Bernstein & Feldman, P.A.

Providing Personal Counsel
And Representation For Over
30 Years

Lenders' forgiveness a little short-lived for many borrowers

Anyone with a mortgage who has gone through a foreclosure may breathe a sigh of relief when it's all over. What he may not realize is that the clock has started ticking on something called a deficiency judgment. And now that Maryland's foreclosure backlog is dwindling, consumer advocates are concerned that the state could be in for a rush of deficiency judgments.

In a foreclosure auction or a short sale, the property sells for a price lower than the mortgage debt owed. The lender loses money -- but just for a while, because the lender can then sue the borrower for the difference. In Maryland, lenders have 12 years from the date of sale -- the date the loss was incurred -- to file this default judgment.

What advocates do not want to see is borrowers getting back on their feet only to be slapped with an enormous debt. So, they are working with state legislators on a handful of bills that would reduce that risk. One would reduce the statute of limitations to 180 days; another would prohibit deficiency judgments altogether.

Lenders and debt-buyers, needless to say, are not in favor of either measure. The Maryland Bankers Association is working with lawmakers on a compromise. If lenders had just 180 days to file, an association representative explained, they would be much more likely to file automatically, the second a property sells at auction or a short sale is approved. Right now, he continued, lenders take a more strategic approach.

The data backs up the last claim. The number of deficiency judgments increased dramatically from 19 in 2006 to 120 in 2012. However, according to the Maryland Foreclosure Task Force Report of January 2012, the fourth quarter of 2009 saw 16,788 foreclosures -- in three months, the state logged more than 100 times the number of deficiency judgments filed in one year.

An outright ban on deficiency judgments would hurt borrowers as well, the bankers association said. Banks would likely tighten lending standards, probably increase interest rates and require larger down payments.

And yet, 10 states have barred deficiency judgments; a dozen states have 90-day statutes of limitations. (Maryland would opt for three years to bring the default judgment statute in line with other debt statutes of limitations.)

We should note, too, that state laws may differ when it comes to commercial borrowers. That is why it is so important to discuss your own situation with a local attorney.

Source: The Baltimore Sun, "Consumer advocates shifting focus to foreclosure's aftermath," Natalie Sherman, Feb. 28, 2014 

No Comments

Leave a comment
Comment Information