Wednesday, August 26, 2015

Banks Finally Catching on to Collection of Deficiency Judgments

I ran across this article in the Wall Street Journal the other day, entitled “The House is Gone but the Debt Lives On:”
Which raises a rather disconcerting point that I have long been worried over; A staggeringly large segment of the population of the State of Florida has suffered through a mortgage foreclosure in the past 5 years, and during that same time the economy and local real estate markets collapsed. The combination of these factors meant that virtually every single one of these foreclosed properties sold for less (often far less) than its mortgage value at the judicial sale, leaving a balance owed by the foreclosed homeowner.

Lenders have, thus far, been sleeping on their rights when it came to collecting these deficiencies, due to a variety of factors, not the least of which is that most of them were TARP recipients and only avoided collapse with the aid of bailouts from the same taxpayers they were foreclosing on. So they were in something of a public-relations catch-22 when it came to playing hardball. But 2008 is now a fading memory, at least in the eyes of Washington and the media, and time has marched on. Many banks failed, and the ones that remain ultimately repaid their government bailout funds.

With banks no longer bound by many of the same public relations concerns, they are now beginning to go about collecting on these outstanding mortgage deficiencies. Some are selling the debts to collection agencies or junk debt buyers, and others are beginning to go after homeowners directly. As always in credit and collections law, those with salaries and personal property to garnish and attach are the most likely targets of collection efforts. Another wrinkle is mortgage insurors, who additionally may have the right to collect on a mortgage deficiency.

I suspect that, as 2012 arrives, many people who were forced to walk away from a home or investment property, and who have thought that heart-wrenching period of turmoil was over, are going to wind up with a nasty surprise, as this appears to be the new hot-ticket item for collectors and junk debt buyers. Thankfully, these deficiencies are dischargeable in bankruptcy, and because of the sheer size of the obligation (deficiencies often run several hundred thousand dollars) the former homeowners are more likely to qualify for a Chapter 7, wherein the deficiency can be completely eliminated. Even so, it strikes me that just when people thought they were moving forward, out pops another roadblock, courtesy of the financial crisis.

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