Chermack Law

Tag Archives: deficiency judgment

More than 500,000 HAMP modifications have been made permanent

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As of February 1, 2011, more than half a million HAMP modifications have been made permanent. Read more about it here. What do people do when they don’t receive a permanent HAMP modification? Some people, who may not qualify for a modification under the HAMP program have been able to obtain an in-house modification through their bank. Generally, the application process for an in-house modification is the same as the application process for the HAMP program, but the banks have more leeway in deciding whether to grant an in-house modification. The process for obtaining an in-house modification is not really any less frustrating or time-consuming than obtaining a HAMP modification. It is, however, another option for a struggling homeowner who would like to save his or her home.

Homeowners who are not able to save their homes sometimes participate in the Home Affordable Foreclosure Alternatives (HAFA) Program – by doing a short sale or a deed in lieu of foreclosure.

Sometimes, a homeowner who is unable to obtain a modification chooses to let their house go into foreclosure. A homeowner who chooses this option should be sure that they understand their state’s laws regarding deficiency judgments and foreclosure. Here is a link to my blog post about Minnesota’s laws regarding deficiency judgments.


Should Non-Recourse Mortgages Exist?

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The blog, Credit Slips, recently featured a post by Adam Levitin about whether mortgages should ever be non-recourse.

I agree wholeheartedly with Mr. Levitin’s post. I’d also like to add that the current mess that we have found ourselves in is an anomaly. It wasn’t normal for housing prices to increase at such a high rate, and it’s not normal for housing prices to drop at the rates at which they have currently dropped. Exotic mortgages and zero-down loans, and the idea of starter homes and getting into the market before you were “priced out forever” all contributed to this mess. For the people who bought into those ideas and now find themselves in financial distress due to job loss or health problems or any other “life happens” reasons, I am thankful that some mortgages are non-recourse. When someone is worried about “hanging on” and just making it through one of the worst economic times our country has seen, I am glad that people who have non-recourse mortgages don’t have to worry about one more stress – the stress of a deficiency judgment.

Is Minnesota a Recourse State?

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When a homeowner is worried that they might lose their house to foreclosure, they are usually also worried about whether their state is a “recourse” or “non-recourse” state. In a non-recourse state, if the funds from the sale of the mortgaged property (the house) are  not enough to cover the outstanding debt (the amount the homeowner owes on the mortgage), the mortgage-holder may not have recourse against the borrower (through a deficiency judgment) after foreclosure. In a recourse state, the homeowner remains responsible for any remaining debt through a deficiency judgment.

Minnesota is generally considered to be a “non-recourse” state, although in certain situations mortgage-holders (or other creditors) may seek a deficiency judgment. Generally, if a foreclosure sale of a home is done by advertisement in Minnesota, no deficiency judgment is allowed. If, however, the homeowner has more than one mortgage on that property (a second mortgage, for example), then that mortgage-holder may sue for a deficiency judgment. In Minnesota, most foreclosure sales are done by advertisement.

Minnesota permits deficiency judgments in cases of a foreclosure by action. A foreclosure by action occurs when a lender forecloses on a property in court. This is a rare occurrence in Minnesota, but if your house is foreclosed on in this manner, it’s important to know that a deficiency judgment is permitted.

This is pretty confusing, right?

Luckily, there are some great resources available online that do a good job of explaining this in easy-to-understand language.

The blog entry “Sued – After a Foreclosure” on the Minnesota Home Ownership Center’s blog does a great job of explaining the operation of the Minnesota deficiency statute and Minnesota’s status as a “non-recourse” state.

The fact sheet “Understanding Deficiency Judgments” by the Minnesota Home Ownership Center, Volunteer Lawyers Network, and the Housing Preservation Project does an excellent job of explaining deficiency judgments in Minnesota.

NOTE: If you have a question for me, I do not check my blog comments on a regular basis (only about once per month). For a faster reply, please email me. My email address is liz@chermacklaw.com

Deficiency Judgments after Foreclosure in Minnesota

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As I discussed in my posts about the different options for homeowners in “underwater” mortgages, Minnesota allows for deficiency judgments in some cases. See Minn. Stat. § 582.30. CNN recently posted this article about mortgage lenders pursuing deficiency judgments. These deficiency judgments have caused people to have to file for bankruptcy, even after they thought that the nightmare of losing their homes was behind them.

If your house is going into foreclosure, or you think that you may have to short sale your house, please consult with an attorney about it. There is a lot of mixed information out there about what happens when there is a deficiency after a foreclosure or short sale. It’s imperative to have accurate information when your financial future is at stake.

Options for Homeowners in Underwater Mortgages: When You Can’t Save Your House

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If you are struggling to pay your mortgage due to a job loss or transfer, illness, or change in life circumstances (such as a divorce), you may not be able to save your house. When the housing market was in better shape, people used to be able to easily sell their houses when these situations occurred. Unfortunately, the housing market has changed, making this option unlikely for many people.

Because many homeowners are “underwater” or have negative equity, they owe more on their mortgages than their homes are worth. This post is the second of two about homeowners in underwater mortgages. In this post, I will discuss some of the options that are available for homeowners who are not able to save their homes.

Sell your house and bring cash for the difference between the sale price and the mortgage balance to the closing. Unfortunately, this is not a realistic option for many people, especially once you include closing costs and realtor fees. On occasion, sellers in this situation have been able to secure a personal loan for the difference between the sale price and the mortgage balance, but this is quite rare.

Deed in lieu of foreclosure.  Some homeowners are able to negotiate a deed in lieu of foreclosure with their lenders. In this case, the homeowner deeds the house back to the lender, in order to satisfy their mortgage and avoid foreclosure proceedings.

Short sale. If the lender agrees to accept a short sale, a homeowner can sell his house for what it is currently worth, even if that is less than what he owes on his mortgage(s). The lender may not agree to forgive the “deficiency” (the difference between what the house sold for and the amount owed on the mortgage).

Foreclosure. If you are no longer paying your mortgage, the lender will eventually begin the foreclosure process. Foreclosure is a legal process by which a bank, mortgage company, or other creditor takes a homeowner’s property in order to satisfy a debt.

In Minnesota, there are two different methods of foreclosure:

(1) Foreclosure by action. See Minn. Stat. § 581.01 et seq.

(2) Foreclosure by advertisement. See Minn. Stat. § 580.01 et seq.

Deficiency Judgment. Minnesota allows for deficiency judgments by mortgage holders (lenders) in certain cases. See Minn. Stat. § 582.30. A deficiency judgment is a judgment against a debtor (homeowner) whose foreclosure sale did not produce sufficient funds to pay the mortgage in full.

Mortgage Forgiveness Debt Relief Act and Debt Cancellation. If you have a successful short sale and your mortgage bank decides to forgive the deficiency, this would normally be a taxable event. This is also true in the case of a foreclosure or a deed in lieu of foreclosure. This is because debt forgiveness or cancelation is considered to be “income” by the IRS. The Mortgage Debt Relief Act of 2007 provides an exception for “qualified principal resident indebtedness.” According to the IRS website:

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.