Deficiency Judgment Landmines

We have noticed here in the Tampa Bay, Florida legal community that written deficiency waivers of the unpaid loan balances for first mortgages are getting harder to come by. A recent St. Petersburg, Florida Times article focuses in on the potential landmine: “People have no idea of all the trouble that is coming” says Margery Golant, a lawyer in Broward County who sees deficiency defense cases on the rise. Florida is known as a recourse state and the lenders have a right to obtain a personal judgment for the remaining unpaid balance. They then can seek to collect that debt by garnishing wages or bank accounts or placing a lien on other property that the debtor owns.

This is true of short sales regardless of lender. It is also true of deed in lieu or other voluntary return of the property through a consent judgment in rem (which means against the property only). Even Freddie Mac has aggressively pursued new reduced promissory notes in short sales.

What does this mean? We think it means someone will come knocking to collect that debt eventually. It might be five years down the road (prior to the expiration of the statute of limitations), but if the lender obtains a deficiency judgment, like any judgment it can be collected for 10 years and renewed for a second 10 year period. In the State of Florida, a judgment creditor has 20 years to try and collect an unpaid judgment.

Most people cannot afford to pay back mortgage deficiencies when the home sold for 50% of the loan balance. These folks pay rent now elsewhere and with the understated inflation of living expenses going on right now, there simply is not extra funds to pay back the remainder of a mortgage note on property lost in short sale or foreclosure.

In Tampa Bay while we seeing far fewer waivers of deficiencies, we are not seeing waves of deficiency lawsuits yet. At least not for first mortgages. We have many second mortgage lawsuits to collect the balance owed. Most of the first mortgage deficiency lawsuits have been brought by regional smaller banks, and credit unions. Suncoast Schools Federal Credit Union is responsible for one-third of the deficiency lawsuits on first mortgages filed in the Tampa, Florida area. It is reported that the Cape Coral and Fort Myers area have been hit much harder with deficiency lawsuits perhaps because of the perceived or real wealth in the area.

Even if the bank elects not to pursue the debt, the debt still has value. It can be sold to a debt buyer or collection agency. It can be securitized and packaged with tens of thousands of other loans and sold as an investment on Wall Street.

Filing bankruptcy will of course discharge the claims for deficiency whether done now or years from now. So consumers may have the last word after all.