Lehigh Acres, Florida–Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it. In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71. It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest. The result was a foreclosure hangover that homeowners rarely anticipate but increasingly face: a “deficiency judgment.” Until recently, “there was a false sense of calm” among borrowers who went through foreclosure, Mr. Englett says. “That’s changing,” he adds, as borrowers learn they may be financially on the hook even after the house is gone. In Mr. Reilly’s case, “there’s not a snowball’s chance in hell that we can pay” the deficiency judgment, says the 39-year-old man, who remains unemployed. He says he is going to speak to a lawyer about declaring bankruptcy next week, in an effort to escape the debt.
This kind of thing doesn’t make sense to me for three reasons:
Don’t foreclosures necessarily assume bankruptcy? I mean, if your credit is ruined, isn’t bankruptcy the only real option anyway?
And what happens if the amount owed in this scenario is more than the market value, i.e. it was an underwater mortgage? That seems particularly crooked.
And, finally, how can the mortgage place claim that more is owed if they get the house back? You (the bank) either get the money owed you or the house. How can the bank make the claim for both? It seems to me if the bank sells off the house and gets diddly for it, then that’s their problem. They could have found a way to rent it or some other money making scheme. The former owner doesn’t have a say in that.
That’s just truly bizarre to me.
The house is only collateral for the debt. If the value of the house goes down below the value of what you borrowed, in most states that is your risk, not the bank’s. The bank still loaned you the money, and can still collect a “deficiency” judgment against you for the difference (that is, what they are still out of pocket on what you owe them after the house is sold at foreclosure).
Often, there are no bidders at the auction because the market is bad, and there the bank “credit bids” and takes the home back (legislation in most states says the credit bid must be at least as high as the then-appraised market value of the home, but that still may not be very much), and then they can pursue you individually for the deficiency. Often these homes are actually a burden to them, because often by the time they get them back they are in terrible condition, either because no one has lived in them or they have been trashed and vandalized, and so often they can’t be rented or resold without substantial money being put into rehabilitating them. The banks also then become responsible for paying for maintenance, real property taxes, etc., which also drag the banks down financially.
Some states, like California, have what they call “anti-deficiency” protection if the home was your primary residence. There, your liability is limited to the value of the home at the foreclosure sale, and the risk of loss is thereby shifted to the lender. But that is not true in many states.
One reason the foreclosure crisis is so bad in California is that if the value of your house goes “upside down” (i.e., the value of the house is less than what you owe), it may make sense for you financially (if you don’t believe in keeping your word to the bank to repay what you owe them) to just walk away from the property even if you can still make the monthly payments, leaving the bank with the financial loss. That’s a big reason why there are such high levels of foreclosed properties in California, because there is no penalty for walking away from your obligation.
The worst is that a certain percentage of people in such states realize it could be 9 months to a year or more before the bank can finish foreclosure proceedings, so they can essentially intentionally stop paying the mortgage, and then live rent-free in the property until the sheriff kicks them out. That is happening a lot now.
Sorry Archer but that ain’t how the game is played. Bankruptcy and foreclosures can be interconnected but not necessarily. Also, note that this was a vacation home. Only primary residences are protected in bankruptcy. If you sign a note for $200,000 you are expecte d to pay $200,000 along with interest. Why would you think anything different?
I very rarely (almost never) side with banks on just about anything, but in this case I think they are within their rights. The bottom-line is people borrowed money and don’t think they should have to repay it. To which my response is the same one Calvin Coolidge gave when asked about foreign nations who owed the US money back when we were still a creditor nation.
“They hired the money.”
Some clarifications of the above article and comments.
Almost half of the states are anti-deficiency states. In CA, all homes that go thru non-judicial foreclosure (and now, short sales) preclude any deficiency judgment. (In 30 years I have yet to encounter a judicial foreclosure that could allow a deficiency in most cases.)
If a borrower faces a deficiency, normally any liability can be extinguished via bankruptcy if the borrower qualifies. That is true regardless of type of property. Actually, in reorg bankruptcies the court can force modifications on rental properties, but not on primary residences (unless the chapter 13 cramdown ever passes).
I can’t feel any sympathy for Mr. Reilly whatsoever. Most people work hard to pay for their house [primary residence], and many have lost their homes to foreclosure due to unemployment or health care costs. At one time, Mr. Reilly apparently had enough money to purchase a vacation home – something I feel qualifies as a major extravagance. That expenditure is now coming back to haunt him with a vengeance, and he has no one to blame but himself. Every mortgage I’ve ever seen specifically states that the borrower is responsible for the full amount of the loan, regardless of the value/selling price of the property. If he had rented a house once a year for 2 weeks instead of buying a house, he’d still have extra cash on hand right now and not face the deficiency judgement/bankruptcy.
Those of us who keep to budgets and live within our means are getting awfully tired of the whining by people who have racked up $20-30,000 in credit card debt and now don’t know how they can pay it off; by people who bought a house at the extreme upper limit of their borrowing capacity with 0% down, took out a home equity loan 5 years later, and are now angry because they’re upside-down on their loan and can’t afford to sell. If anything, I think *I* ought to be entitled to complain – my savings currently earn so little, if I live another 30 years my account will be a mere 1/20th larger when I die than it is now (and that’s not even including taxes……) My “Kid’s Savings Plan” at the bank 45 years ago earned 33 times more interest than I get now – I wish I still had that account!!!!!
I see nothing wrong with what happened here. The bank, is entitled to be repaid the full amount Mr. Reilly borrowed from them. He made a bad investment. Happens all the time. He may have bankruptcy options, but that may require him to sell his primary residence, depending on his state of residence. Some states do not exempt the primary residence in bankruptcy.
Crown Ministries helps thousands upon thousands manage their finances along Biblical principles. This fellow probably would have prospered from their guidance.