I was negotiating on a very large problem mortgage today with a high-up executive at the servicing firm. He made a comment that I thought peculiar and I called him to task on the matter.
The comment was that "after the foreclosure sale, lenders seldom bother to get a court ordered deficiency judgment". I knew this to be false, because lenders today - more than in the past - are investing a few hundred more in attorney fees to get a deficiency judgment. I will tell you why.
But first, lets all get on the same page. A deficiency judgment is obtained when a property is foreclosed and sold (usually at the courthouse by the clerk of the court) to the highest bidder. In most states a "deficiency" judgment can be obtained for the difference between the high bid and the higher foreclosure judgment amount. Usually the court determines which value is higher, the high bid or the appraised value of the property on the date of the public sale, and the higher of the two is taken to determine the difference from the judgment amount, and this difference is the deficiency judgment.
Ok, back to the discussion. Deficiency judgments are just that - judgments. They are a pain in the neck to the debtor and can only be removed by paying it off or by bankruptcy. Further, money judgments usually earn interest until paid. In Florida right now that rate is 11% a year - better than the bank by far!
Now the bank that gets the deficiency judgment might have said that they seldom enforce a deficiency judgment. They are right. They sell the judgments for 5 to 10 cents on the dollar. So for a $100,000 deficiency judgment they invest $500 in attorney fees and get $10,000 in return just for pushing paper.
The problem with a money judgment, which is just what a deficiency judgment is, is that it won't allow you to buy anything on credit! New house? Forget it. New car? Forget it. You want to sell a house? You got to pay off the judgment (there are some exceptions to this rule).
So the question then can be brought over to unsecured promissory notes on short sale shortages. Yes, the banks do the same thing. They get about 5 cents on the dollar.
The executive on the phone laughed and told me I was right - both in the concept and in the pricing and that his firm helps companies that hold these packaged notes collect them from the borrowers.
There is a lot of discussion about how a short sale vs. foreclosure affects a FICO score. Frankly, even if it were the same, the differences in having a deficiency money judgment and a negotiated note are HUGE differences and that alone should settle the dispute.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales
Richard Zaretsky, Florida Real Estate Attorney
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This is a great blog!! Really good information, I have a friend that has had income tax refund witheld for 2 years because of his foreclosure. I really have not seen an exception on the judgemnt from an underwriter, if you know of a lender that will allow this exception, please let me know.
I haven't originated any FHA in 2 years, but have one in the pipeline right now. I am wondering if FHA will allow these types of judgements, depending on the size of the dollar amount, to slide.
Thanks again for the informative blog!!