Friday, September 28, 2012

Deficiency judgments

Continuing our series of e-mails on real estate workouts, many clients are concerned about potential exposure to deficiency judgments resulting from real estate foreclosures. The New York law that deals with deficiency judgments is § 1371 of the Real Property Actions & Proceedings Law. The law provides that:

1. A plaintiff in a mortgage foreclosure action may bring an action for a deficiency judgment if the defendant has been personally served in the action.

2. The action for the deficiency judgment must be made within 90 days after the foreclosure sale.

3. The law provides that the deficiency judgment shall be equal to the amount the defendant is liable to the plaintiff (as determined by the judgment), plus interest, plus the amount owing on any subordinate liens and encumbrances, including interest, costs and disbursements, including referee's fees, less the market value of the property as determined by the court at the time of the foreclosure sale. Accordingly, if the value of the property is greater than the deficiency owed, the plaintiff will not be able to obtain a deficiency judgment.

Notwithstanding the language in RPAPL § 1371, before commencing deficiency judgment actions, secured creditors (such as banks) go through a calculation. They ask themselves the following questions:

1. If we bring a deficiency action, does the defendant have assets or earnings to satisfy the judgment? For example, if the bank believes that the defendant will file Chapter 7 personal bankruptcy to protect his or her assets, or if the defendant is "judgment proof," then they will not commence the action. Some borrowers who do have the ability to pay some or all of the judgment will come forward and offer to settle before an action for deficiency is commenced.

2. Does the defendant have the potential for good future earnings (such as a medical doctor), such that if the creditor obtains the judgment (which is good for 20 years under New York State law), they will be able to collect the judgment from future earnings?

3. What is the fair market value of the property? As mentioned above, the court will determine the fair market value at the time of the foreclosure sale, which can become a battle of appraisals, so creditors must prepare to bring in expert witnesses to testify on this issue.

4. How long will it take and how much will it cost to obtain and collect the judgment?

5. Is the deficiency a result of a "strategic default"? A "strategic default" involves a borrower who has the ability to pay his or her mortgage but chooses not to. Often that decision is tied directly to the property being "underwater" (the fair market value of the property is less than the outstanding liens encumbering the property (mortgages, home equity lines of credit, etc.)). Loan originators rely heavily on their servicers (the entities that are responsible for day–to–day management of mortgage accounts) to determine if a borrower is a strategic defaulter and then makes a determination whether to seek a deficiency judgment.

Clients or colleagues having questions about deficiency judgments should not hesitate to contact Jim Shenwick.


Samuel Jones said...

If a client signed a combined (one document) Note and Mortgage rather than a separate promissory note and then a mortgage, can the lender still seek a deficiency judgment?

Samuel Jones said...

If a client signs a combined note and mortgage rather than a separate promissory note and then a mortgage, can the lender still seek a deficiency judgment?

Anonymous said...

how long after a foreclosure does a bank have to collect on a deficiency?The home was financed by well Fargo which gave a value of $154,000.Now hud is selling it for $100,000.I live on SSD,and worry bout someone in the future knocking on my door saying I still owe on this home.

James Shenwick said...

A lender has 90 days after the consummation of the foreclosure sale (which is when the deed is delivered to the purchaser) to request a deficiency judgment.