According to an October 1, 2011 Wall Street article that a licensee sent to the Real Estate Commission, more lenders are seeking deficiency judgments against homeowners that have been foreclosed on because of the current state of the economy. Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale according to the article. Lenders are suing for deficiency judgment in a minority of the cases that they have a legal right to pursue and they won’t discuss their strategy for why they decide to sue.

Wall Street Journal’s research showed that many borrowers that had been sued in several states had walked away from their mortgage because they lost the equity in their homes when the market declined. However, many borrowers had lost their jobs, were foreclosed on, and are now being served with huge deficiency judgments because the foreclosure sale brought a fraction of what was owed on the home. Interest is tacked onto the judgment until it is paid off as well. Defense attorneys have found the deficiency suits very difficult to poke holes in and they can be brought several years after the foreclosure sale in many states so many lenders may wait until the borrower gets in a better financial position. Many borrowers are, or will be, in another house by the time the deficiency judgment lawsuit is filed.

According to the article, the most aggressive lenders are credit unions and smaller banks because they believe they have to recoup losses for their customers from the bad loans. The biggest banks have so far not been pursuing deficiency judgments according to the article, but they have also been caught up in the foreclosure-paperwork mess. J.P. Morgan Chase & Co. has agreed to waive a deficiency judgment if the homeowner agreed to a short sale.

 There is also a type of secondary market growing where the mortgage deficiencies are being purchased by investors to collect the debt. An expert in the investment market said that the deficiency judgments will eventually be bundled into packages similar to mortgage-backed securities. The judgments sell for about two cents on the dollar, versus seven cents for credit card debt. Other investors buy the bank’s soured mortgages and go to court themselves to get the judgments for the debt that remains after foreclosure sales. According to the article, investors know that most states allow up to 20 years to collect the debt, which is ample time for the borrowers to get back on their feet.

*From the Minutes of the October 13th, 2011 meeting of The Kansas City Real Estate Commission*