The Wall Street Journal published an excellent article this weekend on the dangers of deficiency judgments.
A deficiency judgment is “a judgment lien against a debtor, defendant or borrower whose foreclosure sale did not produce sufficient funds to pay the mortgage in full.”
In plain English: a homeowner can be sued for the difference between the amount the bank received when they auctioned off the house at the Sheriff’s sale, and the amount of the outstanding mortgages.
In the Wall Street Journal article, many of the former homeowners had purchased in Florida, where judgment can be sought on ANY mortgage deficiency. However, Minnesota is a ‘Non-Recourse’ state. This means that FIRST lien holders CANNOT seek judgment (cannot sue) former homeowners for outstanding funds*.
HOWEVER... any “Junior”, or "Second" lien-holders CAN. If there is more than one mortgage on the property – or if there is a line of credit or HELOC taken out against the property – THOSE lenders CAN sue the former property owner for payment of any outstanding debt.
Lenders can take up to SIX YEARS in Minnesota to decide whether or not to sue for any deficiency. In many cases, the lender won't be the ones seeking judgment. They'll simply sell the outstanding deficiency to collections companies, for pennies on the dollar, who will then be relentless in their efforts to collect.
One of the scariest quotes from the article comes from a representative of one of the collection agencies:
"We are waiting for the economy to somewhat heal so that it's a better time to go after people," says Douglas Hannah, managing director of Silverleaf.
The MN Home Ownership Center has a helpful fact sheet on its website about deficiency judgments. You can download the fact sheet here.
Deficiency Judgments are just ONE of the MANY considerations struggling homeowners need to think about when facing a possible foreclosure. If you, or someone you know is struggling with mortgage payments... don't wait until it's too late. To find your local non-profit, FREE Foreclosure Counselor, click here. For additional information about preventing foreclosure in Minnesota, click here.
* There are situations in which a homeowner can open themselves up to deficiency on a first lien. In a short sale situation, if the negotiations aren't carried out properly homeowners may unwittingly sign paperwork that allows the bank to seek judgement. This occurs when the bank is willing to release the lien so a short sale can occur, but does not release the underlying debt. Homeowners that are selling in a short sale situation need to be EXTREMELY careful about the documents they sign before selling.