As the web of short sales and foreclosures continues to unfold, a new twist has come into play. Investors have begun purchasing deficiency judgments (“an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full” Wickipedia) from banks for around 2 cents on the dollar, according to a recent Wall Street Journal article House is Gone but Debt Lives On.
Silverleaf Advisors LLC, a Miami private-equity firm, is one investor in battered mortgage debt. “We are waiting for the economy to somewhat heal so that it’s a better time to go after people,” says Douglas Hannah, managing director of Silverleaf.
As with all complex business and financial matters, a specialist’s advice is invaluable before signing any documents. We recommend speaking with an attorney and an accountant to better understand all possible consequences before making any decisions.
Homeowners who have been able to sell their home as a short sale often feel a sigh of relief to be out from under the burden of their home loan debt. However, it may not be that easy for both short sales and foreclosures as lawsuits against these homeowners may be increasing in the future.
According to several real estate and legal analysts, it is anticpated that lenders will file a tidal wave of lawsuits against homeowners in the next few years as a way to recoup losses when home sales or foreclosure auctions don’t result in enough money to pay the mortgages in full.
Under Florida law, banks have five years from the date of the sale to file for so-called deficiency judgments and up to 20 years to collect. Lenders can garnish wages or make claims on borrowers’ assets. These types of lawsuits were virtually unheard of before the real estate market turned, mainly because foreclosures and short sales were relatively rare at the time.
Homeowners who are at the most risk of being involved with these lawsuits can include those homeowners who ransack properties or even those borrower’s who walk away from “underwater” mortgages. According to a recent survey released by Trulia and RealtyTrac, four out of 10 homeowners said they would consider abandoning properties that are underwater, or worth less than the mortgages. Lenders hope to discourage these behaviors by filing these lawsuits.
On the other hand, most mortgage companies typically won’t sue homeowners who negotiate in good faith or those who default on their loans because of job losses or other unforeseen circumstances, said Anthony Manno, an executive with Steelbridge Real Estate Services. The Miami-based company works with lenders on the resale of foreclosed homes. Still, borrowers shouldn’t rely on a lender’s verbal commitment, Manno said. “Get something in writing.”
A forgiven mortgage balance through 2012 is not considered taxable income on a primary residence as long as the debt was used to buy or improve the house. But borrowers who walk away from investment properties risk having to pay federal income taxes on the forgiven amount.
Homeowners who hand their properties back to the bank through so-called deeds in lieu of foreclosure also should make sure they won’t be on the hook for any mortgage debt.