Thursday, January 28, 2010

Recourse: One of the Dangers of "Walking Away"

by Bill McBride on 1/28/2010 07:31:00 PM

From Bloomberg: Lenders Pursue Mortgage Payoffs Long After Homeowners Default

[L]enders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors.
...
While there are no statistics on the number of deficiency judgments approved by courts, the Federal Deposit Insurance Corp. tracks the amount banks collect after defaulted loans were written off.

These mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period, according to the Washington-based regulator. Recoveries on defaulted home-equity loans almost doubled to $392 million, the FDIC data shows.
As we've discussed before, the recourse laws vary by state. As an example Florida is a recourse state, however in California purchase money is non-recourse. If the borrower walks away in California, the lender is stuck with the collateral. However, if the borrower in California refinanced their home, then the lender usually has recourse, and can pursue a judicial foreclosure (as opposed to a trustee's sale), and seek a deficiency judgment. Usually 2nd liens have recourse too.

Historically lenders rarely pursued a deficiency judgment in California because the trustee's sale was much cheaper and quicker than a judicial foreclosure - and the borrowers rarely had any resources anyway. However in Florida, all foreclosures are judicial, so the lender might as well obtain a deficiency judgment too.

This is important for short sales too. All sellers should obtain the advice of a lawyer and make sure the lender waives their rights for a deficiency judgment if possible.

Update: For a few examples in California, see Greg Weston's blog on jingle mail.

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