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February 13, 2009
OBTAINING A DEFICIENCY JUDGMENT MAY NOT END DEBT TO LENDER
Apparently, banks are not too overloaded dealing with defaults to ignore the pursuit of those who are unable to pay the full amount of their mortgages. Some states, such as California, are so-called "recourse states", which means that you can be personally liable despite the release of the mortgage lien; that is, while banks can repossess only that property that was loan collateral, if the property served as collateral on a refinancing or some additional debt, one must be very vigilant. And, despite the
completion of a short sale, the borrowers often discover that the bank still demands that the full amount that was borrowed is repaid.
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Banks are investigating the status of other payments, via pulling their credit reports, that a borrower had in order to confirm that they are in default in not just their mortgage payments, but are also in default on all of their debt payments.
A deficiency judgment can be pursued for repayment of the amount between what the homeowner owed the bank via their mortgage and the amount that the property would sell for at a bank auction. Also, a bank may give approval to a homeowner to sell their home for less than its current value, but then pursue the seller for repayment of the difference between the sale price and what was owed on the mortgage. The possibility of deficiencies, even in the future, is not one to be ignored.
Banks can, in the event of foreclosure, pursue deficiencies in many states, while some states are non-recourse, i.e. California, and do not permit deficiency judgments. However, even in these states, all of the loan, or a portion thereof, may become the subject of a claim if the original loan had been refinanced.
Release of the title to a home does not always remove the debt. In most states, there are two parts to a mortgage, the pledge of collateral (the house) and a promissory note, which is a promise to pay the loan in full. Banks can release liens on the property in order to complete a short sale, but use the promissory note to make the borrower pay. Also, a lender may pursue the borrower who is abandoning his home if there are other assets belonging to the borrower.
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