As the foreclosure saga continues to work its way through the system in the down economic times, there is a new breed of debtor who may want to think twice before defaulting on, or walking away from, their mortgage.
The first wave of foreclosures was from the debtors who should have never been given a mortgage loan in the first place. They never had the means of paying their adjustable monthly mortgage payments, but with all the housing prices rising during the boom times apparently the banks and the government did not see much downside in putting these people in homes.
Next came the investors who bought multiple properties or kept flipping on up as the housing prices rose, hoping to make a quick buck. Many did for a while until the market turned and they could not get rid of their inventory. They did not get out in time.
Then we had the good folks who were working hard and making their payments until they lost their job and could no longer pay.
Now we have a new breed who still have jobs and can pay their mortgage but are upside down because the value of their homes have dramatically decreased. They see that they will not be able to sell anytime soon at a price that would pay off their mortgage debt, so they think why not just quit paying the mortgage and walk away as a business decision and let the bank deal with the property.
The only problem with this “cut my losses walk away decision” is that the bank in a foreclosure can go for a deficiency judgment against the debtor. What the bank can do is foreclose on the property and then go sell it at a current market price.
As an example, let’s say that the debtor got a $380,000 mortgage when the house was bought for $400,000 in 2006. Now the house can be sold maybe for $180,000. That would leave a deficiency of around $200,000 the bank would lose in the foreclosure.
The bank could then get a deficiency judgment against the debtor for the $200,000 and record the judgment in the county where the debtor lives or any other county where the bank believes the debtor might own property in the future.
The deficiency judgment would be good for at least 20 years. That means that the debtor could not sell or buy any other real estate he may own in the county until the deficiency is satisfied. If there are other properties with any equity, the bank could have them sold to satisfy the judgment.
Also, if the debtor has other assets such as expensive cars, boats or jewelry, the bank could go after those assets to pay for the deficiency. Even if the debtor moved out of the county, state or country, the bank could still follow the debtor and legally collect on the deficiency no matter where the debtor has assets. The bank would, of course, have to follow the collection laws in the other state or country. The debtor would have to be very creative and may have to go far, far away and even change his identity to try to hide from the deficiency.
Of course, the debtor could probably get out of a lot of the deficiency if he declared bankruptcy, but if he has other assets, the bankruptcy court would take those to satisfy his debts.
Thus, the hands of the debtor could really be tied behind his back in making such a business decision where, in the alternative, he could keep making his minimum mortgage payments until such time as the property values return to normal type levels so he could then sell.
Rob Samouce, a principal attorney in the Naples law firm of Samouce, Murrell, & Gal, P.A., concentrates his practice in the areas of community associations including representing condominium, cooperative and homeowners’ associations in all their legal needs including the procedural governance of their associations, covenant enforcement, assessment collections, contract negotiations and contract litigation, real estate transactions, general business law, construction defect litigation and other general civil litigation matters. This column is not based on specific legal advice to anyone and is based on principles subject to change from time to time. If you have any questions about the column, Rob can be reached at www.smglawfirm.com. Those persons interested in specific legal advice on topics discussed in this column should consult competent legal counsel.