Tucson AZ Home Loan Info

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Deficiency Judgements: Can The Bank Do That?

"We're so upside down on our mortgage that it will take us ten years to break even." 

The Foreclosure Scenario

The homeowner on the phone was calling me to see how soon after a foreclosure they could hope to qualify to buy a home. 

"We're thinking about letting the bank keep the house, and renting until we're able to buy.  We think it makes good financial sense, because our mortgage payment is $1,830. and we can rent a nicer house for $500. a month less than that!"

"That's like a $6,000 raise," the homeowner continued.  "Even if it takes us four years, we're going to come out better in the long run.  We're just throwing money down a rathole right now."

The Short Sale Scenario

The REALTOR on her cellphone in the next booth at lunch was talking with the owner of a potential short sale listing.

"You know, I can't give you legal advice, but what I'm hearing is that the banks almost never come after you for the difference between the short sale price and what you owe on your mortgage.  And look how far underwater you are with what you owe.  Getting out from under that debt will give you a fresh start, and won't that feel good?  Let's get together and talk some more..."

The Risk

In many states, the lender has the right to pursue the defaulting homeowner for a deficiency, and they did that last year to the tune of more than a billion dollars.

Let's take Florida as an example.  Let's say you are upside down on the home you purchased in 2005 with that 80/20 mortgage by nearly 50%.  The "jingle mail" philosophy of just sending the bank the keys and walking away sounds real good to you right now, even though the foreclosure will be on your record.

You walk away in 2010.   The bank sells the house as REO.  Years pass.  It's 2014, and the foreclosure is a distant memory.  You've re-established your credit and bought a new house in another part of the country where you moved back in 2011 because you got a great job...finally!  Your daughter is planning her wedding.  Life has never been so good.

January 27, 2014  You get a registered letter from a bank you never heard of.  The letter says that they have purchased the assets of the bank that held your mortgage back in 2010, and includes a demand for $83,000 ~ the amount of the deficiency. 

"They can't do that!" you shout across the room to your wife.  "We can't afford to pay this; we're just getting back on our feet."

As a matter of fact, they CAN do that.  In the state of Florida, the system allows mortgage holders to seek a deficiency for up to five years.  And if the deficiency is granted, they have up to twenty years to collect.

The Implications

  1. Know the law in your state.  Some states, Arizona among them, have anti-deficiency statutes on the books for a primary residence.
  2. Realize that laws are changing.  Don't rely on what you knew to be true last year.
  3. Don't necessarily believe what your real estate agent tells you about short sales.  Do your homework; it's your life.
  4. If you're a REALTOR, be careful how you talk to your clients.  A disclaimer such as the one in the scenario above will not protect you or your broker from an expensive lawsuit farther down the road.

For further reading:  Bloomberg Article

___________________

I'm Mike in Tucson, your preferred Tucson Mortgage lender.

NMLS #223495

SUNSTREET MORTGAGE llc
Offices in Scottsdale, Tucson, and Nogales, AZ, and Albuquerque, NM.

Call me on my Blackberry   (520) 349-9090

content copyright Mike in Tucson

 

Comment balloon 22 commentsMike Jones • January 28 2010 09:36AM

Comments

Thanks for article.  We learn a lot of good information from Active Rain Blogs.  Best Regards,

Posted by Edward & Celia Maddox, EXPERIENCE & INTEGRITY - WE TAKE THE HIGH ROAD (The Celtic Connection Realty) almost 11 years ago

Hmmmmm Interesting. I need to look further into this. Thanks for the info.

 

Posted by Rodney Horne (NC Sunshine Realty, Inc.) almost 11 years ago

Mike,

With the rules regarding lending, foreclosures, short sales and forfeitures changing on a daily basis, it's almost impossible for an industry professional to keep up ... let alone a consumer.  I think part of the tactic with some of these banks and the rules is that if they keep the general populous confused long enough then they will come out on top with all their surprise endings.

There is a true feeling of deep-seated defeat that goes with a foreclosure or short sale.  Those that thought, at one point in their lives, that they finally had a handle on things are now being slapped with reality ... and it's causing yet one more level of upheaval.

Thanks for keeping us all educated!

Hugs to you and your darlin'!

Posted by Carol Smith (Casmi Photography) almost 11 years ago

Carol,

Having lived a bankruptcy and foreclosure twenty years ago, I know firsthand about that deep seated feeling of defeat.  It gives us a clearer view of the path ahead, though.  And hugs are always in demand; Ginny says "Hi!"

Lynn,

Welcome to Active Rain!  Thanks for stopping by to comment.  I'll do tha same on your blog.

Ed & Celia,

Thanks for being the first to comment!  See you on your blog.

Mike in Tucson

Posted by Mike Jones, Mike Jones NMLS 223495 (SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) ) almost 11 years ago

Good Blog. It was very informative.

Thanks

Posted by Jesse Neely, Real Estate Sales Pro (Century 21 First Choice) almost 11 years ago

Hi Mike,

What a great article and sound advice. Research on your own and understand laws are changing!

Posted by Dorie Dillard CRS GRI ABR, Serving Buyers & Sellers in NW Austin Real Estate (Coldwell Banker Realty ~ 512.750.6899) almost 11 years ago

Great advice and well written Mike!  Regarding a short sale - one thing I learned the other day is to be sure to ask the lender how they will report the short sale (and of course get it in writing).  Depending on how it's reported a short sale could affect someones credit the same as if they went through foreclosure!

Posted by Lee & Pamela St. Peter, Making Connections to Success in Real Estate (Berkshire Hathaway HomeServices YSU Realty: (919) 645-2522) almost 11 years ago

Mike, a great article with some good information. Thanks,

Posted by Rebecca Gaujot, Realtor®, Lewisburg WV, the go to agent for all real estate almost 11 years ago

Great Information Mike...our Broker is constantly advising us to have our Short Sale Sellers...CALL the BANK to find out how it will be handled. They need to get the info from the "horses mouth" so to speak!

Posted by Joan Mirantz, Realtor, GRI, CBR, SRES - Concord New Hampshire (Homequest Real Estate) almost 11 years ago

I suspect there will be lawsuits ......

Posted by Susie Blackmon, Ocala, Horses, Western Wear, Horse Farms, Marketing almost 11 years ago

Very useful information, especially in light of all the strategic defaults that are threatening to come.  Thank you.

Posted by Jane Peters, Los Angeles real estate concierge services (Home Jane Realty) almost 11 years ago

I get SO MAD when I hear agents say...I can't give you legal advice, but....

Stay out of it, agents.  Trust me.  I work for the banks.  You really don't want the homeowner to come back at you after you have given them that advice.  Do you want to be sued?  Don't give legal or financial advice.  You are not qualified.  Unless you are licensed to be an attorney in the state in which you

And, if you aren't experienced in short sales, don't take the listing unless you have a mentor who will assist you, and take a cut, or not depending on their "fairy godmother" status.  And, if you haven't been a buyer's agent for a short sale, same story.  You might be neglecting your fidicuciary responsibility to the client if you aren't up to the task...again lawsuit potential. 

 

Posted by Suzanne McLaughlin, Sabinske & Associates, Realtor (Sabinske & Associates, Inc. (Albertville, St. Michael)) almost 11 years ago

Suzanne,

I can almost see the steam coming out of your ears!  Thanks for commenting.

Jane,

It's getting worse, not better at the moment, isn't it?

Susie,

I expect you're right!

Joan,

It's good to see you, and you're on the money!

Rebecca,

You're welcome; thanks for commenting.

Lee & Pamela,

I appreciate your comment about getting it in writing.  If it's not in writing, it never took place.

Dorie,

Hi there!  Thanks for stopping by to comment.

Jesse,

'Welcome!

Mike in Tucson

Posted by Mike Jones, Mike Jones NMLS 223495 (SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) ) almost 11 years ago

Mike- Agree- This is a time bomb waiting to happen here in Florida.

Posted by Dick and Dixie Sells, Realtors, Tampa Bay Florida Homes For Sale (Sells Real Estate, LLC) almost 11 years ago

Thanks for sharing. Home owners that walk away from mortgage obligations should carefully consider the adverse consequences. It is a good time to seek legal advice.

Posted by Roy Kelley (Realty Group Referrals) almost 11 years ago

Mike~

Good point about being observant about rapid changing scenarios...so fluid right now that even the bank representatives may not know the terms and implications...

Posted by ASHEVILLE REALTY REFERRAL RESOURCE 828-776-0779, CONTACT janeAnne365@gmail.com ( REAL ESTATE REFERRAL NETWORK ) almost 11 years ago

Mike,

Tell them and tell them again!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1

This also makes a compellingly strong argument for dealing with professionals, not just licensees!

So many hide behind the idea they're not attorneys "You know, I can't give you legal advice, but what I'm hearing is that the banks almost never come after you for the difference between the short sale price and what you owe on your mortgage."  to give bad advice!

Bill

 

Posted by William J. Archambault, Jr. (The Real Estate Investment Institute ) almost 11 years ago

Never, ever tell a potential or current client what the bank will do to close a short sale.  Period.  End of sentence.  And the sentence might be yours if you give legal advice without a JD. 

Is a commission of even 10-30K worth a fine of twice that and possibly losing your license by giving legal or financial advice without the licenses to back it up? 

Posted by Don Sabinske, Sabinske & Associates Inc. (Don Sabinske, Sabinske & Associates Inc.) over 10 years ago

Good post and good advice.  I have heard some things that will make your hair stand on end, right before it falls out! 

Posted by Doreen McPherson, Phoenix Arizona Real Estate ~ (Homesmart ~ Scottsdale ~ Tempe) over 10 years ago

Doreen,

Too late!  LOL

Don,

Amen to that!

Bill,

I've heard it more often than once!

Green-O-Lina,

Thanks for commenting; your point is well taken.

Roy,

That it is; thanks for stopping by.

Dick & Dixie,

I have a brother in Florida, and what I hear is not good.

Mike in Tucson

Posted by Mike Jones, Mike Jones NMLS 223495 (SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) ) over 10 years ago

How I hate this whole short sale mess!!!

Posted by Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional, Palm Harbor, Dunedin, Clearwater, Safety Harbor (Charles Rutenberg Realty) over 10 years ago

BarbaraJo,

I expect that it will be with us through 2011, though...

Mike in Tucson

Posted by Mike Jones, Mike Jones NMLS 223495 (SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) ) over 10 years ago

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