Bank Foreclosures Sales Do Not Mean Borrowers Are Loan-Free

by Donald Hanz on Foreclosures

Bank foreclosures sales do not mean that foreclosed-upon borrowers are already free from their mortgage contracts.

If the difference between the foreclosure sale price and the loan balance is too big, mortgage banks may file a case to collect the difference from the borrower, especially if the banks find out that the borrower strategically defaulted and continued to pay other personal loans.

Recently in Miami-Dade County, the court allowed a collection agency to collect the amount of $44,000 from John King, whose house in Coral Gables went into foreclosure in 2008. King wrongly thought that his mortgage contract was already voided by the foreclosure action on his property.

According to data from the Federal Deposit Insurance Corporation, which monitors the amounts collected by mortgage lenders from foreclosed loans that were already written off, the amounts collected from these mortgages soared on a year-over-year basis by a record 48 percent in the first three quarters of 2009 to $1.01 billion.

Additionally, the amounts recovered from already-written-off home-equity loans nearly doubled to $392 million.

The figures did not include other types of mortgage collections, but the numbers already soared. The FDIC data did not include collections by trusts supervising mortgage-backed securities and by distressed-asset investment firms that buy from bank foreclosures sales.

Ben Hillard, a corporate lawyer with Florida-based Hillard & Rogers, said that deficiency judgments had been rare over the past years because banks were too busy with getting back their properties from sheriff sales or with making sure that their properties get the best prices at sheriff auctions.

But now that the banks have put their systems in order to handle huge numbers of defaults and foreclosures, they are now able to pursue mortgage deficiencies. Hillard predicts that deficiency judgments are going to cause the next crisis for homeowners.

Based on a report from the Mortgage Bankers Association, nearly 4.5 percent of homes in the U.S. purchased with loans were put into foreclosure in the July-September quarter of 2009. A record ten percent of all mortgage borrowers nationwide were in default by at least one month during the quarter.

In several states like Florida, courts allow mortgage lenders to seek deficiency judgments within five years and give them as long as 20 years for collection. Lenders can even extend the collection period if the deficiency remains unpaid after 20 years.

In other states like California and Arizona, collecting deficiencies from bank foreclosures sales involving primary residences are prohibited. However, most states allow the collection of unpaid equity loans.

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