Debt Defense Must Read Alert: Principles and Strategies for Dealing with Deficiency

The Wall Street Journal reported in its aptly named article House Is Gone but the Debt Lives On that lenders and/or third party debt collectors are suing borrowers for deficiency judgments. 

This is not a new issue. This has been a growing concern among borrowers. There is a dawning realization that if a property cannot pay off the mortgage loan balance in full then the borrower will be responsible for the shortage. We talked about deficiency debt in our March 2010 post entitled Plan To Be Followed When You Walk Away From Debt. As predicted, there has been an increase in lawsuits for deficiency judgments.

This current post focuses on principles and strategies that can be a guide  towards resolving deficiency debt.

A deficiency debt arises when a property sold at a foreclosure auction cannot generate enough proceeds to pay off the entire loan amount. If a lender can prove to a court that a borrower is personally responsible for the payment of a deficiency debt then the lender can obtain a deficiency judgment against a borrower. A deficiency judgment is a court order that directs a debtor to pay the lender a certain amount of money. A deficiency judgment includes the principle balance, unpaid interest, legal fees, escrows, and/other costs. A deficiency judgment allows the lender to collect interest until the balance is paid in full. It provides a lender with various tools to collect the judgment such as the right to garnish wages, the right to place a hold on a bank account, and the right to place a lien on personal property or real estate. A deficiency judgment can appear on a credit report. If you are not clear about deficiency debt please read the article What Everyone Should Now About Debt Forgiveness, Obligations, and Deficiency.  

There are three alternatives that can arise from the auction of a property at a foreclosure sale:

1. The property is sold to the highest bidder or,
2. The lender takes the property in full satisfaction of the debt or,
3. The borrower redeems the property by paying in full at auction.  

If a lender takes the property at an auction then there is no deficiency debt arising from the loan made by the lender. If the lender decides to take a cash bid at an auction, instead of the property, then the borrower may be responsible for the difference between the total amount due on the loan and the amount collected from the cash bid.  

Keep in mind that an auction may not always eliminate a second mortgage and/or Home Equity Line of Credit ("HELOC"). A foreclosure auction typically deals with the loan that is the subject of the foreclosure lawsuit. A foreclosure lawsuit is usually started by the first lien mortgage lender. A borrower can still remain liable for a second mortgage and/or HELOC after the first lien mortgage lender takes the property at an auction.

Each state has specific laws governing the collection of a deficiency debt. In some cases, states prohibit the creditor from seeking more than the collateral used to secure the loan. This is called “non-recourse” or “anti-deficiency.” This means that a creditor cannot hold the borrower personally liable for more than the value of the property at the time of sale. In a “recourse” jurisdiction such as Ohio, if a borrower owes a lender an $100,000 deficiency after a foreclosure sale, then the lender can sue the borrower for the difference, i.e., get a deficiency judgment against a borrower. You can learn more by reading What Is The Difference Between Non-Recourse and Recourse States. 

The WSJ article contained important points which should serve to remind all strategic defaulters about the need to develop a written action plan. The following are the main points from the article: 

Got Questions? Get Answers... KO Wants A Plan To KO Bank of America For Not Responding To A RESPA Request

Got Questions?

I recently ordered and read your book and I have a few questions particular to my situation. I hired a loan modification company about six months before I ran out of credit to juggle, in order to make my mortgage payments. The loan modification company has done a good job working for me and they are not what this email is about, I just mention it to explain my current circumstances. I now have not made a payment for almost a year. The loan modification company has been consistently working with the bank's loss mitigation department, which is why the bank has not begun the foreclosure process. It's been the bank's lack of action to come forward with a loan mod offer that has taken so long.

Then in May of this year I worked with a guy who's house in Reno has lost over half of it's value since his purchase in 2006. He used to be an accountant and had been reading about the derivative and MERS mess with mortgages. He was very angry in the fact that the banks had sold off loans once to Wall Street, continued to collect mortgage payments after the derivatives had crashed and then received bail outs from us tax payers on top of it.  Now his house is worth less than half of what he paid all because of the bubble the banks and politicians created.

In December of 2009 he saw an article in the paper about a Law Firm in Reno who was helping homeowners fight back against the banks. He hired the Law Firm who immediately had him stop making his mortgage payments. Over a year later they finally went to court with the bank, who at the hearing could not show that they either owned the Note or who was the actual owner of the Note for which they were servicing the loan. The Judge stopped the hearing until the bank could prove that they had the legal right to collect or foreclose on the house. He and his family are still living in the house today, rent free, and saving their mortgage payments in case some day someone does come forward with the note.

I explained my underwater and default situation to him and he told me to just start searching online and get educated on all that has gone on with the banks, derivatives and MERS. Since I bought my home in early 2007 my mortgage was probably also securitized and sold off.

In my research I came across your website and ordered your book on Strategic Default. Through your advice as well as many other web sites on the subject, I decided to send off a RESPA letter. I added to my request that if Bank of America claimed to still own the Note on my house that I would like to set up a viewing of the original 'wet ink' Note for verification. This concept came from a few sites, in particular www.consumerdefenseprograms.com. 

While Bank of America did respond and sent copies of all of the original documents of which I already had copies, their response to the viewing of the original note was, "You cite no legal authority that supports your claim that you are entitled to view the original Note, and we are not aware of the existence of any such authority.  Accordingly, Bank of America, N.A. respectfully declines this request.  If you wish to pursue this matter further, please provide such legal authority."

Do you have any advice in this situation? 

Is "Show me the Note" something you recommend pursuing?

If so, what is the best way to find a lawyer in Washington State to assist me in this pursuit?

Thanks for any help. KO

Get Answers...

Planning For A Strategic Default Series : Putting Together Your Financial Snapshot and Gathering Documents

In our last post in our Planning For A Strategic Default Series we wrote about the importance of Developing an Action Plan before initiating a strategic default. We are now going to focus on preparing an income and expense form and gathering documents. These are steps 2 and 3 respectively of Chapter 8 from our guide book Strategic Default: How To Create A Brighter Financial Future For You, Your Family Or Your Business. Chapter 8 provides an introductory step-by-step guide on how to successfully initiate and complete a strategic default. 

If you are like most strategic defaulters, in addition to owning underwater property, you possess other types of debt such as school loans, business loans, credit cards, and home equity lines of credit.  

Remember. The primary objectives of a strategic default are cash flow protection, savings preservation, and wealth protection. So putting together a financial worksheet and keeping proper records is an important step towards your objectives. All of these objectives point to one inescapable conclusion. Your ultimate objective is to be in a better financial position by the end of a strategic default.  

So let's take a look at steps 2 and 3.

Understanding The Difference Between Judicial and Non-Judicial Foreclosures

By Kenneth F. McCallion, Esq. 

It is very important to understand the difference between judicial foreclosures and non-judicial foreclosures. In simple terms, a judicial foreclosure requires a proceeding in a court. A non-judicial foreclosure does not require any proceeding in a court. In each type of procedure, a lender has the right to auction a property if the lender has properly filed all of the necessary paperwork. Let’s review important aspects of each. 

The 3 Must Send Debt Defense Letters

The 3 Must Send Letters

The following are the 3 "Must Send" Debt Defense letters. This means that at all times you must send any of these letters to any debt collection company or the original lender that contacts you.

Consider Using A Mortgage Calculator, Amortization Table And Property Value Data For A Strategic Default

Part of our job at strategicdefault.org is to review other viewpoints about strategic default. This current post is inspired by another post we found while researching the universe of articles on strategic defaults and foreclosures.

We found this post entitled : “Should I Do a Strategic Default on my Mortgage?” by JLP in his blog All Financial Matters posted December 2, 2010.  

This question was posed by a reader of JLP's blog. The question and answer are as follows:

• "I bought my condo at precisely the wrong time. I didn’t, however, listen to everyone telling me I could afford to buy more. I did a straight 30 year fixed that I could afford in reality. Of course I am incredibly underwater on my mortgage now. It is depressing, needless to say, and even more so when I feel as if my taxes are helping people who didn’t “do things the right way” and some companies who seemed to have contributed greatly to the problem and are not being held responsible...I live in Illinois, western burbs of Chicago...I bought for $139,000, now owe $122,000 and the most recent sale was $77,000...30 year, 6.75% (which was good then!) percent...When I bought I planned on staying 5 years or so and moving up (didn’t everyone?). I don’t *need* to move. I sure wish I could buy some of the houses on the market now though! For what I paid? I bring home (after taxes) about $40,000 a year. My mortgage + PMI + escrow is almost $1,100...I know there are people in much worse shape. If I lost my job this whine about underwater wouldn’t even exist, you know? Still – just the though of paying even MORE out when I feel like I am not getting any benefit is upsetting, depressing."

         The writer, JLP answers as follows:

Happy New Year !!!!

Happy New Year. We all made it to 2011. Somehow, someway, to breath another day. 

The feeling of change in the beginning of a new year can be used to create a meaningful focus in our lives. For those of you who read our website...Thank You for visiting and taking time to read our content. 

We believe that your primary concern is how to strategically default the right way with the least financial and emotional impact. We believe you are seeking solutions to protect yourself, family, cash, savings, and wealth when deciding to not pay a debt. 

One thing is for certain in 2011, strategic defaults will continue to rise. Thus the demand (and need!) for solid, reliable, and actionable information will continue to be strong. 

We will be coming out with a new look and feel for our website. It will be easier to access our content based on categories and interest. We will be adding a strategic default calculator, forms, and other tools to better help you with a strategic default. We will continue to provide detailed steps for an effective strategic default. We will be adding a forum for our readers to share their experiences. Our goal is to continue to provide the best and free strategic default resource on the planet. 

We are predicting that the key issues for strategic default this year will be: