You Can Walk Away, But You Can’t Hide: Lenders Selling Deficiency Judgments to Collection Agencies

posted on March 23rd, 2010 filed under: Financial Responsibility, Real Estate News

A recent post explained that walking away from your mortgage could leave you in hock in states, like Florida, where lenders have recourse against borrowers for the difference between the loan amount and property value.  Several news outlets have since published similar reports.

For example, an article in the Miami Herald reports that investors are buying the rights to collect second mortgages and other liens such as home equity lines of credit.  The practice is especially relevant in non-recourse states like California, where first-mortgage lenders can look only to the property to satisfy the debt, but junior lienholders apparently can pursue the debtor personally.

In places like Miami and Coral Gables, real estate became so ridiculously overvalued that a foreclosure or short sale does not even recover enough to satisfy the first mortgage.  Nothing is left for the second mortgage or HELOC lender, who gets zero cents on the dollar.

To mitigate the loss, the lender sells the loan (at a substantial haircut, no doubt) to a collection agency, which then hounds the debtor until the end of time.

[L]enders have been quietly selling second mortgages and home equity lines left unpaid after foreclosures and short sales.  The buyers: collection agencies, which in some states have years to make a claim.

If they win court judgments, these collectors could have years to pursue borrowers with repayment plans, and even garnish their wages . . . .

“The only relief a consumer will have is entering into a debt negotiating plan or filing for bankruptcy” . . . .

Debtors can attempt to head off these troubles by negotiating a solution at the time of a short sale.  But many don’t know better, and aren’t warned by real estate agents who often are “not really equipped . . . . They’re set up to make the sale.”

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posted by // This entry was posted on Tuesday, March 23rd, 2010 at 10:13 am and is filed under Financial Responsibility, Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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