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 of 2010 through January of 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 a 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.
Hillard says, too, that lenders will look at the financial ability of former homeowners. They probably won't pursue those owners who don't have the financial ability to pay. These owners are more likely to declare bankruptcy, meaning that lenders won't receive any funds anyway.
Some lenders also look at the actions that homeowners took before losing their homes. Those homeowners who strategically defaulted - who walked away from their home loans even though they could afford them - might be at greater risk of being sued by their former lenders than those who because of job loss, mounting medical bills or other reasons could no longer afford their monthly payments.
Hillard, who worked in the banking industry before becoming an attorney, said that it didn't make sense for lenders to sue every time they lose money in a foreclosure or short sale. That holds true today, too, he said.
"We didn't sue indiscriminately," Hillard said. "We pulled credit reports to see whose credit was or had rebounded, looked at loan applications, occupations and conducted due diligence to determine the best targets."
Homeowners facing foreclosure now can protect themselves from future deficiency judgments by negotiating with their lenders. Hillard recommends that these owners hire attorneys who can, during foreclosure negotiations, encourage lenders to include provisions, as part of a settlement, stating that they won't pursue deficiency judgments.
But those who have already lost their homes and are worried about deficiency judgments? Again, it's in their best interest to seek legal help as soon as they are notified of a lawsuit. They might be able to negotiate a better agreement. If not, they might have to file for bankruptcy protection - which comes with its own challenges, obviously - to prevent having to pay up.