Foreclosure May Not Cancel Your Debt
You fell behind on your mortgage payments and lost your home to foreclosure. That's the end of this financial nightmare, right? Not quite: Something called a deficiency judgment could come back and haunt you.
Your lender might have lost money when it sold your home through the foreclosure process. Say you owed $200,000 on your mortgage loan but your lender was only able to sell your home for $120,000. This means that your lender is short $80,000. If you live in a state where deficiency judgments are permitted, your lender could sue you for that missing $50,000.
Yes, that's bad news for homeowners who are trying to recover from a foreclosure. And the attorneys defending these owners say that deficiency judgments are just one more hit that already struggling former homeowners don't need.
"I see more and more lenders pursuing deficiencies today," said Ben Hillard, a foreclosure defense attorney and founder of Castle Law Group in Largo, Fla. "The big lenders caused this (foreclosure) mess. They shouldn't be allowed to get their cake and eat it, too."
But in the vast majority of states lenders are allowed to pursue these deficiency judgments. The only bright spot for homeowners? The odds are still low that lenders will pursue them for the money they've lost on foreclosure or short sales.
A complicated issue
Many homeowners think that the mortgage contract is a simple one: If they no longer pay their mortgage bills, their lenders will take possession of their homes. That does happen. But consumers rarely consider that they might one day face a deficiency judgment.
Such judgments weren't much of an issue in the days when housing prices were soaring. Then, lenders could sell the homes on which they foreclosed for enough dollars to pay off what homeowners owed and still make profits. Today, with a large number of owners still owing more on their mortgage loans than what their homes are worth, deficiency judgments are becoming more common.
Lenders can even pursue these judgments when they agree to a short sale, a process in which homeowners sell their residences for less than what they owe. Lenders take a loss on these sales, obviously. But they can recover these losses through a deficiency judgment, even if they've given their OK to the original short sale.
But how likely is it that your lender will file a lawsuit against you? Not surprisingly, there's no simple answer to that question. It mostly depends on how big of a loss your lender took on your home's foreclosure sale and whether you had legal help to negotiate relief from deficiency judgments before your lender officially took over your residence through foreclosure.
An October feature story from Reuters provides some perspective. The story said that Fannie Mae is one of the more aggressive mortgage companies when it comes to pursuing deficiency judgments. According to the story, Fannie Mae was involved in 595,128 foreclosures from January 2010 through January 2012. Fannie Mae has referred 293,134 of these foreclosures to debt collectors for possible deficiency judgments.
Other lenders told Reuters, though, that they rarely pursued deficiency judgments, including big companies such as Bank of America, Wells Fargo & Co., and Citigroup.
A 2013 story by Washington Post writer Kimbriell Kelly found that pursuing these deficiency judgments rarely pays off for lenders. The Post story said that a government audit found that the successful recovery rate for deficiency judgments is just one-fifth of 1 percent.
Where you live matters
Certain states don't allow deficiency judgments, while others only allow them in a narrow set of circumstances. If you live in the following states that mostly ban these actions, the odds are that you won't have to worry about lenders suing you for lost money: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.
If you live in a state that does allow deficiency judgments, it's still not certain that your lender will come after you for money lost during foreclosure or short sale. That's because pursuing these judgments doesn't always pay off for a lender. It might take more time and money than it is worth.