Lenders Increasingly Coming After Borrowers with Deficiency Judgments

10/24/2014 12:19 PM (CST)

Short Sale DebtWe’ve bene hearing for quite some time now that banks are becoming more aggressive when it comes to foreclosing on delinquent homeowners.  Based on our own anecdotal evidence, about 50 percent of properties that receive NODs will be foreclosed in a year or less from the time when the NOD was served.

Apparently, banks, but especially Fannie Mae, are taking yet another step: using deficiency judgments to collect money owed by former occupants of foreclosed properties.

Before the housing bubble, banks often refrained from seeking deficiency judgments, which were seen as costly and an invitation for bad publicity. Some of the biggest banks still feel that way.
Three of the biggest mortgage lenders, Bank of America, Citigroup, JPMorgan Chase & Co and Wells Fargo & Co., all say that they typically don’t pursue deficiency judgments, though they reserve the right to do so.

However, Fannie Mae doesn’t feel the same way.

Of the 595,128 foreclosures Fannie Mae was involved in – either through owning or guaranteeing the loans – from January 2010 through June 2012, it referred 293,134 to debt collectors for possible pursuit of deficiency judgments, according to a 2013 report by the Inspector General for the agency’s regulator, the Federal Housing Finance Agency.

It is unclear how many of the loans that get sent to debt collectors actually get deficiency judgments, but the IG urged the FHFA to direct Fannie Mae, along with Freddie Mac, to pursue more of them from the people who could repay them.

Andrew Wilson, a spokesman for Fannie Mae, said the finance giant is focusing on “strategic defaulters:” those who could have paid their mortgages but did not. Fannie Mae analyzes borrowers’ ability to repay based on their open credit lines, assets, income, expenses, credit history, mortgages and properties, according to the 2013 IG report. “Fannie Mae and the taxpayers suffered a loss. We’re focusing on people who had the ability to make a payment but decided not to do so,” said Wilson to Reuters.

So, what’s the moral of the story? For homeowners and for real estate agents who work with them, it’s yet another reason to push for a short sale. Foreclosure not only damages homeowner’s credit, but also can end up turning into a deficiency judgment which banks or government sponsored enterprises may actually pursue.

How about deficiency in a short sale? It’s still a possibility, yet not as straightforward as with foreclosure. Firstly, some state, including Azirona, California and Oregon, prohibit lenders from doing any of the following:

  • seek a deficiency judgment following the short sale
  • require the borrower to sign a promissory note as a condition of the short sale, or
  • require the borrower to contribute funds at the close of escrow as a condition of the short sale.

Other states don’t have the ban, but experienced short sale processor, such as National Closing Center and RealtyProx, can assist in negotiating a waiver of the deficiency. There’s no guarantee for each case, but we have been very successful in doing so, especially in judicial states such as Illinois and New York.

Finally, banks’ willingness to pursue deficiency judgment in foreclosure cases reaffirms the need for the Congressional extension of the Mortgage Forgiveness Debt Relief Act.

Congress cannot undo the damage to homeowners and communities already done in 2014 because this tax break is not available to distressed homeowners. However, extending the tax break through 2015 and making it retroactive to cover all of 2014 would be a good start.