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 By now, banks have usually sold the houses. But the proceeds of
those sales were often not enough to cover the amount of the loan,
plus penalties, legal bills and fees. The two big
government-controlled housing finance companies, Fannie Mae and
Freddie Mac, as well as other mortgage players, are increasingly
pressing borrowers to pay whatever they still owe on mortgages they
defaulted on years ago.
Using a legal tool known as a "deficiency judgment," lenders can
ensure that borrowers are haunted by these zombie-like debts for
years, and sometimes decades, to come. Before the housing bubble,
banks often refrained from seeking deficiency judgments, which were
seen as costly and an invitation for bad publicity. Some of the
biggest banks still feel that way.
But the housing crisis saddled lenders with more than $1 trillion of
foreclosed loans, leading to unprecedented losses. Now, at least
some large lenders want their money back, and they figure it’s the
perfect time to pursue borrowers: many of those who went through
foreclosure have gotten new jobs, paid off old debts and even, in
some cases, bought new homes.
"Just because they don't have the money to pay the entire mortgage,
doesn't mean they don't have enough for a deficiency judgment," said
Florida foreclosure defense attorney Michael Wayslik.
 Advocates for the banks say that the former homeowners ought to pay
what they owe. Consumer advocates counter that deficiency judgments
blast those who have just recovered from financial collapse back
into debt — and that the banks bear culpability because they made
the unsustainable loans in the first place. “SLAPPED TO THE FLOOR”
Borrowers are usually astonished to find out they still owe
thousands of dollars on homes they haven't thought about for years.
In 2008, bank teller Danell Huthsing broke up with her boyfriend and
moved out of the concrete bungalow they shared in Jacksonville,
Florida. Her name was on the mortgage even after she moved out, and
when her boyfriend defaulted on the loan, her name was on the
foreclosure papers, too.
She moved to St. Louis, Missouri, where she managed to amass $20,000
of savings and restore her previously stellar credit score in her
job as a service worker at an Amtrak station.
But on July 5, a process server showed up on her doorstep with a
lawsuit demanding $91,000 for the portion of her mortgage that was
still unpaid after the home was foreclosed and sold. If she loses,
the debt collector that filed the suit can freeze her bank account,
garnish up to 25 percent of her wages, and seize her paid-off 2005
Honda Accord.
"For seven years you think you're good to go, that you've put this
behind you," said Huthsing, who cleared her savings out of the bank
and stowed the money in a safe to protect it from getting seized.
"Then wham, you get slapped to the floor again."
Bankruptcy is one way out for consumers in this rub. But it has
serious drawbacks: it can trash a consumer's credit report for up to
ten years, making it difficult to get credit cards, car loans or
home financing. Oftentimes, borrowers will instead go on a repayment
plan or simply settle the suits — without questioning the filings or
hiring a lawyer — in exchange for paying a lower amount.
Though court officials and attorneys in foreclosure-ravaged regions
like Florida, Ohio and Illinois all say the cases are surging, no
one keeps official tabs on the number nationally. "Statistically,
this is a real difficult task to get a handle on," said Geoff Walsh,
an attorney with the National Consumer Law Center.
Officials in individual counties say that the cases, while virtually
zero a year or two ago, now number in the hundreds in each county.
Thirty-eight states, along with the District of Columbia, allow
financial institutions recourse to claw back these funds.
"I've definitely noticed a huge uptick," said Cook County, Illinois
homeowner attorney Sandra Emerson. "They didn’t include language in
court motions to pursue these. Now, they do."
"A CURSE"
Three of the biggest mortgage lenders, Bank of America, Citigroup,
<C.N> JPMorgan Chase & Co <JPM.N> and Wells Fargo & Co. <WFC.N>, all
say that they typically don't pursue deficiency judgments, though
they reserve the right to do so. "We may pursue them on a
case-by-case basis looking at a variety of factors, including
investor and mortgage insurer requirements, the financial status of
the borrower and the type of hardship," said Wells Fargo spokesman
Tom Goyda. The banks would not comment on why they avoid deficiency
judgments.
Perhaps the most aggressive among the debt pursuers is Fannie Mae.
Of the 595,128 foreclosures Fannie Mae was involved in – either
through owning or guaranteeing the loans - from January 2010 through
June 2012, it referred 293,134 to debt collectors for possible
pursuit of deficiency judgments, according to a 2013 report by the
Inspector General for the agency’s regulator, the Federal Housing
Finance Agency.
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It is unclear how many of the loans that get sent to debt collectors
actually get deficiency judgments, but the IG urged the FHFA to
direct Fannie Mae, along with Freddie Mac, to pursue more of them
from the people who could repay them.
It appears as if Fannie Mae is doing just that. In Florida alone in
the past year, for example, at least 10,000 lawsuits have been filed
— representing hundreds of millions of dollars of payments,
according to Jacksonville, Florida-based attorney Chip Parker.
Parker is about to file a class action lawsuit against the
Dallas-based debt collection company, Dyck O'Neal, which is working
to recoup the money on behalf of Fannie Mae. The class action will
allege that Dyck O'Neal violated fair debt collection practices by
suing people in the state of Florida who actually lived out of
state. Dyck O'Neal declined to comment.
In Lee County, Florida, for example, Dyck O'Neal only filed four
foreclosure-related deficiency judgment cases last year. So far this
year, it has filed 360 in the county, which has more than 650,000
residents and includes Ft. Myers. The insurer the Mortgage Guaranty
Insurance Company has also filed about 1,000 cases this past year in
Florida alone.
Andrew Wilson, a spokesman for Fannie Mae, said the finance giant is
focusing on "strategic defaulters:" those who could have paid their
mortgages but did not. Fannie Mae analyzes borrowers' ability to
repay based on their open credit lines, assets, income, expenses,
credit history, mortgages and properties, according to the 2013 IG
report. "Fannie Mae and the taxpayers suffered a loss. We're
focusing on people who had the ability to make a payment but decided
not to do so,” said Wilson.
Freddie Mac spokesman Brad German said the decision to pursue
deficiency judgments for any particular loan is made on a
"case-by-case basis."
The FHFA declined to comment.
But homeowner-defense lawyers point out that separating strategic
defaulters from those who were in real distress can be tricky. If a
distressed borrower suddenly manages to improve their financial
position – by, for example, getting a better-paying job - they can
be classified as a strategic defaulter.
Dyck O'Neal works with most national lenders and servicing companies
to collect on charged-off residential real estate. It purchases
foreclosure debts outright, often for pennies on the dollar, and
also performs collections on a contingency basis on behalf of
entities like Fannie Mae. "The debt collectors tend to be much more
aggressive than the lenders had been," the National Consumer Law
Center's Walsh said.
A big reason for the new surge in deficiency claims, attorneys say,
is that states like Florida have recently enacted laws limiting the
time financial institutions have to sue for the debt after a
foreclosure. In Florida, for example, financial institutions now
only have a year after a foreclosure sale to sue — down from five.
Once financial institutions secure a judgment, they can sometimes
have years to collect on the claim. In Maryland, for example, they
have as long as 36 years to chase people down for the debt.
Financial institutions can charge post-judgment interest of an
estimated 4.75 percent a year on the remaining balance until the
statute of limitation runs out, which can drive people deeper into
debt.
"This is monumentally unfair and damaging to the economy," said Ira
Rheingold, the executive director of the National Association of
Consumer Advocates. "It prevents people from moving forward with
their lives."
Software developer Doug Weinberg was just getting back on his feet
when he got served in July with a $61,000 deficiency judgment on his
old condo in Miami's Biscayne Bay. Weinberg thought the ordeal was
over after Bank of America, which rejected Weinberg’s short sale
offers, foreclosed in 2009.
"It's a curse," said Weinberg. "It's still haunting me. It just
doesn't go away."
(Reporting by Michelle Conlin in New York; Editing by Dan Wilchins
and Martin Howell)
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