Over the past year, foreclosure sales and short sales have been on the rise. Most consumers have never been through this process and have no idea what to expect. Importantly, most consumers feel the process is over once the sale has been consummated. Depending on the state of the transaction, a bank could have the right pursue a deficiency judgment for the amount the bank did not recover against the borrower.
Deficiency Judgments and Residential Real Estate
When homeowners take out a mortgage on their home, they sign a very lengthy contract. In states like California, the mortgage contract only allows the bank the ability to pursue the property if their mortgage is not repaid. However, in other states like Florida, banks have the right to pursue a deficiency judgment against the borrower if the property does not make them whole. For example, if a borrower short sales his/her home with the agreement of the bank and they sell the home for $30,000 less than the remaining mortgage balance, the bank has the right to go after that borrower for the remaining $30,000 balance. Furthermore, the bank could pursue this matter well after the home has been sold.
This provision also applies to foreclosures. If a bank forecloses on a property, in some states they will still have the right to pursue a borrower for additional funds after the property has been repossessed and sold.
Deficiency Judgments and Strategic Walkaways
Deficiency judgments have always been common in commercial real estate, where borrowers often guarantee some or all of their borrowings personally. While deficiency judgments have been uncommon in real estate, many banks have begun to pursue them in response to strategic walk aways. Borrowers, who walk away simply because their home is worth less than their mortgage, could find themselves being sued by the bank for the full payment of their mortgage.
Defense Against Deficiency Judgments
Borrowers facing foreclosure or pursuing a short sale should hire a real estate lawyer to look over the negotiated contracts with the bank. Often banks draft these contracts in an extremely vague manner to give them maximum remedies. A real estate lawyer can help consumers understand their rights and the potential short falls in the contract. Even if a borrower cannot get the bank to agree to waive this right, the borrower will be aware of a potential liability. Additionally, consumers that file bankruptcy are much less likely to be pursued by the bank because the bank may not feel like it is worth their time. Conversely, consumers that only default on their mortgage but remain current on all of their other debts could be target by banks for deficiency judgments.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
