Deficiency Claim Defense

Lenders Fannie Mae and Freddie Mac, among banks and mortgage servicers, continue to pursue former homeowners for deficiency balances after the foreclosure completes. Many of these cases are brought by a collection firm Dyck-O’Neal, Inc. There is presently a one year statute of limitations to bring suit to collect these monies. It used to be five years before 2013 so at least that is good news.

Basically a deficiency is the difference between the amount of the Final Judgment (which includes the outstanding balance of the mortgage loan, accrued unpaid interest and the fees and costs of foreclosure) and the value of the home on the date of sale. If the bank was the winning bid at the foreclosure auction for $100, the value of the home per an appraisal would be used instead. Following the decline in the property market in 2008, the deficiency amount could easily exceed six figures.

A foreclosure does not automatically result in a deficiency judgment. First, the property has to be worth less than the amount of the Final Judgment. Second, the mortgage holder has to timely file a motion for deficiency judgment or a separate lawsuit within one year from the day the clerk issues a certificate of title to whoever purchased the property at the foreclosure sale.

If you purchased property with your spouse, only the person who signed the promissory note can be held responsible for a deficiency judgment.

Many defenses exist to such cases including personal matter jurisdiction; subject matter jurisdiction (if brought in the wrong court); statute of limitations (if they wait too long); documentation of chain of ownership and proof of authority to pursue claims; appraisal defenses and others. These defenses can be raised by legal counsel to dismiss the case or to leverage a more favorable settlement.

Consult with an attorney as soon as possible after you are served. You have twenty days to file a response to the summons – through legal counsel if possible. If you default, they will be able to secure a final judgment that lasts for 20 years. Not only that, but the lender can then engage in collection efforts including taking other real property, vehicles, and wage or bank account garnishment.

If you still own the property and are concerned about a possible deficiency judgment, you may instead negotiate a deed in lieu, a consent judgment in foreclosure or short sale – with a deficiency waiver in writing. You have more leverage to do this while you still own the property. It is important to retain an attorney at the earliest possible time in order to negotiate a return of the property in full satisfaction of the unpaid promissory note and any fees/costs. At times a new much smaller note can also be negotiated.

If you are facing the possibility of a deficiency judgment, it would be beneficial to hire an experienced attorney who can defend against the deficiency, negotiate a settlement to minimize the amount of the deficiency or to assist in arranging a short sale, deed in lieu or consent judgment with a waiver of any deficiency balance.