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.
Early in February, the Minnesota Home Ownership Center highlighted (in this post) the Foreclosure Counselors in the state had begun to see an uptick in the number of homeowners who were seeking help AFTER a foreclosure because their bank was seeking to collect on the deficiency.
Now... the practice apparently is going mainstream... and the Washington Post highlighted the issue in an article posted on June 16th. (Lenders go after money lost in foreclosure).
Here's one of the highlights of the article:
Over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales, creating more grief for people who thought their real estate headaches were far behind.
The MN Home Ownership Center has a helpful fact sheet on its website about deficiency judgments (with MANY thanks to the Housing Preservation Project for their work!). 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.
The Minnesota Home Ownership Center's network of Housing Counselors (Foreclosure Counselors) has begun to see an uptick in lenders seeking deficiency judgments AFTER a foreclosure... and, without getting too technical in this blog post, we felt it was important to warn struggling homeowners and our partners about this new trend:
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.
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” 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!
Here’s a realistic scenario:
- If a homeowner purchased a $200,000 home in 2005 and financed the purchase 100% using an 80/20 loan (80%, or $160,000 financed with one lender who holds first lien position, 20%, or $40,000 financed with a second lender who holds second lien position).
- Now, given current market circumstances in Minnesota, the home may only sell for $150,000 at the Sheriff’s Sale.
- The first lien holder (who was owed $160,000) is wiped out. The homeowner does not owe this first lien holder any additional funds, and the first lien holder CANNOT sue the former homeowner for the ‘deficiency’ of $10,000. ($160,000 - $150,000).
- HOWEVER… the second lien holder CAN sue the homeowner for their ‘deficiency’. In this scenario… they can sue for the ENTIRE outstanding amount of $40,000. (To keep the math simple, we’re assuming that no principal was paid down in the last 5 years).
If the lender seeks a deficiency judgment, the former homeowner may find themselves having their wages garnished, tax returns withheld or garnished and other consequences.
Here’s the kicker - - - lenders can take up to THREE YEARS SIX YEARS after the Sheriff’s Sale to decide whether or not to seek judgment! THREE.YEARS. SIX.YEARS. (!)
Former homeowners may find themselves being sued for outstanding mortgage debt YEARS after a foreclosure... just as they begin to rebuild their financial lives.
Jennifer Lancour, a Housing Counselor at PRG, Inc., one of the organizations that work with the Minnesota Home Ownership Center to offer Foreclosure Prevention Counseling, stated recently:
We’ve always counseled clients about the possibility of Deficiency Judgments in situations where there is more than one lien on a property. But in the past it was unlikely that a lender would seek judgment. Since the middle of last year, we’ve started seeing more and more clients coming back to us after a foreclosure looking for assistance because they’ve been served court papers.
In addition, Homeowners also need to be EXTREMELY careful when negotiating a SHORT SALE on their property as well. If the negotiations aren’t done properly, even the FIRST lien holder can seek judgment for any deficiencies.
The MN Home Ownership Center has a helpful fact sheet on its website about deficiency judgments (with MANY thanks to the Housing Preservation Project for their work!). 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.
Many homeowners that are facing foreclosure assume that the Sheriff's sale is the end of the process... that after the house is sold, their personal financial responsibility for the house and any payments are done. THIS MAY NOT BE TRUE!
In Minnesota - if a house is sold at the Sheriff's sale - and the sale price isn't enough to cover all debt against the property - there may be PERSONAL financial responsibilities for the homeowner(s). There are specific situations in MN where lien holders can seek a personal deficiency judgment, - in plain English: sue a consumer - for unpaid debt after a foreclosure. The Housing Preservation Project, in cooperation with the Minnesota Home Ownership Center, and the Volunteer Lawyers Network, has put together a fact sheet that outlines what can happen in Minnesota if the Sheriff's sale price doesn’t cover all outstanding debt against the property. The fact sheet covers the different types of foreclosure - including the difference between a foreclosure by advertisement and a foreclosure by action - and its effect on judgments. In addition, the fact sheet explains what can happen with second, and other junior, lien holders. The fact sheet can be downloaded here. Consumers that are having difficulty making their house payment should seek the services of a certified non-profit (FREE, Non-Biased) foreclosure prevention specialist to understand their options and responsibilities during a foreclosure. For a complete list of foreclosure prevention specialists, click here.
