The law varies greatly from state to state regarding deficiency judgment availability and enforcement after foreclosure. A deficiency judgment allows a lender after foreclosure to sue on and to collect the remainder of the loan balance. In Florida, there is a very real risk of deficiency judgment.
1
WHAT IS A DEFICIENCY JUDGMENT?
The term "deficiency judgment" refers to a judgment for a debt, the amount of which is the shortfall that is created after foreclosure, when the collateral taken back by the lender (your property) has a current market value that is less than your current debt to the lender. Since the lender was not made whole by taking the property back, the law allows it to come after you for the difference.
2
IN FLORIDA, WHAT IS MY RISK OF DEFICIENCY JUDGMENT?
Unless you proceed carefully, and assuming that your mortgages are upside down, you are at very real risk of facing a deficiency judgment. In Florida, it is entirely feasible (even easy) for the lender to foreclose and then to get a deficiency judgment against you for the entire shortfall, to which it is allowed to continue adding interest, costs, realtors' commissions, etc.
Florida has the second highest foreclosure rate in the US, Florida mortgages are heavily upside down, and Florida law makes the process of pursuing deficiency judgment quite simple. This means that the odds are very high that the lender will not realize enough through foreclosure to pay itself back in full for the amount owed, and therefore it will still show a substantial balance due from the borrower.
3
IS IT POSSIBLE THAT THERE WILL BE NO SHORTFALL?
Possible but not likely. If your property is worth more than you owe the lender, odds are good that deficiency judgmentwill not be a problem. This means there is "equity" in the property, and if so, there is a good possibility that some other bidder will outbid your lender, which will result in your lender getting all of its money. However, due to the large numbers of mortgages in Florida now that are upside down, the odds are that this will not happen, and that therefore the lender will wind up owning your property. If the lender is the successful bidder, it then continues to add interest, costs, advances and expeenses to the debt until the property is disposed of.
4
HOW DOES THE AMOUNT OF THE DEFICIENCY JUDGMENT GET DETERMINED?
Once the lender becomes the owner of the property, there are a couple of different possible scenarios. One is that the lender can wait until it resells your house, and then go back to the foreclosure judge and present all the numbers: what you owed when the foreclosure sale was held, how much additional has accrued in interest, costs, advances for taxes, insurance, realtors' commissions, maintaining the property, etc. It gives all those amounts to the court, as well as the (undoubtedly very low) price it received, and asks that the court enter judgment for the difference, which the court will do.
Another option the lender has is to apply for deficiency judgment at any time after it becomes the owner of the property, and to provide the court with an appraisal of the CURRENT value of the property to show the shortfall, add the additional costs, interest, advances, etc that it has expended or reasonably expects to expend until it is rid of the property, and ask for judgment.
5
I HAVE HEARD THAT LENDERS ARE NOT SEEKING DEFICIENCY JUDGMENTS IN FLORIDA, SO WHY WORRY?
Some people are telling me that they have been advised by attorneys and realtors not to be concerned about the risk of deficiency judgment, that lenders do not pursue them. With all due respect, THAT IS INCORRECT. They can, and they DO.
I had a new client in my office just YESTERDAY with a demand letter from a collection law firm relating to a deficiency judgment they were seeking from him from a recently completed mortgage foreclosure. It is already happening, and I assure you that there will be a great deal more of this happening in Florida.
Deficiency judgment did not used to happen, because until very recently, people were not upside down on their mortgages, so there was not much chance there would be a deficiency and there were few foreclosures. However, that is all different now. People bought or refinanced when the market was high, and now that it has dropped, many are seriously upside down, and if they are foreclosed on, there is usually a shortfall.
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