Some homeowners might think the worst that can happen in a foreclosure is that they lose their home.
Sadly, they're wrong.
In what our Miami foreclosure lawyers know is an increasing occurrence, banks are filing deficiency judgement actions against borrowers who have already lost their homes to foreclosure. In some cases, these judgements are for hundreds of thousands of dollars and can have a devastating impact not only on your finances and your credit (having already suffered a blow from the foreclosure) but also your income taxes.
Here's what happens: Let's say you take out a mortgage for $400,000. You put a down payment of $20,000. In the aftermath of the housing bubble, that same home is now only worth $280,000. That means the remaining $100,000 balance is what is known as the underwater amount. Lenders refer to it as the "deficiency balance."
If a person's home is foreclosed upon, they assume that is the end of the struggle. The bank has their home, their own credit is damaged and they have nothing else to forfeit. But increasingly, that's not the end of the story. Banks are going after people for that deficiency balance.
In addition to that balance, banks can also sue you for the cost of attorneys' fees, court costs and interests. So that person who lost their home with a $400,000 mortgage later finds out he or she is still on the hook for $150,000.
Or, if by chance the bank does choose to forgive the deficiency balance, you could be on the hook for taxes on that amount, as the federal government will view such forgiveness as "Income," even though you didn't actually make any money off the foreclosure.
Lenders Freddie Mac and Fannie Mae, quasi-governmental organizations, say deficiency judgements are necessary to recoup their losses. Still, they maintain they are focusing energies on homeowners who opted for a strategic default. That is, homeowners who perhaps had the means to keep paying, but chose instead to walk away because they were so far underwater.
So Wall Street jacked up the prices of these homes, irresponsibly doled out loans to anyone with a pulse and when the market crashed, the homeowners were stuck holding the bill. The borrowers try to walk away from a raw deal, and the banks go after them for failure to pay to help the banks recoup their losses in the mess the banks created.
Last year, Freddie and Fannie tapped 12 percent of foreclosed borrowers for deficiency judgements in an effort to recoup more than $2 billion.
Despite claims from a Fannie spokeswoman that deficiency judgments are nothing new, the reality is that pursuing such debt recovery was almost never done pre-market crash.
That's changing. In some cases, the banks are waiting years to file these actions. The theory is that there is little to be gained from suing a person who has just been foreclosed upon. They are going to be broke as it is. But if the bank waits a few years, when the person is back on their feet with a good job and better credit - then there might be something gained.
When this happens, people are blindsided.
The amounts are compounded by the fact that the lender has allowed the debt to rack up interest - sometimes amounting to several hundred dollars a month.
Different states have different time frames for how long lenders can wait to file a deficiency action. In some cases, it's up to an astonishing 30 years. In Florida, it's five years.
This is forcing many borrowers into bankruptcy, just as they were beginning to become financially stable again.
All of this should give you one more reason why it's important to aggressively fight a foreclosure.
If you're battling foreclosure in Miami or the surrounding areas contact Bruce Jacobs & Associates for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don't miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on "Mortgage Wars," discussing foreclosure topics that matter to YOU.
Lenders seek court actions against homeowners years after foreclosure, June 15, 2013, By Kimbriell Kelly, The Washington Post
More Blog Entries:
Bank Debt Collection Practices Getting Scrutiny From Feds, June 11, 2013, Miami Foreclosure Lawyer Blog