Mortgage loan contracts have deficiency judgment provisions in recourse states like Nevada. This means that several years after a short sale, bank-approved sale or foreclosure sale is completed, the primary or secondary lenders can still pursue the borrower for the payment of the difference between the sales proceeds and the mortgage loan balance.
In most cases, the lenders would not be the ones collecting; it would be collection agencies who have bought the deficiency judgments at a discount. To make money on these judgments, collection agencies would wait for a few years and then collect the deficiencies when the borrowers have recovered and have restored their finances.
According to analysts, about 67 percent of all homeowners with mortgages in Las Vegas are underwater. Of these distressed homeowners, many whose homes are valued 50 percent or more below their loan amounts are seriously considering strategic defaults.
Some are hoping prices will rise again, but according to SalesTraq and other housing analysts, significant price appreciation in Las Vegas will not happen in the near future.
This realization has pushed many underwater borrowers to default, believing that wiping out their savings to rescue their underwater homes is a hopeless endeavor. Studies have found that substantial levels of negative equity are a major factor for preforeclosures and for default behavior.
Analysts have also found that incidences of strategic mortgage loan defaults are intensified in neighborhoods where almost everyone is in foreclosure. Age, political affiliation, location and attitudes toward the government also affect the decision to default intentionally.
Nevertheless, whatever the factors that pushed homeowners to strategically default or however valid their reasons may be, these defaulting borrowers will not be completely relieved from their obligations in recourse states. They still face the possibility of being called to court to pay deficiency judgments.
In many states, primary lenders have six months to sue for the collection of the deficiencies while secondary lien holders have 6 years to sue borrowers and ten years to collect the deficiencies.
Today, in some short sale cases, a rising number of real estate professionals are including in their proposals an addendum asking lenders to waive their deficiency judgment rights. But some bankers are contending that deficiency judgments may be exercised by lenders in cases where the borrowers have lots of assets.
All in all, distressed borrowers need to think of deficiency judgments when considering strategic mortgage loan defaults and need to ask for waivers when working out short sales.
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