First off, what is a deficiency judgment: It is simply the difference between what the lender is owed and what they are paid back. When a lender is not paid back in full via a short sale, they can go to court and get a court order directing the borrower to pay them back the difference. The lender can then take that judgment and attach it to the borrower's other properties, if they have any, or garnish the wages of the borrower.
The majority of short sale payoffs we have received over the past couple of years have had specific language stating that the accounts were settled at the time of closing. For example, here is the language that EMC used in a recent payoff letter:
Once all conditions set forth have been met, EMC will execute a full Satisfaction and Release of Mortgage and, if applicable, foreclosure activity will cease.Here is the language that Aurora uses:
If all of the above contingencies are met, Aurora Loan Services will issue a full satisfaction of mortgage. This will be reported as a settled debt to the credit reporting agencies.But, alas, in the short sale negotiation business, things are never that simple. Here is the new language from Bank of America:
BAC Home Loans Servicing, LP and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law, if the short sale closes on the loan referenced above. In addition, if this loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller for the deficiency based on the terms of the mortgage insurace policy.There has been some confusion and debate over whether the foreclosing lender has the right in Washington state to pursue the deficiency judgment after the short sale. The reason is that in Washington, the lender gives up the right to a deficiency judgment if they sell the property or take it back in the non-judicial trustee sale process. It turns out that because a negotiated short sale closes in lieu of a trustee sale, the lender preserves their right to get a deficiency judgment.
That does give the borrower some leverage. You can basically tell the lender that the borrower will simply allow the house to go to sale if they don't remove the deficiency language in the payoff. Simply cross out the deficiency language and send the payoff back to the negotiator.
Another strategy is to always include language in the PSA stating that the sale is contingent on the bank approval and each lenders' waiver of any rights to a deficiency.
In the end, most people involved in a short sale are in a dire financial situation and they don't really have any assets for the lender to pursue, so there is no real reason for the lender to lose a deal just to preserve their deficiency rights.
Lastly, at this point, there is little to no evidence that banks are actually seeking to enforce the deficiencies. If they did, we could expect to see a dramatic rise in bankruptcies that would help people dismiss the judgments.
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