Deficiency and Judgment Short Sales New Hampshire / Massachusetts Homeowners

People misunderstand the terms deficiency and deficiency judgment when explaining the risks in short sales or foreclosure actions.  It is easy to do.  Short sales and foreclosures are confusing for most homeowners.  Even after explaining the potential outcomes of a short sale or foreclosure in Massachusetts or New Hampshire, homeowners still are overwhelmed.

Do not confuse deficiency and deficiency judgment.  They are two separate terms.  In short sales, as a short sale is negotiated a lender may refuse to release the deficient portion of the note.  So for example, a home that has a note of $200,000 which is sold for $150,000, has a deficient amount of $50,000.  Most homeowners cannot afford to bring $50,000 to closing; the $50,000 can either be forgiven debt by the lender, or a deficient amount that the lender can pursue. 

In both short sales and foreclosures you will have a deficient amount (unless at auction someone bids more than the mortgage note, which is extremely rare), so if your home is auctioned off for $125,000 and you owe $200,000, you now have an automatic deficiency of $75,000.

The deficiency is the balance owed.  What the lender intends to do with that deficiency is what leads you to a potential judgment. 

Now, in the case of a short sale, a lender may opt to forgive the deficient amount.  This is a great thing for most owner-occupied home buyers as they will likely be able to walk away without any ramifications.  They will be issued a tax form 1099-C, so now the balance could be considered taxable income unless they are insolvent.  Insolvency is one of the criteria that meets the 2007 Mortgage Debt Forgiveness Act created by President Bush.  Only your accountant will truly know if you are insolvent, but it is our experience that most owner-occupied properties fall in this category, in this economy.

If the lender chooses not to forgive the balance (debt) then they will “reserve the right to pursue” the deficiency.  This is where the term deficiency and judgment get confused.  Now, just because they reserve that right to pursue it, does not necessarily mean they will.  They are just keeping that option open.  In Massachusetts, they have two years to pursue you for the deficient amount in regards to a judgment, meaning they need to go to court to get a judgment ordered against you and up to twenty years to pursue the actual deficiency.  So they could pass your file off to a collections agency to try to chase you for twenty years on that remaining balance, OR go to court and try to file for a judgment within two years of the foreclosure and/or short sale and then twenty years to collect that judgment.  In New Hampshire they have twenty years to pursue you.

For example:

Foreclosure or short sale with deficiency
Massachusetts
*Lender has 2 years to pursue a judgment – If judgment is ordered they have option of 20 years to collect
* Lender has 20 years to pursue with collections agency – likely selling off debt to 3rd   party company

New Hampshire
Lender has 20 years to pursue the deficiency balance – regardless of judgment

In order to obtain a judgment, the lender actually has to go to court and this is what I see most people confuse.  Most people throw the term judgment around when explaining to homeowners about the deficient portion of the short sale.  The judgment is not an automatic thing that happens with a short sale.  A judgment would occur after short sale has closed and the lender has taken more time and money out to go to court to seek out that judgment for the remaining balance in court.  Do not tell your client you can negotiate a deficiency judgment.  You can’t.  You CAN try to negotiate a deficiency, but the judgment is only something the court can order.

Attorney Burt Kliman, of Kliman Law, Newton explained, “As a general rule, I’m not seeing lenders sue on deficiencies.  The problem is that the cost of litigation is high, the debtors are often judgment proof, and the defenses keep mounting.”

Burt specializes in Real Estate law and has closed hundreds of properties throughout New England.

Another outcome to a short sale is a promissory note.  Many times the lender will ask the homeowner to come to the table with SOME type of money.  If the homeowner can’t they request a promissory not to be paid off over a certain term or all at once at closing.  So for instance, a home mortgage balance of $200,000 which is bought for $150,000, still has a $50,000 deficiency.  The lender may ask the homeowner for a payment of $12,000 paid out over a period of 3 – 4 years to release the lien on the property.  That $12,000 payment is typically not subject to penalties or interest and then the balance of the note is forgiven.

In Massachusetts if a lender is seeking a judgment, they have two years to file to go to court for the judgment and up to twenty years to collect it.  In New Hampshire, they have 20 years to pursue the deficient portion.  Lenders are understaffed, and the high cost of pursuing a judgment could be the reason we see the decline of pursuit of a deficiency judgments.

The important thing to remember for homeowners and agents working in short sales is when you are talking about a short sale approval, you shouldn’t be talking about a negotiating a judgment.  You can’t negotiate the judgment.  You can only TRY to negotiate away the deficiency and no one can guarantee that will happen.  There is never a guarantee when working with a foreclosing or short sale lender that they will release the deficiency and forgive the debt.  Your best action is to educate yourself to be prepared for any outcome.

Maryann Little
Preforeclosure Acquisition and Negotiation
http://rapidpropertyrelief.com
http://massachusettsshortsales.net
http://twitter.com/rapidshortsales