Deficiency Judgments, Statutes Of Limitations, Collection Period Extensions, Lien Renewals & Other Pleasant Thoughts For Now-Foreclosed Ex-Homeowners
The Washington Post reports:
- Lenders are filing new motions in old foreclosure lawsuits and hiring debt collectors to pursue leftover debt, plus court fees, attorneys’ fees and tens of thousands in interest that had been accruing for years.
It’s an aftershock of the foreclosure crisis, and most homeowners don’t know it’s coming.
“When people take out a loan, they generally think the home is the security for the loan,” said Alys Cohen, an attorney in the Washington office of the National Consumer Law Center. When they no longer have that home, “people don’t expect that debt to follow them,” she said.
It’s all part of a legal process known as a “deficiency judgment,” which is allowed in the District and 40 of 50 states, including Maryland and Virginia. Since the start of the mortgage meltdown of 2008, at least 400 Maryland homeowners have been pursued in court, according to a Washington Post analysis of state court data. In the first four months of this year, 57 new court actions have been filed against homeowners — on pace to exceed last year’s total of 120.
- Suing people immediately after foreclosure was problematic. For one thing, lenders usually could not get more money out of already broke homeowners. But, if lenders waited a few years, some forecast that people would have money again once the economy recovered.
The irony is not lost on Evan Goitein, a Bethesda-based foreclosure attorney.
“There is very little to be gained from the bank’s perspective to be suing people for the money at this point,” Goitein said. “While deficiency judgments are not really a problem right now, I can see it being a big problem in the future. So seven years from now when my client has recovered from his foreclosure, he’s got a job again, he’s saved up enough money . . . [from the bank’s perspective], that would be a great time for the bank to try to sue them.”
- States have different statutes of limitation on how long they allow lenders to pursue deficiency judgments, ranging from 30 days to 20 years. In Kansas, a deficiency judgment must be sought at the time of foreclosure. If a judge feels the bid at foreclosure sale isn’t “fair value,” the judge can deny or reduce the judgment.
In Maryland, it’s three years. However, there’s a little-known exemption for most mortgage documents that gives debt collectors 12 years to sue homeowners, plus another 12 years to collect the debt and on top of that a one-time renewal of 12 years for a total of 36 years.
“That’s 36 years that lenders have to go after people,” said [Maryland bankruptcy attorney Tate] Russack, whose firm has taken on 80 bankruptcy cases in the past four months, all of which involve deficiency judgments.
- Already-foreclosed homeowners won’t know that they’re being targeted until they receive the court notice. In many cases, it is hard to even know who owns the debt until the notice arrives. Often times, the entity pursuing the debt is not the original lender, because that debt can be sold by the homeowner’s lender to someone on the secondary debt market for pennies on the dollar. Most of the deficiency cases that Goitein said he sees involve smaller banks.
- The wave of deficiency judgments had a prologue in Texas.
During the 1980s in Houston, the bottom went out of the oil market, with the price dropping to about $15 a barrel. Homes that had been assessed at $200,000 couldn’t be sold for $100,000. More than 200,000 people lost their jobs and could not pay their mortgages.
The lenders foreclosed on the homes and then pursued the homeowners for the outstanding balance.
Once a judgment was granted, debt collectors had 10 years to collect, according to the Texas statute at the time, and another 10 years if the debt collector petitioned the court to renew the judgment. “It was an absolute disaster,” [retired professor at the University of Houston Law Center John] Mixon said.
In response to the situation, the state passed laws increasing consumer protections in deficiency cases. “It’s less an event in Texas today than it was back then,” Mixon said. “But Texas still provides the object lesson of what could happen.”
But for the moment, efforts to pursue deficiency judgments are ramping up rather than winding down.