Mortgage lenders pursue homeowners even after foreclosure
cnnmoney


By Les Christie, staff writer , On Wednesday February 3, 2010, 3:21 pm
EST

http://finance.yahoo.com/news/Mortga...09798.html?x=0

As terrible as it is to lose your house to foreclosure, at least it's
a relief to put your biggest financial headache behind you, right?

Wrong.

Former homeowners may still be on the hook if there's a difference
between what they owed on their mortgage and what the bank could sell
it for at auction. And these "deficiency judgments" are ticking time
bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them
selling their home for less than it is worth.

Vanessa Corey, for example, short sold her Fredericksburg, Va., home
in April 2008. She and her husband built the house in 2004, but
setbacks, both personal (divorce) and professional (housing bust),
made it impossible for the real estate agent to keep her home. So she
negotiated the short sale and thought that was the end of it.

"My understanding was that the deficiency was negotiated away," she
said. "Then, last November, I got a letter from a lawyer telling me I
owed my lender $65,000. I had to declare bankruptcy. There was no way
I could pay it."

Many homeowners are now in the same boat. And not just those who took
out bigger loans than they could afford or who did so called "liar
loans" where they didn't have to verify their income.

Because of falling home prices, borrowers who always paid their
mortgage but who have run into unforeseen circumstances -- like
unemployment or a job transfer -- can no longer sell their homes for
what they owe. As a result, they are being forced to short sell or
foreclose and are getting caught up in deficiency judgments.

"After the banks foreclose, it's very common now to have large
deficiencies with houses not worth the balances owed," said Don Lampe,
a North Carolina real estate attorney.

Lenders mostly declined comment. Although Corey's lender, BB&T did
indicate it was pursuing more deficiency judgments.

"They follow the rise and fall of foreclosures," said the spokeswoman,
who would not discuss Corey's account.

Can they come after you?

Whether banks can and will pursue deficiency judgments depends on many
factors, including what state the borrower lives in and whether
there's a second mortgage or other liens. But if borrowers ignore the
possibility of deficiencies, it could haunt them.

"Once they have a judgment, they can pursue you anywhere," said
Richard Zaretsky, a board-certified real estate attorney in West Palm
Beach, Fla. "They can ask for financial records, have your wages
garnished and, if you fail to respond, a judge can put you in jail."

In the case of foreclosure, lenders can pursue deficiencies in more
than 30 states, including Florida, New York and Texas, according to
the U.S. Foreclosure Network, an organization of mortgage law firms.

Some states, such as California, are "non-recourse" and don't allow
deficiency judgments. But, even there, if the original loan was
refinanced, some or all of it may be subject to claims.

Deficiency judgments on short sales and deeds-in-lieu can happen in
many more places. In these cases, extinguishing the debt is often a
matter of negotiating with the bank.

But even when lenders are willing, many borrowers may not be aware
that they have to ask for release. So, if you are pursuing a short
sale, be sure your attorney asks the bank to release you from any
further obligation.

"People shouldn't have a false sense of security that a deficiency
judgment may not be later sought," Zaretsky said.

He expects many will be filed over the next few years, based on the
fact that banks have sold many of these accounts to collection
agencies and other third parties, at discount.

"The parties who bought those notes wouldn't have paid money for them
unless they had the intention of acting," Zaretsky said.

Ticking time bomb

What can be scary is that the judgments don't have to be obtained
immediately. Lenders or collection agencies may wait until debtors
have recovered financially before they swoop in. In Florida, the bank
can wait up to five years to file. Once the court grants a judgment,
the lender has 20 years there to collect, with interest.

It doesn't have to be a large amount of debt for a lender or
collection agency to come after borrowers. Richard Varno and his wife
short sold their Nashville home back in 2004 after he lost his job.

It wasn't until 2008, when the second lien holder asked him for
$25,000, that he realized he still was liable.

"I told them, 'Hey, you guys released the title,'" he said. "As far as
I know, I'm off the hook."

He wasn't. Releasing title does not necessarily end the debt. It's
complicated because of variations in state law, but, generally, a
mortgage has two parts: a pledge of collateral, represented by the
home, and a promise to pay off the loan.

Lenders may release property liens in order to facilitate short sales
without releasing borrowers from their obligations to pay under the
promissory notes. The secured debt can convert to an unsecured one
after the sale.

Zaretsky had one client who was so relieved to have arranged a short
sale that he signed every paper his real estate agent shoved at him,
even a confession that clearly stated he still owed the debt.

"He had no idea what he was doing," said Zaretsky. "All the lender had
to do was go to court to convert the confession into a deficiency
judgment."

Lenders are also very inconsistent. One of Zaretsky's short-sale
clients was ready, willing and able to pay, but the bank did not even
ask; another lender always reserves the right to pursue the
deficiency.

Strategic defaults

Sometimes lenders go after borrowers walking away from their homes if
they have other assets, according to Florida real estate attorney
Larry Tolchinsky.

"Banks are pulling credit reports to see if it's a strategic default,"
he said. "If you're behind on all your other payments, you're okay.
But if you're not, they'll come after you."

If borrowers have any doubts about their risks, they should seek legal
advice. Or, at least, call non-profit organizations such as
NeighborWorks for advice. According to Doug Robinson, a NeighborWorks
spokesman, its counselors always try to negotiate away deficiencies
when they facilitate short sales or deeds-in-lieu.

"We don't favor any short-sale contracts that leave any deficiency
that can be pursued," he said.

Robinson himself knows what can happen. He paid off a deficiency after
his own New Jersey house went through foreclosure 11 years ago.