By Christine E. Springer
CHRISTINE E. SPRINGER IS NOT AN ATTORNEY AND THIS POST IS NOT INTENDED TO BE LEGAL ADVICE.
Last month, I told you about nine ways a loan audit may be useful. There were several that were new to me, partly because I've been focused on foreclosure lawsuits.
In today's post, I'm talking about deficiency judgments in the mortgage context. I am talking about borrowers who lost their home during the foreclosure crisis, owed more than their home was worth at the time of foreclosure and were in states that allowed deficiency judgments.
Years ago, I read a news story that was clearly intended to scare people into paying on their home loans through a non-existent moral obligation. The piece suggested that lenders would wait until the economy recovered and would then sue borrowers for deficiencies on their foreclosed homes.
While I'm sure there are people who have been sued, we haven't heard a lot about it in the news.
I think there are a couple of reasons for a low number of deficiency judgments: a slow-to-recover economy, which made it harder for people to repay, even if they are sued. I also think sentiment toward banks is at an all time low, and the courts have clearly shifted toward more equitable decisions for homeowners.
Also, I think lenders probably take case law decisions into consideration when they develop their policies on deficiency lawsuits. If the case law in their state is not on their side, they would probably think twice before suing borrowers after the fact.
Ultimately, I think if the original (pretender) lender had trouble demonstrating authority to foreclose, they would also have trouble winning a deficiency lawsuit if the borrower actively fought them.
During the foreclosure crisis, my research suggests that a lender would be most likely to sue a borrower for deficiency if they had the ability to pay. I can tell you that as a paralegal, suing the party with deep pockets is pretty standard. But post-recession, things did not happen the way we all expected, and that's probably why we're not seeing many deficiency lawsuits.
Regardless, foreclosures and deficiency lawsuits are nothing new, and they will still happen in the future. The loan audit is a new tool that we did not have before the foreclosure crisis (along with the case law) that can be used by borrowers and their attorneys to push back in these situations.
A loan audit is useful because it will show why a lender cannot foreclose using facts and evidence, provided there is evidence. If you were in foreclosure or in and out of foreclosure for an extended period of time, there's a very good chance that you will find some sloppy foreclosure documents recorded in your chain of title.
I have been auditing quite a few loans lately, and I can tell you that the banks are STILL recording garbage documents. In a recent audit, I saw five different entities claiming entitlement to foreclose on the same home.
It's still not difficult to find problems in foreclosure documents.
Also, I am reasonably sure that the banks sold off a large percentage of nonperforming loans to debt collectors or default debt buyers. Some of these loans have been repackaged into new securities.
Remember, that with very low interest rates, investors aren't making a lot of money on their less risky investments. Subprime debt pays more because higher interest rates can be charged, which nets investors a higher return.
These transferees of mortgage debts may may pursue foreclosures or deficiency lawsuits. If they paid pennies on the dollar for the debt, they may be more incentivized to spend the money on a deficiency lawsuit.
And this leads me to my point about an audit's usefulness in mortgage deficiency lawsuits: if recorded evidence exists that shows the original (pretender) "lender" did not have true authority to foreclose, a transferee of the mortgage debt essentially acquires those same problems.
Additionally, I've seen some credit card affidavits in the past that look a lot like affidavits in foreclosure documents.
A transferee or a debt collector may also use suspicious looking documents as prima facie evidence of the authority to foreclose.
A loan audit of the mortgage documents and debt collection notices or lawsuit paperwork will spot any issues relating to lack of authority.
The bottom line is this: if your original lender could not show authority to foreclose, transferring the debt to another party doesn't necessarily erase those problems.
Debt collectors will typically shake the tree just to see who pays, even when the statute of limitations has run.
And that brings me to another point: use caution when dealing with any debt collector.
I think time has run out for many foreclosures, depending on when they happened. If you receive notices, be sure to research your state's statute of limitations or check with an attorney in your state.
Also, by talking to a debt collector on the phone, you may inadvertently restart the statute of limitations.
I hope this post has been helpful! If you need help with your home loan, please check out my digital products for homeowners and professionals!