Like zombies, it appears that deficiency judgments keep coming back. In layman’s terms, banks that lost money on foreclosures or short sales are using debt collectors to collect the money owed by former owners. The difference between the original debt and the final liquidation amount is the deficiency and collectors are chasing this by freezing their bank accounts, garnishing wages and seizing assets of former owners.
Using a legal tool known as a “deficiency judgment,” lenders can ensure that borrowers are haunted by these zombie-like debts for years, and sometimes decades, to come. 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.
But the housing crisis saddled lenders with more than $1 trillion of foreclosed loans, leading to unprecedented losses. Now, at least some large lenders want their money back, and they figure it’s the perfect time to pursue borrowers: many of those who went through foreclosure have gotten new jobs, paid off old debts and even, in some cases, bought new homes.
It’s incredibly hard to feel any compassion for these lenders, but it’s just as equally hard to feel anything for most owners. While a small number were genuinely hurt, the majority were owners that played fast and loose with their homes and credit. The actions of the back to those legitimate hardship cases was nothing short of reprehensible, and nothing has changed. They were bailed out by taxpayers, continue to enjoy record profits and continue to operate with little regard for true hardship cases.
And what about “strategic defaulters”, those that could pay their mortgage but simply elected not to? Using the “businesses routinely walk away from non performing assets, why can’t I?” logic, these moves are justified in heir minds.
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. Freddie Mac spokesman Brad German said the decision to pursue deficiency judgments for any particular loan is made on a “case-by-case basis.” But homeowner-defense lawyers point out that separating strategic defaulters from those who were in real distress can be tricky. If a distressed borrower suddenly manages to improve their financial position – by, for example, getting a better-paying job – they can be classified as a strategic defaulter.
Dyck O’Neal works with most national lenders and servicing companies to collect on charged-off residential real estate. It purchases foreclosure debts outright, often for pennies on the dollar, and also performs collections on a contingency basis on behalf of entities like Fannie Mae. “The debt collectors tend to be much more aggressive than the lenders had been,” the National Consumer Law Center’s Walsh said. A big reason for the new surge in deficiency claims, attorneys say, is that states like Florida have recently enacted laws limiting the time financial institutions have to sue for the debt after a foreclosure. In Florida, for example, financial institutions now only have a year after a foreclosure sale to sue — down from five.
In Georgia, lenders considering chasing deficiency judgments have to be fast. In a recent opinion, the Georgia Court of Appeals reaffirmed that creditors who wish to seek deficiency judgments following a non-judicial foreclosure must seek to have the sale confirmed within 30 days of the sale. Many creditors elect not to pursue deficiency judgments in Georgia because collecting sufficient admissible evidence to prove that the property sold at true market value within this short time period often is challenging. While infrequent, some lenders do what is required and judgments are recorded.
While many call the lenders “unfair” for pursing judgments, many also wonder about the morality of many that cut and run on their obligations. The small portion of legitimate hardship owners are paying that price as are tax payers and even home buyers – in the form of increased red tape and higher fees. The ones least impacted, the banks of course. Read the full Reuters article here.