Banking Law

Ex-Homeowners Face 'Foreclosure Hangover' as Banks Pursue Deficiency Judgments

Banks are increasingly pursuing deficiency judgments against former homeowners who lost their homes in foreclosures.

Lenders may sue borrowers for mortgage debt that isn’t covered in a foreclosure sale in 41 states and the District of Columbia, creating a “foreclosure hangover” for former homeowners, the Wall Street Journal (sub. req.) reports. Some banks told the newspaper they are most likely to pursue homeowners when they perceive them to be “strategic defaulters” who stopped paying their mortgages because of a decline in property values.

Lenders are still pursuing default judgments in only a fraction of the cases where they could recover the money, but at least one observer is expecting more. Sharon Bock, clerk and comptroller of Palm Beach County, Fla., tells the Wall Street Journal she expects “a massive wave of these cases as banks start selling the judgments to debt collectors.”

One firm seeking to profit is Silverleaf Advisers, which buys bad mortgages and then goes to court for deficiency judgments after foreclosure sales, the story says. Other companies buy deficiency judgments after they are obtained; the going rate is about two cents on the dollar because it is so difficult to collect.

The newspaper profiled Joseph Reilly, an unemployed mortgage broker who lost his vacation home to foreclosure. The bank obtained a $192,000 deficiency judgment, and Reilly says “there’s not a snowball’s chance in hell” that he can pay it. He is considering filing for bankruptcy.