Some Foreclosed & Short Selling Homeowners Find Themselves Still "On The Hook" For Deficiencies

In Miami, Florida, Bloomberg reports:

• When John King stopped making payments on his home in Coral Gables, Florida, two years ago, he assumed the foreclosure ended his mortgage contract, he said. Last month, a Miami-Dade County court gave collectors permission to pursue him for $44,000 stemming from the default.

• King is among a rising number of borrowers who are learning that they can be on the hook for years after losing their homes. Amid a crisis that stripped $6.4 trillion, or 28 percent, from the value of U.S. residential real estate since the 2006 peak, lenders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors.(1)

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• It’s not just foreclosures that can trigger debt collections. Short sales also may lead to deficiency judgments years after former homeowners have moved on, according to [Ben] Hillard, [an] attorney in Largo. [...] “Banks are being very careful to preserve their rights, either outright in the short sale agreement or by using vague language that leaves that door open,” Hillard said. About 90 percent of people who do a short sale think they are “off the hook.”

• That was the case when two of his clients, Brigitte and John Howard, sold their home in New Port Richey, Florida, almost two years ago without using a lawyer to check the bank’s short sale agreement. “We got a call out of the blue saying we owed $20,000,” said Brigitte Howard, 45. “It was a shock. There was no mention in the short-sale contract that the bank might come after us for the difference.”

For the story, see Lenders Pursue Mortgage Payoffs Long After Homeowners Default.

(1) According to the story, in Florida, courts give mortgage holders as long as five years to seek a deficiency judgment and, if granted, up to 20 years to collect. Usually, they have the option of renewing the judgment if it’s not paid off within 20 years. About a third of U.S. states, including California and Arizona, prohibit collection efforts on primary residences after foreclosure. In some cases, homeowners waive that protection if they refinance. Most states allow collection on unpaid home equity loans.

The story states that the Federal Deposit Insurance Corp., which tracks the amount banks collect after defaulted loans were written off, has reported that these mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period. Recoveries on defaulted home-equity loans almost doubled to $392 million, the FDIC data shows. Reportedly, these figures don’t include money retrieved by trusts overseeing mortgage-backed securities, such as the one that holds the loan on King’s former home, or efforts by distressed- asset funds and companies that buy bad loans to profit from collection rights. Such judgments usually tack on court fees, fines and interest.