Is a lawsuit from your lender in the future a possibility after your short sale or foreclosure? Homeowners may find themselves in the possible tidal wave of lawsuits from lenders or mortgage holders against homeowners in the future as a way to recover losses when sales of homes involve a short sale or foreclosure when not enough money to pay the mortgage(s) in full, according to legal and real estate analysts.
“It will be a dramatic problem because the borrowers will not know it’s coming,” according to Frank Alexander, a law professor at Emory University in Atlanta, Georgia.
Laws vary from state to state. In Florida, banks have five years from the date of the sale to file for so-called deficiency judgments and up to 20 years to collect the short fall. Lenders can garnish wages or make claims on borrowers’ assets.
Previously, few lenders filed these lawsuits. Short sales and foreclosures – sell for less than the amount owed on the mortgage – were relatively few and many of the homeowners didn’t have sufficient resources to make it worth the bank’s time, expense and losses were not as significant as experienced in today’s real estate market.
It is not uncommon for some borrowers to purposely default on their mortgage(s) – strategic default – while still having substantial assets.
As the housing crisis continues, those most in danger of a lawsuit are homeowners who ransack or destroy properties they’re losing in foreclosure or borrowers who walk away from their mortgage. In both cases, analysts say, banks will want to discourage other people from such behavior.
More than 40% of homeowners said they would consider abandoning properties that are underwater, or worth less than the mortgages, according to a national online survey.
Typically, mortgage holders won’t sue homeowners who have a true financial hardship, negotiated in good faith, job loss, or an unforeseen negative financial circumstance, who default on their loans.
Borrowers should not rely on any lender’s verbal promises. Get something in writing and be sure you work with a competent attorney knowledgeable in real estate matters.
Remember it is a business decision – not an emotional decision for lenders. “You can’t get blood out of turnip.”
Even if lenders or investors don’t pursue lawsuits, they could sell at deep discounts the owed amounts to collection agencies.
A spokesperson from American Home Mortgage, stated when homeowners seeking short sales demonstrates a legitimate hardship, “we provide a full release of liability, and we do not pursue deficiency judgments.”
Homeowners considering a short sale or walking away from the property should always seek the advise of appropriate advisers – such as but not limited to attorneys, accountants or other financial adviser, as early as possible in the decision making process and during the actual process to guide them through the maze of landmines to ensure they are adequately protected.
Under new government guidelines – Homes Affordable Foreclosure Alternative Program (HAFA) for short sales that took effect on April 5 of this year, lender aren’t supposed to hold homeowners responsible for any remaining mortgage debt. But not all short sales fall under the guidelines. Some investors (owner of the mortgage) may not implement the guidelines.
A forgiven mortgage balance through 2012 is not considered taxable income on a primary residence as long as the debt was used to buy or improve the house. But borrowers who walk away from investment properties risk having to pay income taxes on the debt forgiven. Consult with your tax adviser to determine any income tax affects.
Homeowners who hand their properties back to the bank through a deed-in-lieu of foreclosure also should evaluate they will not be responsible for any unpaid amounts.