CNNMONEY.COM
By Les Christie, staff writer
, On Wednesday February 3, 2010, 3:21 pm EST
As
terrible as it is to lose your house to foreclosure, at least it's a
relief to put your biggest financial headache behind you, right?
Wrong.
Former
homeowners may still be on the hook if there's a difference between
what they owed on their mortgage and what the bank could sell it for at
auction. And these "deficiency judgments" are ticking time bombs that
can explode years after borrowers lose their homes.
It can even happen to people who got their bank to approve them selling their home for less than it is worth.
Vanessa
Corey, for example, short sold her Fredericksburg, Va., home in April
2008. She and her husband built the house in 2004, but setbacks, both
personal (divorce) and professional (housing bust), made it impossible
for the real estate agent to keep her home. So she negotiated the short
sale and thought that was the end of it.
"My understanding was
that the deficiency was negotiated away," she said. "Then, last
November, I got a letter from a lawyer telling me I owed my lender
$65,000. I had to declare bankruptcy. There was no way I could pay it."
Many
homeowners are now in the same boat. And not just those who took out
bigger loans than they could afford or who did so called "liar loans"
where they didn't have to verify their income.
Because of falling
home prices, borrowers who always paid their mortgage but who have run
into unforeseen circumstances -- like unemployment or a job transfer --
can no longer sell their homes for what they owe. As a result, they are
being forced to short sell or foreclose and are getting caught up in
deficiency judgments.
"After the banks foreclose, it's very
common now to have large deficiencies with houses not worth the
balances owed," said Don Lampe, a North Carolina real estate attorney.
Lenders mostly declined comment. Although Corey's lender, BB&T did indicate it was pursuing more deficiency judgments.
"They follow the rise and fall of foreclosures," said the spokeswoman, who would not discuss Corey's account.
Can they come after you?
Whether
banks can and will pursue deficiency judgments depends on many factors,
including what state the borrower lives in and whether there's a second
mortgage or other liens. But if borrowers ignore the possibility of
deficiencies, it could haunt them.
"Once they have a judgment,
they can pursue you anywhere," said Richard Zaretsky, a board-certified
real estate attorney in West Palm Beach, Fla. "They can ask for
financial records, have your wages garnished and, if you fail to
respond, a judge can put you in jail."
In the case of
foreclosure, lenders can pursue deficiencies in more than 30 states,
including Florida, New York and Texas, according to the U.S.
Foreclosure Network, an organization of mortgage law firms.
Some
states, such as California, are "non-recourse" and don't allow
deficiency judgments. But, even there, if the original loan was
refinanced, some or all of it may be subject to claims.
Deficiency
judgments on short sales and deeds-in-lieu can happen in many more
places. In these cases, extinguishing the debt is often a matter of
negotiating with the bank.
But even when lenders are willing,
many borrowers may not be aware that they have to ask for release. So,
if you are pursuing a short sale, be sure your attorney asks the bank
to release you from any further obligation.
"People shouldn't have a false sense of security that a deficiency judgment may not be later sought," Zaretsky said.
He
expects many will be filed over the next few years, based on the fact
that banks have sold many of these accounts to collection agencies and
other third parties, at discount.
"The parties who bought those notes wouldn't have paid money for them unless they had the intention of acting," Zaretsky said.
Ticking time bomb
What
can be scary is that the judgments don't have to be obtained
immediately. Lenders or collection agencies may wait until debtors have
recovered financially before they swoop in. In Florida, the bank can
wait up to five years to file. Once the court grants a judgment, the
lender has 20 years there to collect, with interest.
It doesn't
have to be a large amount of debt for a lender or collection agency to
come after borrowers. Richard Varno and his wife short sold their
Nashville home back in 2004 after he lost his job.
It wasn't until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.
"I told them, 'Hey, you guys released the title,'" he said. "As far as I know, I'm off the hook."
He
wasn't. Releasing title does not necessarily end the debt. It's
complicated because of variations in state law, but, generally, a
mortgage has two parts: a pledge of collateral, represented by the
home, and a promise to pay off the loan.
Lenders may release
property liens in order to facilitate short sales without releasing
borrowers from their obligations to pay under the promissory notes. The
secured debt can convert to an unsecured one after the sale.
Zaretsky
had one client who was so relieved to have arranged a short sale that
he signed every paper his real estate agent shoved at him, even a
confession that clearly stated he still owed the debt.
"He had no
idea what he was doing," said Zaretsky. "All the lender had to do was
go to court to convert the confession into a deficiency judgment."
Lenders
are also very inconsistent. One of Zaretsky's short-sale clients was
ready, willing and able to pay, but the bank did not even ask; another
lender always reserves the right to pursue the deficiency.
Strategic defaults
Sometimes
lenders go after borrowers walking away from their homes if they have
other assets, according to Florida real estate attorney Larry
Tolchinsky.
"Banks are pulling credit reports to see if it's a
strategic default," he said. "If you're behind on all your other
payments, you're okay. But if you're not, they'll come after you."
If
borrowers have any doubts about their risks, they should seek legal
advice. Or, at least, call non-profit organizations such as
NeighborWorks for advice. According to Doug Robinson, a NeighborWorks
spokesman, its counselors always try to negotiate away deficiencies
when they facilitate short sales or deeds-in-lieu.
"We don't favor any short-sale contracts that leave any deficiency that can be pursued," he said.
Robinson
himself knows what can happen. He paid off a deficiency after his own
New Jersey house went through foreclosure 11 years ago.
