CRR Blog

Deficiency Judgments: The Next Wave

We have been asked about Deficiency Judgments many times in the last 8 years.  We didn't hear anecdotal accounts about them going on in any great number. According to Reuters and CNBC, in an article today titled "Americans face post-foreclosure hell as wages garnished, assets seized", people who lost their homes to foreclosure are in for a rude awakening if they took out cash from their property above and beyond what they originally bought it for.  As you all know, the values of homes skyrocketed after 2003 with the advent of sub-prime and stated income loans.  Homeowners were inundated with solicitations to borrow equity out of their properties.  Many borrowed more than 100% of the value of their homes at a time when values were inflated.

In 2008 the market values began falling and these homeowners began to "Strategically Default" because they had intended to sell their homes at a profit.  These loans were originated with a variety of lenders and brokers.  But many of these loans are now owned by Fannie Mae, either through standard practices or through the recent programs designed to "Help" homeowners with modifications by having Fannie Mae buy and modify the loan agreements.  The bad news for those borrowers who thought they were being helped by those nice-sounding modification programs is that over 80% of modifications are failing.  Good intentions don't pay bills, and these people do not have the income to support these loans.  They never did.

Fannie Mae is filing Deficiency Judgments against these borrowers who lost their homes to foreclosure, where the auction price was less than what was owed and they took cash out of the property and strategically defaulted.  Note that we enjoy telling stories of "Drop Bids" at auction.  These are the true stories where the lender reduces the auction price to as little as 70 cents on the dollar.  So if you borrowed $1.5Million on a house that is only worth $900k when it goes to auction, the new owner may pay just $750k or less for the property.  That means the lender was "Shorted" $750k.  If that lender is Fannie Mae, the borrower could owe the balance to the Federal Government, not a bank.  Fannie Mae could have literally YEARS to come after the borrower and get that money.  

According to the article Fannie Mae referred over 50% of the foreclosures that Fannie Mae was involved in from January 2010 to June 2012 to collections for deficiency judgments.  According to Andrew Wilson, a spokesman for Fannie Mae, they are focusing on "Strategic Defaulters" who had the ability to pay but chose not to.  If this really is true, then I take my hat off to that effort and it is about time the "Strategic Defaulters" got some payback.   I have researched these foreclosures for years now, and it is amazing how many people did exactly what this article describes.  What is most telling is that over half of these Fannie Mae foreclosures are being referred to debt collection after the foreclosure process is over.  So over 50% of Fannie Mae defaults are in this category. Scary.

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