"Deficiency Balance Paper" Traders Keep Sour Home Loans Alive; "Dracula Blood Suckers" May Haunt Foreclosed Homeowners, Short Sellers w/ Dormant Debt

In South Florida, the Daily Business Review reports:

• Jeff Baum is at the forefront of a real estate industry trend that is sure to cause more pain for homeowners who thought they had left their troubles behind. Baum, a principal with Green Circle Capital Group in Boca Raton, brokers the sale of nonperforming residential debt between lenders and investors. Those investors buy the debt with the intention of collecting from the former homeowners.

• “I’ve made quite a bit of my living over the last two, three years selling deficiency balance paper,” said Baum. A deficiency balance is the portion of the mortgage loan that wasn’t covered by the sale of the home. That debt becomes an unsecured note similar to other consumer debt such as credit cards.

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• After winning a foreclosure action, a lender has up to five years to ask a judge to declare a deficiency judgment [in Florida]. The judgment amount is the difference between the loan and the market value of the home on the day it sold at a foreclosure auction. [...] Judgments are good for 20 years [in Florida], and while people may be broke now, their financial situations could improve in the next two decades, said Richard Zaretsky, a West Palm Beach foreclosure defense lawyer. The dormant debt may come back to haunt them, he said.(1) [...] “Can you imagine, as people’s finances are beginning to improve — boom! — they get hit with a collection action for tens if not hundreds of thousands of dollars,” [another attorney] said. “You are going see a lot of people having to declare bankruptcy.”

For more, see Foreclosed homeowners may still have debt to pay.

(1) The practice has its critics within the lending industry, the story states. Miami-based Republic Federal Bank doesn’t sell deficiency debt, said Jim Angleton, the bank’s senior vice president. But Angleton predicts other lenders will seize the opportunity, according to the story. “As the market declines, it is going to be more in vogue: institutions trying to sell the debt and debt collectors trying to create another niche for themselves,” he said. “Those [debt collectors] are not even bottom feeders, they are subterranean feeders. They are in the Dracula mode of blood sucking.” zombie debt