It's just another kick in the teeth. After losing homes in foreclosure a few years ago, borrowers may be getting another big surprise soon as mortgage lenders are now gearing up to file lawsuits against homeowners for the balance of the mortgage.
Many homeowners who were foreclosed upon don't know it, but most still owe money to the mortgage lender.
A foreclosure on a home works like this:
- The mortgage lender declares a "default" (breach of the contract) after payments are missed and "accelerate the mortgage" so that the WHOLE mortgage now becomes due and payable. (This is why a mortgage payment is often returned to the homeowner after several missed payments - the whole loan is due. One payment will not pay it off. The lender sends it back to avoid a legal defense from the homeowner that by accepting the payment the lender was reinstituting the loan.)
- The foreclosure auction is advertised in the newspaper for a specific date and time. In "non-judicial foreclosure" states -- which is the case for DC, Maryland and Virginia -- there is no actual court involvement in the process. (In Maryland, a foreclosure case is "docketed" in the county court, but there is no actual suit where the lender has to prove his right to foreclose.)
- At the auction, investors can, and sometimes bid, but usually it's the mortgage lender itself that bids a part - but only a part -- of its loan. For example, on a house with a $400,000 loan outstanding, and worth only $300,000, the lender may bid only $250,000 of its loan to win the auction. The balance of the loan - $150,000 in this example - is what is known in legal terminology as the "deficiency." The lender can re-sell the house at a profit, but that is solely the lender's to keep.
Most of the states in the US, including MD, VA and DC permit the mortgage lender to sue the borrower to get a judgment from a court for that deficiency.
And once the lender has a judgment, it can proceed to forcibly enforce that judgment through a variety of means it chooses including seizing the borrower's bank accounts, placing a lien on the borrower's property and/or requiring an employer to deduct from the borrower's paycheck and send it to the judgment creditor (known as garnishment). In this area, the judgment creditor is permitted to take up to 25% of the debtor's take-home pay.
It's a worrisome state of affairs, for borrowers who thought they were out of the woods after the foreclosure and after years of no communication from the bank.
During the past few years second mortgage lenders had been pretty aggressive and could almost be counted on to pursue borrowers after a foreclosure (since in most foreclosures it's conducted by the first mortgage holder and leaves the second mortgage holder with nothing).
But, until recently, the first mortgage holders had NOT been pursuing borrowers. Most of us lawyers who specialize in debt and foreclosure issues assumed they would NEVER sue for deficiencies. It may not turn out that way. In Maryland, according to the article, in 2006 there were deficiency lawsuits involving 19 homes that resulted in a total of $432,115 in judgments. Last year, in 2012, there were similar lawsuit involving 120 properties demanding $13.6 million.
So, how do you know if you owe? And what steps can you take to protect yourself? We'll discuss that in the next blog post here.
But if you're in a hurry, call our law office for an appointment. We specialize in legal representation of individuals and small business with financial distress issues in DC, Virginia and Maryland.