And can spring out from beneath years from now, long after a homeowner has lost their property in a foreclosure or Shortsale, depending on what state you live in.
When even losing your home is not nightmare or punishment enough, lenders can unleash yet another fiend to torment borrowers with (cue ominous Jaws-type music) Dum dum dum dum - The DEFICIENCY JUDGEMENT!!!!!!
If you live in Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington State and your foreclosure or Shortsale was on just an original purchase loan you can probably sleep a little better, because you live in what is referred to as a “Non-Recourse” state and your lender does not have the ability to summon the monster from under the bed.
If you live in one of the other “Recourse” states and have lost your home to foreclosure or a Shortsale, you will have to look under you bed for any number of years depending on your state’s laws concerning DEFICIENCY JUDGEMENTS.
When you owe more on your home than it is worth, which would define almost one quarter of America’s homeowners according to recent figures, and you lose it in foreclosure, the difference between what was owed on the mortgage and what was obtained in the foreclosure sale is called the “deficiency”. If you owed 200K and your house went for 100K, your deficiency is 100K – got it?
Hopefully, if your house was sold through a short sale the Lender noted the short payoff as “paid in full per negotiation” or words to that effect and forgave the deficiency.
If they did not forgive the deficiency,and you live in one of the recourse states, then that 100K can continue to haunt and stalk you for whatever the time limit is in your state which can vary from as little as 90 days to virtually no limit – 20 years or even longer! By the way, I am NOT an attorney, so all information about potential deficiency judgments as they affect you personally should be discussed with a real estate or bankruptcy attorney in your state. I am simply trying to alert people that the horror of the Foreclosure Fraud/Crisis doesn’t necessarily end with the Foreclosure.
Deficiency judgments have not been a big deal or much in the public eye as of yet, but that will change shortly. Some banks have made the decision to go after deficiencies where they determine that the default has been “strategic”, i.e. the homeowner could have continued paying on the mortgage but preferred to walk away from negative equity. That particular class of homeowner who strategically defaults will probably not garner the sympathy of many. And, if they choose to be strategic, the bank can choose to be strategic back.
My far greater concern, and the reason for this diary is concern for the type of homeowners which comprises the much larger group – people who lost their homes due to job loss, illness, underemployment, servicer induced default, and a host of other completely legitimate reasons. Some banks will chose to bundle their deficiencies and sell them off for pennies on the dollar to professional bad debt collectors who have the potential to hound and harass people for the deficiency for years to come. They will add years of interest and fees. They will obtain their own judgments for this Zombie debt. I fear that people will actually be driven to suicide, when their foreclosure nightmare never ends, I really do fear that, and I don’t consider that to be hyperbolic in the least.
What can we do? I suggest that while Foreclosure Fraud is still on the front burner and while banks are still negotiating with various states that we do NOT forget this critical issue.
DEFICIENCY JUDGEMENTS and the forgiveness of same MUST be part of any homeowner rescue effort.
It is a part of the HAFA (Home Affordable Foreclosure Alternative) Shortsale program, but that program does not cover all mortgages and it doesn’t address the issue of the hundreds of thousands of people who have already lost their homes.
One point I have made once I would like to repeat. The banks that are or will sell this debt to collectors stand to make very little on the sale anyway. Why should they do it at all? Why should they turn millions of homeowners who have already been through the emotional and financial mills of ruin and home loss into carrion for debt vultures?
I would like to see legislation that forbids the sale of this debt by any lender who is receiving federal dollars. I would like to see legislation that says if any debt has been sold to any third party debt collector that it’s collection value will be capped at no more than 10 times the amount paid for the debt.
Please don’t let the Deficiency Judgment monster lurk under the bed for decades to come. Please try to make this a topic of national discussion anytime the word “foreclosure” is raised.
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Update - here are some links that prompted this diary
Ex-Homeowners Face Foreclosure Hangover As Banks Pursue Deficiency Judgement
House Is Gone But Debt Lives On
Congress and Banks Declare War on the Middle Class