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October 27th, 2011

Banks, lenders coming after borrowers years after foreclosures

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This post was written by HSH.com contributing writer Lynnette Khalfani-Cox.

Buying justice macroAs if losing your home to foreclosure wasn’t bad enough, now comes word that some banks and collection agencies are going after ex-homeowners–sometimes years—after a foreclosure sale.

Here’s the scenario:

Once a homeowner fails to pay his or her mortgage, at some point a lender will repossess the home and try to sell it in a foreclosure auction.

At a foreclosure auction, however, a bank rarely sells a home for the amount of the outstanding loan balance. Amid the housing bust, banks simply ate the cost of these bad loans and evicted homeowners bore the brunt of having a foreclosure on their credit reports.

Deficiency judgments

But recent media reports suggest that following foreclosure auctions, banks are selling those soured home loans off to collection agencies. Then either the banks or the collection agencies are going to court to sue and get so-called “deficiency judgments” against consumers.

The judgments are designed to force ex-homeowners to pay the difference between their outstanding mortgage balances and the amounts that the homes sold for at the foreclosure auction. The average difference is about $100,000.

Prime suspects: Those who walked away

In most cases, the consumers being pursued are those believed to have engaged in strategic default. Regardless, however, of whether you went through a voluntary or involuntary foreclosure, how likely is it that a bank or debt collector might get a court judgment and come after you?

The odds are extremely low–as in less than half of 1percent, according to experts.

Jon Maddux, CEO of YouWalkAway.com, which advises homeowners how to do a strategic foreclosure, says his company doesn’t see a noticeable trend here at all.

Maddux notes that roughly two million homes will receive a foreclosure notice in 2011, according to data from RealtyTrac, and only a tiny sliver of those homeowners will be hit with a deficiency judgment.

Few defaulters will be affected

Maddux says that his company is approaching 7,000 clients served since its inception in 2007. And roughly 3,000 of the company’s customers live in recourse states, where lenders have the legal right to pursue deficiency judgments.

“Of those 3,000 consumers (who’ve done strategic foreclosures), we’ve seen maybe a dozen at most who dealt with a deficiency lawsuit,” says Maddux. And of those clients who were sued, “95 percent were based on second mortgages or home equity lines.”

“You have a greater chance of getting hit by a car walking across the street than you do of being hit with a deficiency judgment,” Maddux concludes.

Be ready to bargain

In all, 41 states and the District of Columbia allow lenders to sue borrowers for mortgage debt that remains after a foreclosure auction.

If you’re among the unlucky ones that do get pursued, Maddux suggests that you negotiate hard. Since debt collectors typically buy deficiency judgments for just two cents on the dollar, offer a low-ball amount in that range if you want to settle the matter. “But no more than 10 cents on the dollar,” Maddux recommends.

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4 Responses to “Banks, lenders coming after borrowers years after foreclosures”

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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