For a nice write-up on deficiency judgments please consider the Wall Street Journal article House Is Gone but Debt Lives On.
Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.Laws vary from state to state and things may depend on whether or not the loan is a recourse loan or not. Once again, before walking away, and before considering a short-sale or bankruptcy, please consult an attorney who knows real estate laws for your state.
In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71. It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest.
The result was a foreclosure hangover that homeowners rarely anticipate but increasingly face: a "deficiency judgment."
Until recently, "there was a false sense of calm" among borrowers who went through foreclosure, Mr. Englett says. "That's changing," he adds, as borrowers learn they may be financially on the hook even after the house is gone.
Some close observers of the housing scene are convinced this is just the beginning of a surge in deficiency judgments. Sharon Bock, clerk and comptroller of Palm Beach County, Fla., expects "a massive wave of these cases as banks start selling the judgments to debt collectors."
Because most targets have scant savings, the judgments sell for only about two cents on the dollar, versus seven cents for credit-card debt, according to debt-industry brokers.
Silverleaf Advisors LLC, a Miami private-equity firm, is one investor in battered mortgage debt. Instead of buying ready-made deficiency judgments, it buys banks' soured mortgages and goes to court itself to get judgments for debt that remains after foreclosure sales.
Silverleaf says its collection efforts are limited. "We are waiting for the economy to somewhat heal so that it's a better time to go after people," says Douglas Hannah, managing director of Silverleaf.
Investors know that most states allow up to 20 years to try to collect the debts, ample time for the borrowers to get back on their feet. Meanwhile, the debts grow at about an 8% interest rate, depending on the state.
Mike "Mish" Shedlock
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