Early-Stage Mortgage Delinquency Falls to Lowest Since 2000 proclaimed a Headline News article in the June 13, 2017 issue of Credit and Collection News. The statistics came from a March report and the article included this quote, “Dropping delinquency and foreclosure rates reflect the beneficial impact of stringent post-crisis underwriting standards as well as better fundamentals such as higher employment, household formation and home price gains,” said Frank Martell, President and CEO of CoreLogic. “Looking ahead, we expect these positive trends to continue as the industry shifts its focus toward solving supply shortages and looming affordability crises in an increasing number of markets.”
Mother Nature had other ideas when Hurricanes Harvey and Irma hit. A Sept. 11 headline told readers how quickly things can change: Hurricane Harvey Could Cause Mortgage Delinquencies to Soar. The predicted data in this article—up to 300,000 new mortgage delinquencies, with 160,000 becoming seriously past due—was up-to-the-minute news. A same-day headline read, JPMorgan, U.S. Banks Face $3 Billion of Loan Losses from Catastrophic Hurricanes. In the related article, Goldman Sachs analysts predicted that eight banks could see $156 billion of loans affected by the pair of storms over the next 12 months.
Mortgage delinquencies can become mortgage deficiencies if the loan is declared in default. For some, the difference between the two might be confusing.
Mortgage Delinquencies occur when a borrower fails to make the required loan payments on time. Failure to make the required payments gives the lender the right to foreclose the mortgage and report the delinquency to credit bureaus. The borrower can make things right by paying the outstanding balance to get the payments back on schedule or arrange a loan restructure with the lender.
Mortgage Deficiencies occur when borrowers obtain a mortgage loan and signs a Note promising to repay the loan providing for the property to be sold at a public auction if they default. The hope is to repay the loan from the proceeds of the sale. Sometimes, however, the property is sold at auction for less than the balance due to the lender, resulting in a deficiency. When this occurs, the Lender may obtain a Deficiency Judgment against the parties who signed the Note. This is a money judgment against the debtor for the remaining balance due.
It is important to note the difference between a deficiency and a deficiency judgment. A deficiency is simply the difference between the amount owed on a loan and the total amount received/collected at the closing of a loan. A deficiency judgment is a court judgment that is a public record of the amount owed and by whom. In many states, items included in calculating the amount of a deficiency judgment include: the loan principal, accrued interest and attorney fees, less the amount the lender bid at the foreclosure sale.
Deficiencies play a role in short sales too. In most states, the borrower is expected to pay any deficiency after a short sale. With both foreclosures and short sales, borrowers also might owe the IRS some money. Whether a lender can go to court and get a judgment for the deficiency, and then collect it, depends on state law.
Peter T. Roach, attorney with an NL member firm, Peter T. Roach and Associates, P.C., told us some interesting facts about deficiency law in New York.
“New York’s RPAPL 1371 limits the amount of the deficiency to the difference between the property’s ‘Fair Market Value’ at the time of the foreclosure sale (NOT the lesser amount the property was actually sold for) and the amount due pursuant to the Judgment of Foreclosure. It is important to note that when seeking a Deficiency Judgment, one must establish the ‘Fair Market Value’ of the property. In order to do so, one must submit an actual affidavit from an appraiser, describing his/her qualifications and describing the methodology employed to determine the ‘Fair Market Value,’ as courts will not consider a bare appraisal by itself. One can, and should, however, annex the appraisal as an exhibit in support of the affidavit.
“Additionally, RPAPL 1371 provides an extremely short Statute of Limitations of only 90 days from the date the Referee executes and delivers the deed until the motion seeking a deficiency judgment must be filed. Failure to adhere to this severe time constraint will enable the Defendant to plead the Statute of Limitations as a complete defense and the application for a Deficiency Judgment will be dismissed.
“Finally, it should be noted that, few, if any, lenders actually pursue Deficiency Judgments, perhaps because it is simply not cost effective to do so. Should a Deficiency Judgment be obtained, the Defendant (whose credit rating has already been devastated by the foreclosure) may then simply file a Bankruptcy petition and have it discharged as an unsecured debt.”
In 2014 Geoff Walsh, a staff attorney with the U.S. National Consumer Law Center, said on NPR that the United States is “seeing an uptick” in the pursuit of deficiency claims, because technological developments have enabled large debt-buying institutions and mortgage insurers to more easily pursue former borrowers, who often don’t know their legal rights.
Collecting on a deficiency judgment
Mortgage creditors can garnish wages, attach bank accounts, or file liens against property in order to collect a deficiency judgment after foreclosure. Creditors who find that it is just not worth the cost and expense to pursue collection, can instead write-off the debt and issue a 1099-C. If this happens, the borrower might owe taxes on the forgiven amount.
The bad mortgage debt will undoubtedly add to the damage for the financial industry, with insurers already facing more than $100 billion of combined losses from Harvey and Irma. The hit to the broader economy is also likely to be substantial. Harvey may end up being the most expensive natural disaster in history, costing as much as $108 billion, according to Bank of America. Of course, these disasters will also affect the debt collection industry as a whole.
If you are looking for an attorney who specializes in mortgage delinquencies, deficiencies or bankruptcy, contact the National List of attorneys for a referral suited to your needs: tel: (800) 227-1675, firstname.lastname@example.org.