Banks Pursuing Deficiency Judgments May Have Something To Fear

By
Services for Real Estate Pros with TheHousingGuru.com

foreclosureAn article in the Washington Post describes how banks pursuing deficiency judgments may have something to fear. According to the article, some lenders are taking a more aggressive stance in dealing with distress sales that recoup significantly less than the original loan amount.

 

In the past, the cost/reward ratio caused few lenders to seek deficiency judgments, but the practice has become more widespread as lenders incur greater looses due to increasing numbers of foreclosures and short sales. According to the MBA, banks are not pursuing those who lack the ability to repay; and lenders participating in the government’s HAFA program waive their rights to deficiency judgments. But for homeowners who have chosen “strategic default” who or appear to have the financial resources to make full or partial restitution, many banks are seeking to recoup some of their losses.

 

To counter such actions, a growing number of homeowners are seeking bankruptcy protection as a means of vacating additional liability, and personal bankruptcies have recently soared. Others, however, have discovered a different route. Aware that their lender may have participated in mortgage fraud in qualifying them for a loan, some have successfully presented that as a legal defense. The potential consequences of such actions brings pause to bankers, fearful of being implicated in anything resembling mortgage fraud, and aware that judges may not only rule in the borrower’s favor, but seek further redress from the lender. An interesting post on Calculated Risk  provides an insider’s view.

 

The moral and legal issues that have surfaced during this housing crisis are many, and it is impossible to develop all-encompassing solutions. While some have suffered the loss of their home, the losses for others have been even greater, yet such victims are often ridiculed for imagined behavior and often by those who know nothing of the circumstances. As homeowners struggle with the consequences of their actions, my advice would be to make every effort to seek an amicable resolution with their lender, and if that fails, to make the best choice given their specific financial circumstances. Any who believe their lender may have acted illegally, should consult an attorney.

 

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Re-Blogged 7 times:

Re-Blogged By Re-Blogged At
  1. Judy Chapman 06/17/2010 06:48 AM
  2. Lenn Harley 06/17/2010 08:37 AM
  3. Harry F. D'Elia 06/17/2010 10:12 AM
  4. John MacArthur 06/17/2010 10:51 AM
  5. Christianne Gordon 06/17/2010 01:20 PM
  6. Rob Arnold 06/19/2010 10:52 PM
  7. Jennifer Dulmaine 06/19/2010 11:29 PM
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Rainer
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Dave Minder
Wellspring Investments LLC - Quarryville, PA

John, interesting twist. I actually know one guy who is trying tonegotiate with banks to buy short sales and he  is upside down in his own house and bankrupt as well. I guess people will do anything although it doesn't make it right. Great Post.

Jun 17, 2010 07:00 PM #35
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Bryan Robertson
Catarra Real Estate, Inc - Los Altos, CA
Broker, Author, Speaker

I blogged about this same issue a few months ago.  In my opinion the banks should be forced to "suck it up" and take their losses on anything except a loss where the borrower committed fraud (liars loans, etc).  If the personal bankruptcies keep piling up, we'll see a lag in consumer spending which is the basis of our current recovery and a "double dip" in the economy might actually happen.

Jun 17, 2010 07:24 PM #36
Rainmaker
453,503
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Wendy - Good advice.

Dave - It just gets "curiouser and curiouser."

Bryan - We are seeing an increase in bankruptcies at an astonishing rate; and may, in fact, be on our way to that "double dip."

Jun 17, 2010 09:05 PM #37
Rainmaker
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Esko Kiuru
Bethesda, MD

John,

Homeowners are finding some useful solutions of their own to somehow stay whole in this housing mess.

Jun 17, 2010 09:13 PM #38
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Erica Ramus
Erica Ramus - Ramus Realty Group - Pottsville, PA - Pottsville, PA
MRE, Schuylkill County PA Real Estate

It is a strange world we live in right now. I am seeing more strategic defaults and it seems to have lost some of the stigma even.

Jun 17, 2010 09:16 PM #39
Rainmaker
453,503
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Esko - Useful and sometimes "novel."

Erica - I suspect we're only seeing the first wave of "strategic defaults."

Jun 17, 2010 09:23 PM #40
Rainmaker
267,855
Tamara Inzunza
RE/MAX Executives / www.MovingToNova.com / 703-623-8759 - Alexandria, VA
Homes for Sale In Alexandria VA & South County

Thanks for pointing out the article, I hadn't read it yet.  This is a good reference for people who are considering strategic default.

Jun 17, 2010 09:52 PM #41
Rainmaker
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John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Tamara - Thanks for stopping by!

Jun 17, 2010 10:09 PM #42
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Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

I think it is kind of ironic that the people that the banks are identifying as possibly being able to pay a deficiency judgement are also the ones that might threaten a mortgage fraud claim... 

They may have the money to pay, but shouldn't have gotten the loan?

Jun 17, 2010 10:43 PM #43
Rainmaker
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John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Lane - Ultimately, I think the WaPo article is pointing out the aberrations, not the rule. There are probably stranger stories to come.

Jun 17, 2010 10:56 PM #44
Anonymous
Anonymous
Anonymous

John,

I'll take the other stance. There's probably some truth there that the banks knew there was complicity in "iffy" transactions.

Jun 18, 2010 12:43 AM #45
Anonymous
Anonymous
Anonymous

John,

Good post. Featured in Voice of Reason. Keep at it.

Jun 18, 2010 12:46 AM #46
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Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 800-610-7253 DRE01267479 - Costa M

This is an interesting twist.  I am off to read the article. It sound like both parties may have a sword hanging above their heads. It reminds me of the sword of Damocles or (MAD) Mutually Assured Destruction. I'm curious to see how it all comes out over time.

Jun 18, 2010 01:07 AM #47
Rainmaker
689,364
Pamela Seley, REALTOR®
REALTY EXECUTIVES OTF - Temecula, CA
Seals the Deals in Temecula Valley California

We won't hear much about borrowers suing their lenders for mortgage fraud because the cases will be settled out of court.  Thanks for the timely post, John.

Jun 18, 2010 06:21 AM #48
Rainmaker
574,887
Neal Bloom
Keller Williams Properties, Weston FL - Weston, FL
Realtor CRS-Weston FL Real Estate

The likely solution would be to go after the LO's and or the companies that provided the loans. The problem with that is most of them are now out of the business so where do you go?

Jun 18, 2010 07:35 AM #49
Rainmaker
17,626
Gabe Fitzhugh
Florida Homes Realty & Mortgage - Lake City, FL
REALTOR®

Interesting wide range of views.  This is a very controversial topic and a non winner for the debater on both sides.  This is too much of a mess and there are problems that reach far deeper than a LO or broker qualifying someone for a loan, or someone accepting a loan they could not afford, or a large part of the Florida job market relying heavily on construction and having that market come to a virtual halt, industries leaving Florida, property taxes, insurance, etc.

Jun 18, 2010 10:06 AM #50
Rainmaker
453,503
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Terry - I'd guess that many lenders were aware that the borrower was "fudging" the numbers, but since the govt. was encouraging home ownership, they didn't care. Thanks for the feature.

Christine - It will be interesting if nothing else.

Pamela - I agree.

Neal - I doubt we'll see a very high percentage of the lenders pursued.

Gabe - I agree that this is only one factor in the overall economic crisis--and it is still a crisis.  We do need to deal with the core issues, but are far from doing that so far.

 

Jun 18, 2010 12:33 PM #51
Rainmaker
690,831
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

Deficiency judgments are such a slippery slope.  I wouldn't be surprised if a bunch of vulture collectors don't show up 3 or 4 years from now when the economy is hopefully better.  That will catch a lot of the solvent borrowers by surprise.

Jun 19, 2010 10:51 PM #52
Rainmaker
453,503
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Rob - I think your'e right, and would advise those negotiating a short sale to insist that the bank agree not to pursue the deficiency. If you ask, some will.

Jun 20, 2010 09:14 AM #53
Anonymous
Anonymous
Baywatch

If you are a realtor representing a short sale seller and you do not negotiate a deficiency waiver than you are derelict in your duty to represent their interests and you should find another line of work.

You people are coming off pretty holier than thou. Let's just remember you are only a Realtor and are no better or worse than anyone else.

If all the jaded egoists would please leave the building, the profession might begin to gain more respect. I have advanced degrees in finance and math, and I find it amusing the the people at my wife's realtor events are snobbier than those at my employer's (100+ billion hedge fund) events.

Get a grip people, you sit on the toilet just lie everyone else. Until you have walked a mile in someone's shoes, you really have no right to judge. If you have such contempt for the people that you represent, then why do you do it? Oh right for their money. This is the very definition of greed.

 

Mar 26, 2011 12:10 AM #54
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