Bad news, my friends: A lender isn’t the only entity that can pursue a deficiency judgment in the case of a foreclosure. Your private mortgage insurance provider can seek a judgment against you too – even if the lender has agreed not to pursue it.
Here’s how it works: You’re the owner of an underwater property, and you decide to just walk away because you believe your equity will never catch up to your debt. You talk with your lender and agree to give them a deed in lieu of foreclosure, and in return, the lender agrees not to pursue a deficiency judgment.
For the new investors among us, a “deficiency judgment” is little more than a court-ordered requirement for you to pay back a lender for the amount of their losses on a loan Example: You owe $300,000 on a property that is foreclosed. The lender sells it for $250,000, leaving a $50,000 deficiency. A “deficiency judgment” happens when a court issues a judgment that requires you to pay the deficiency back to the lender to cover the shortage.
The problem is that the lender isn’t the only party in the transaction. If you purchased your home with a loan that required private mortgage insurance, it’s entirely possible that your mortgage insurer could pursue you for the amount of the deficiency, since the mortgage insurer is likely to be forced to bear at least some of the expense of the loan losses.
So before you, or your clients, take great comfort in having a lender agree not to pursue a deficiency judgment, keep in mind that a borrower could face the threat of a deficiency judgment from a mortgage insurer despite what a lender might say.
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How can an entity other than a lender collect on the $50,000 not recovered, if they never lent the money in the first place?
Corey:
Because the MI Co. DID lend the money in a proxy-sorta way. The lender lent the entire amount, recovers only a portion, and gets paid off by MI for some or all of that lost portion.
Then the MI Co. comes looking for their payback.
Of course, if this scenario unfolds in CA and the mortgage(s) are purchase money for qualified principal residence there is NO recourse.
Fascinating article. Has this started to happen with any frequency? Any particular PMI companies doing this?
So the Banks commit Fraud, collect over 700 Billion in Bailout “Reward” monies, begin foreclosure proceedings and they still get to “legally” collect deficiency judgments against a homeowner who was the original “Victim” of the Fraud committed by the banks.
“Oh what a wicked web………………………..
Would this affect a note purchase from that same lender ?
It sounds like a Ponzi Scheme to me when you think about it. What’s the purpose of paying mortgage insurance if you’re not covered in the event you can’t pay your mortgage? (Ponzi scheme). Now mortgage insurance companies can make even more profit by going after home owners when they can no longer afford to live in their home. I guess all those years of mortgage insurance payments don’t count for anything.
Aren’t there still taxes that have to be paid?
Interesting issue. I will have to research this some more.
Can you give us a citation in Law where this possible?
Al D
Simple. Look at debt collection. Unless you fight it, people just pay these places even if they don’t own the account. Got to prove it otherwise…well you the consumer has to.
Besides, a lot of these will get marked down. Once they get a hold of you to start collecting, if aggressive enough, judgments can be filed.
If the PMI shoulders some of the loss, they won’t know that there was an agreement likely. So they pursue it if chosen to do so.
Let’s see… The banks forced this drastic drop in home prices by driving them up in the first place. Then the courts support the banks, who often own the mortgage insurance companies anyway, through these deficiency judgments. It appears the reality is that the whole system is geared to stealing from the people – the law, courts, banks, all of it. They call the people the consumers. Nah… the real consumers are those entities that consume the people!
Think of it like car insurance. When you have a wreck, but it the other person’s fault, then you can file the claim with your insurance company. Your insurance company pays you, but then deals with the other person’s insurance company to recover the money that they paid you.
It is similar with a house. The insurance company is going to try to recover any money they paid out to the lender. If you default on the loan, you now become the ‘at fault’ party that triggers the insurance company’s payout.
What can we do to protect ourselves in a short sale transaction then? Kick us while we are down why dont you – thx for protection from the industry giants – Bush had done a better job at this when this all hit the fan with protecting the lil guy from being hit with a dbl edged sword and now the New Obama admin is gonna allow these giants to kick the lil guy when he’s dwn how great!!
Not only that, A lot of people at this point don’t care, you can’t get blood from a turnip. The people that caused this problem are living high on the hog, while everyone suffers from their deflation of wealth and assets. It’s really a crime that started from the top, and now they have everyone else paying for it, financially, physically and emotionally, I never seen everything so screwed up all at once. Basically, people losing everything could careless…
It’s true in AZ too. In negotiting short sales PMI is the one entity in the negotiation that is sure to screw a deal. To the point now where if you have PMI some agents won’t even waste their time. ThinkBigWorkSmall.com has several great videos on how the scam is perpetrated with OUR money, meaning the US Taxpayer. Why, oh why, would the banks or PMI try and help the desperately broke homeowner/borrower when they can make more money foreclosing? As far as taxes, Yes, you may be on the hook. It’s important to speak with an Accountant and use IRS form 982 when filing your taxes with the 1099 from the lender. As long as you can prove you are financially insolvent, or unable to pay, there should be no taxes due on what is reported as income.
Bryan-
If what you’re saying was commonplace within the business at this time, I think most of us would’ve heard about it by now, so either it is almost never done, or it’s just starting to happen. And no one I know has ever mentioned about dealing with your PMI insurer during a shortsale. Maybe they’re bogged down too with all these shortsales; I dunno. So I hate to state the obvious, but the PMI insurer may come after someone for a deficiency judgement—-and the supervolcano under Yellowstone may erupt too. At this time, the PMI stuff seems like just useless trivia to keep in the back of my mind to say “Oh, yeah, I heard they can do that!” if the subject ever arose. Even if it does, how does that affect us doing shortsales? It would seem not to really concern me because there’s nothing we can do about it anyway, is there.
To my esteemed readers: Mr. Cronin appears to be of the belief that because he doesn’t know anyone to whom this has happened, that it is therefore not worthy of consideration. That seems a questionable policy, but to each his own. — Bryan Ellis
So, the investor that buys the foreclosure with a judgement against it,gets stuck with that judgement?
Some 21 years ago, I suffered through a farm business bankruptcy. My wife and I also had our house foreclosed. The lender made it clear prior to my filing bankruptcy, that they would “use every means at their disposal “to recover their investment;” code for Deficiency Judgment. It is amazing to me how few people seem to realize that this process has been around for a long time. Laws vary from state to state, but in Nebraska, the process of Deficiency Judgment has been around for a long time.
I appreciate the information. Just one more thing to keep in mind when doing REO’s and negotiating short sales. Shouldn’t professional negotiators be aware of this problem and make their investors aware? What can be done to help home owners understand this potential problem. Shouldn’t lenders make the homeowners who are being foreclosed on aware of this possibility?
Would putting the house in an LLC solve the “deficiency judgment” issue? I qualified to buy the house, but then I put it in an LLC (or sold it to the LLC) so now it is the LLCs asset. Payments are made from an LLC checking account.
If the LLC walks away from the house, any “deficiency judgment” would go after the LLC, since the LLC “owned” the house, right? But the house was the only asset the LLC owned.
Small business buy things in a company name all the time, with the small business owner being who is qualified, until the small business builds enough credit of its own.