Many former owners of foreclosed homes or houses sold in short sales are finding to their horror they are being brought to courts to force them to pay balances on their mortgages.
In many states, mortgage lenders have the right to sue former owners of properties sold in short sales and previous owners of foreclosed homes to collect balances.
As the gaps between sale prices of foreclosed homes and loan amounts get bigger, more and more servicers of mortgage loans, home equity loans and other second mortgage loans have been requiring homeowners negotiating short-sale contracts to sign promissory notes to pay the balances if the selling prices are not adequate to cover all the mortgage debts.
The case of Jodie Byrd of Los Angeles is one of former homeowners who thought they have solved their financial problems after overcoming the rigors of a short sale. Byrd worked out a short sale after her husband got laid off, selling their house for $685,000 that fully paid their mortgage loan. To the couple’s shock, their former bank Washington Mutual Co. pursued them for their second mortgage loan balance of $21,600. Byrd claimed her real estate broker told her the loan balance would be extinguished. The Byrds later paid $4,000 to settle the bank claim.
A spokesperson for JPMorgan Chase, which took over Washington Mutual in 2008, said generally all mortgage lenders or servicers treat a second mortgage separately from the first mortgage.
David Knight, a top executive at Wells Fargo, said lenders and servicers typically go after borrowers to collect balances after a foreclosure or short sale if the unpaid debt is relatively large, the borrower has other significant assets, the house was acquired as an investment or there is no evidence of financial hardship.
A spokesperson for PMI Group Inc. said mortgage insurance firms pursue balances in cases where borrowers simply walk away from their foreclosed homes to preserve their other investments and assets.
According to real estate brokers and lawyers, they are seeing more and more short-sale contracts with promissory notes to pay balances. Florida real estate consultant Regina Rivard said half of the 22 short sales she worked out included promissory notes to pay balances to holders of first or second mortgages.
In Lee County, Florida, the number of cases filed to collect balances from short sales or sales of foreclosed homes has been rising in the past several months. Lee County Clerk of Court Charlie Green said most of the cases filed involved second mortgages linked to short-sale properties or foreclosed homes sold at bargain prices.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.
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