unsecured money judgment against a borrower whose mortgageforeclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full. [1] The availability of a deficiency judgment depends on whether the lender has a recourse or nonrecourse loan, which is largely a matter of state law. In some jurisdictions, the original loan(s) obtained to purchase property is/are non-recourse, but subsequent refinancing of a first mortgage and/or acquisition of a 2nd (3rd., etc.) are recourse loans.
In short, many jurisdictions hold that the loans obtained at the acquisition of a property (“purchase-money”) are non-recourse, and most if not all subsequent loans are.
States that follow the title (trust-deed) theory of mortgages typically allow non-judicial foreclosure procedures, which are fast, but do not allow deficiency judgments. States that follow the lien theory of mortgages require judiciary foreclosure procedures, but allow deficiency judgments against the debtor.
It is important to note that there is a difference between a deficiency and a deficiency judgement. A “deficiency” is the difference between the amount owed on a loan and the total amount received/collected at the closing of a loan. A Deficiency Judgement is the constructive notice as well as legal and public record of that amount owed, and by whom.
So, that is the technical description of what a deficiency judgment is…now, should defaulted owners live in fear of deficiency judgments?
Not really. HREU has been monitoring all the major lenders for any indication that they intend on pursuing judgments. Thus far, 5 years into the housing crash there is no evidence that the banks have any intention of pursuing defaulted owners for judgments.
Why? Because the lenders must know the judgments would be largely uncollectible. Defaulted owners are generally not asset rich.
Additionally, HARRIS REAL ESTATE UNIVERSITY trains agents to negotiate their final short sales agreements so that the deficiency judgment language is completely removed from the paperwork. Bottom line, NO short sale agreement should contain Deficiency Language if negotiated correctly.
Many states have formally made deficiency judgments near impossible for lenders to pursue…now, there is a bill to make deficiency judgments a near non-issue for the entire country:
A bill introduced in the U.S. House of Representatives Tuesday aims to limit and standardize the timeframe that a mortgage company can go after a home owner following a foreclosure for a deficiency judgment.
Known as the Fairness in Foreclosures Act of 2011, H.R. 3566, the bill seeks a one-year cap on any deficiency judgment, except in states that already have shorter time limits already in place. The bill also proposes that mortgage lenders not be allowed to go after “low-income” borrowers for a deficiency judgment.
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Deficiency judgments vary greatly by states. In some states, when a bank does not recover the money owed on the mortgage after a foreclosure or short sale, the bank may pursue the former home owners and require them to make up the loss. In some states, lenders can pursue borrowers for deficiency judgments up to six years after a foreclosure sale, HousingWire reports. Other states, such as California and Nevada, have banned deficiency judgments in some circumstances.
“A deficiency judgment after foreclosure seems to be one of the greatest injustices that occur to home owners after they have gone through the arduous foreclosure process,” Rep. Edolphus “Ed” Towns, D-N.Y., who introduced the bill, said in a release. “Not only are they behind by thousands of dollars on their mortgage payments and facing public auction of their houses, the ordeal may continue indefinitely.”
Source: “House Bill Proposes 1-Year Limit on Foreclosure Deficiencies,” HousingWire (Dec. 7, 2011) and “Rep. Town Introduces the Fairness in Foreclosure Act,” Congressman Ed Towns (Dec. 6, 2011)
