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from Local Attorney, Michael H. Wasserman

Thursday, January 26, 2012

MORTGAGE LOAN DEFICIENCIES



Homeowners are not always "out of the woods" once their home is lost to foreclosure or sold by "short sale."  Foreclosures and short sales remove  the mortgage lien from a property, but do not eliminate the debt described in the note or loan agreement, or it's promise to repay the debt in full. That remaining balance due is the "deficiency." Contrary to public perception, banks are not only allowing short sales and completing foreclosures,  but they are still looking to borrowers to satisfy deficiencies well after closing.


The Illinois Appellate Court has started the new year with a "win" for mortgage lenders. The Court confirmed  a bank's right to pursue it's borrower for everything that was due and owing, over and above the recovery from a foreclosure sale. Banks can be awarded deficiency judgments as long as borrowers are given proper notice of the fact that they were being sued.   This case held specifically that even a notice (summons) handed to another member of the household - also mailed to too - was a proper notice of the foreclosure lawsuit.


Deficiency judgments go on your permanent record. Unpaid judgments stay there forever. In the short term, they can influence credit scores and employment applications or prospects. More importantly, and over the long term, they can be enforced by wage deductions or asset forfeitures (garnishments). Following proper procedures, a bank can enforce for up to 27 years

Home owners using short sales to escape their mortgages may also see long term after-effects of their efforts. Many short sale lenders are asking their sellers to either pay additional money out of pocket at closings, to sign new promissory notes agreeing to make further repayments over time, or are simply refusing to waive the right to pursue deficiencies in the future.  Second lien holders in particular are very insistent on retaining the right to repayment.

The best way to avoid deficiency complications is to try to get the lenders to waive them, Many will. Often times however, home owners have little choice but to sign loan re-affirmations or modifications. Doing so may be necessary to accomplish the much more important goal of ending the mortgage loan and cutting off liability.   Even still, there are several known and effective strategies that people facing deficiencies can employ to mitigate their losses. Legal counsel can and should be able to explore these with debtors and help craft courses of action best suited to the circumstances.

A final problem - there may also be income tax consequences to borrowers where lenders waive a debt/deficiency. Debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Debt Relief Act of 2007 gives some protection to people who have lost their homes to foreclosure, but this relief is schedule to expire this year. Always best to consult your own tax consultant to evaluate these consequences.