Greater Risk Of Deficiency Judgment From Smaller Regional Lenders
Over the past year I have commented more than once that although the large national banks had generally not pursued deficiency claims on first mortgage foreclosures that smaller regional banks were becoming more aggressive. This week I spoke with a new client who had been sued for a deficiency judgment after foreclosure of first mortgage loan issued by First Priority Bank of Bradenton, Florida. Actually, after the mortgage loan went into default the FDIC closed First Priority Bank and sold the bank assets to an investor group. It is the investor group which is aggressive pursuing collection of the mortgage debt.
I am not sure why the smaller banks are so much more intent on chasing homeowners for deficiency judgments. Maybe the smaller local banks did not participate in the mortgage securitization program and held more loans in-house rather than selling them to Wall Street. Or, perhaps each loan in default represents a significant percentage of their bank assets. Whatever th reason, my observation is that the smaller the mortgage lender the greater is the borrower’s exposure to personal liability from a strategic mortgage default
It probably also stems from the fact that these small banks dont let cases "slip through the cracks" as much as the large ones. I have found, however, that the small banks are much quicker to agree to loss mitigation in the early stages and waive the deficiency judgment upon the completion of a successful short sale or loan modification.
Great posts.
I agree with Michael. It's a fact that the smaller lenders are pursuing deficiency more frequently than the large, national banks. The reason is because the smaller lenders make decisions on a case-by-case basis. They do their due diligence and make informed decisions as to whether deficiency should be pursued. The larger lenders, to be quite frank, have no idea what they're doing most of the time. In fact, it's typically the servicer of the loan that makes the decisions, not the actual owner or investor.
I also agree that the smaller lenders are much better at loss mitigation than the large, national lenders. Once again, they make case-by-case decisions.
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Lenders can try to get a deficiency judgment. However, a lender in first position can be blocked from obtaining a deficiency judgment against a borrower who let the property go in a FORECLOSURE. You simply have to show up in court and contest the deficiency judgment. The judge will laugh at the lender and throw the claim out. If you don't contest the deficiency judgment it is very possible that a deficiency judgment will be allowed against the borrower. This is true with single family properties all the way to a four unit building. Second mortgages and HELOCs are different. Beware of short sales. They only favor the borrower if they are done quickly. What counts against your credit is the late payments! What is worse? A short sale with 18 late payments or a foreclosure with 6 late payments? The foreclosure would be better for your credit to recover faster. If you can get a short sale to go through do not sign IRS form 4506 T or 4506 TEZ. Write the words decline to sign and initial and date the forms. Also, read the contract with the bank on a short sale! Especially page 2. The FULL RELEASE and FULL SATISFACTION that you think you are signing may not be. BE CAREFUL!