Government Programs And Market Conditions May Lead Lenders To Postpone Foreclosure And Sue Homeowner Directly On Underlying Note
A very skilled and busy mortgage defense attorney told me that he sees some mortgage lenders bypassing foreclosure and suing borrowers directly for default on the underlying mortgage note. When you buy a house you sign a promissory note to evidence the obligation to repay the house loan. The mortgage is a security instrument that gives the lender an interest in the house which he can foreclose if you default. Your personal obligation to the lender is based on the underlying note. A lender has the option to sue you for repayment under the note without foreclosing the mortgage. If the lender sues on the note, you, the borrower, will have a personal judgment against you for your default under the note, and the lender still retains his mortgage security in most jurisdictions. So, why would a lender chose not to foreclose a mortgage on your home and sue you directly on the note.
The mortgage defense attorney and myself came up with some good reasons why mortgage lender should not foreclose a home loan:
1. The government has given homeowners more rights under the government mortgage modification program (HAMP) which regulations make foreclosures slower and more expensive for banks.
2. Recently enacted Florida laws and local court rules require mediation proceedings in all foreclosure cases which further delays foreclosure proceedings.
3. Banks who take back properties on foreclosure have to deal with delinquent HOA bills, unpaid taxes, and house repairs.
4. House values are declining again. Banks recover less money than before on repossessed property, whereas costs of maintaining the properties is not going down.
5. Legally, its much easier for a bank to get a personal judgment against the borrower through a suit on the note than it is to get a personal judgment in a deficiency claim after foreclosure.
6. Many foreclosures involve ocean front condos and houses. The BP spill’s damage to the shoreline may result in environmental damage to ocean front property. Banks do not want to foreclose and take over ownership of potential environmental liabilities.
Could it be that government programs designed to protect homeowners from foreclosure by requiring mandatory mediation and loan modifications have in fact damaged homeowners by giving banks the incentive to sue for personal liability when they mostly have not to this point pursued large scale deficiency claims? It would not be the first time that government programs have had unintended consequences. In any event, if my mortgage defense colleague is correct subsequent mortgage defaults may have more serious consequences for homeowners.
We have an investment property that is badly "underwater" and in foreclosure. Our primary concern is a deficiency judgement. Both our primary residence and the property are in Orlando.Our primary residence is also underwater.We own a second home in Georgia free and clear. Other than the normal cars and household goods our only other assets are Florida Retirement System benefits and social security.Which of our assets is vulnerable if a deficiency judgment occurs.? Thanks for your help. We are very frightened right now.
I'm not sure this story makes sense. If it were so much better for banks to sue and not foreclose, they would have done it in a heartbeat.
I have almost the same question: I am retired and my husband in is the DROP program, which is retirement even though he can work at full salary for up to five years.
We own a home that is radically underwater--by about $100,000. We also own a townhouse which we rent out, but it is also underwater by about 20,000.
We want to do a short sale because that seems less awful than a foreclosure. We haven't missed a payment because I've been looting my retirement to pay the mortgage because our income is no longer high enough to cover our mortgage, but we are about to do that.
Are all my retirement accounts (403B and IRA CD) protected from deficiency judgement? The lawyer we spoke to said that he thought so but wasn't sure.
Also, can the bank attach my husband's salary while he is in DROP but still teaching for 4 more years at full salary?