Loan Modification

Beware of Mortgage Deficiency Claims

By Jonathan Ginsberg

In recent months, I have seen a decided increase in the number of mortgage deficiency claims.  A deficiency claim, as you may know, represents the difference between the outstanding balance on a mortgage note and the fair market value of a piece of property.

In Georgia, where I practice, real estate values have traditionally gone up.  Thus, deficiency claims by first mortgage lenders were exceedingly rare and even claims by second mortgage holders were uncommon.

Like many states, Georgia has been hit hard by the economic downturn of recent years.  Home values in just about every price range have gone down and I regularly see situations where a home may be valued at only 75% or even 50% of the outstanding mortgage balance.

Since mortgage lenders have been reluctant to restructure loan balances, I regularly speak to clients who make a strategic decision to simply walk away from their homes, figuring that it does not make any sense to remain tied to a mortgage obligation when they are not likely to see any equity for many years.

When home prices were trending upwards, lenders rarely pursued deficiency claims because the lender was usually able to recoup most or all of its claim by selling the property after foreclosure.  Now, lenders are becoming increasingly aggressive in suing former homeowners for deficiency balances when the property has not or will not generate enough money to pay off the mortgage balance.

Georgia happens to be a non-judicial foreclosure state, which means that lenders do not have to file a lawsuit to initiate foreclosure.  Georgia lenders can foreclosure in as little as 37 days if they follow the notice procedures set out in Georgia law.  Georgia law also provides for a deficiency confirmation procedure whereby a lender who wants to pursue a deficiency claim must first “certify” the deficiency in Superior Court by convincing a judge that the foreclosure sale price reflects true fair market value.

Recently, however, a Georgia lender figured out a way to avoid the deficiency certification process by suing the property owner on the promissory note that is associated with the deed to secure debt (mortgage), and delaying the foreclosure until after a judgment on the note is obtained.  In a Court of Appeals decision issued in 2010, and a Georgia Supreme Court decision issued in 2011, the Georgia courts of last resort have acknowledged a huge loophole in Georgia’s mortgage consumer protection laws.

Your state may have different rules but I think it is no longer safe to assume that lenders will simply go away after foreclosure.  I suspect that deficiency balance claims will become saleable assets,  just like credit card debt and vehicle deficiency claims.

Related posts:

1. Foreclosure Sale May Not End Financial Liability
2. What is the difference between an Escrow Shortage and an Escrow Deficiency?
3. Judge Orders Mortgage Lender’s Attorneys To Review Bankruptcy Claims

Full post as published by Mortgage Law Network on February 15, 2011 (boomark / email).