Lenders Aggressively Pursue Short Sale and Foreclosure Deficiencies

Most borrowers who walk away from their homes, agree to short sales, or get pushed out in foreclosure assume that is the end of the matter. They are wrong.

Irvine Home Address … 29 ANTIQUE ROSE Irvine, CA 92620

Resale Home Price …… $1,350,000

I was blown away.

What could I say?

It all seemed to make sense.

You've taken away everything,

And I can't deal with that.

I try to see the good in life,

But good things in life are hard to find.

Daughtry — It's Not Over

It all seemed to make sense; leave the house and leave the debts behind. How could property debt follow a borrower once they left the property? Well, just because a debt was secured by property doesn't mean that debt is extinguished when the borrower leaves the property. In particular, many borrowers who naively agreed to short sales thought they were avoiding liability for the outstanding debt. They were tragically mistaken.

California is a non-recourse state. This means that any debt used for the purchase of real estate is secured only by the real estate itself, and lenders cannot pursue deficiency judgments or otherwise attempt to collect on any shortfall at sale. However, these recourse protections currently apply only to purchase money mortgages. Any borrower who refinanced their original mortgage gives up their non-recourse protections. Any HELOCs opened or used after the purchase do not enjoy non-recourse status. Since many purchase money mortgages were refinanced, and since many HELOCs were added to the purchase money mortgages, many California borrowers have lost their non-recourse protections.

Lenders go after money lost in foreclosures

By Dina ElBoghdady

Washington Post Staff Writer

Wednesday, June 16, 2010

After the bank foreclosed on Fernando Palacios's Gainesville home in March, he thought he was done with what he described as the most stressful financial situation of his life.

The bank sold the home for far less than Palacios owed on it, as often happens with foreclosures. What Palacios did not see coming was the letter from his lender demanding that he pay the shortfall: $148,064.02. "I really thought I was through with this house," said Palacios, who fell behind on payments when the economy soured and his cleaning business stumbled.

How would you like to get that letter? How many people live in fear of that letter? How many people live in blissful ignorance of the fact that a collection letter like that one is coming soon?

Over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales, creating more grief for people who thought their real estate headaches were far behind.

In many localities — including Virginia, Maryland and the District — lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency.

Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.

The threat of collection is the only remaining defense lenders have against strategic default. It is a good defense.

The people who will be most harmed by collections are those borrowers with assets. People who walk away, agree to short sales, or are pushed out in foreclosure are going to get calls from collections. Why would a lender take a $100,000 loss when the borrower has assets they can take?

Palacios said he was committed to staying in his house, which he bought in 2005. He sunk $20,000 into improving it and hoped to raise his children there. But his lender refused to modify his loan, he said. To avoid personal liability for the deficiency, Palacios is filing for bankruptcy protection, as many people do who are in similar situations, said Nancy Ryan, his bankruptcy attorney.

"I am definitely seeing more people come through my door who walked away from houses a year or two ago and thought they were as free as the dead," Ryan said. "They're stunned when they realize they're not."

I am surprised that people think its over when they leave the house. When people stop paying on car loans and either give back the car or get it repossessed, there is a widespread understanding that they still owe on the loan. The presence of non-recourse laws in some states has convinced people that they don't owe on a house even when they do. Perhaps there is also an optimistic denial because the deficiencies are so large that most borrowers know they could never repay the shortfall even if they wanted to.

Several lenders contacted for this story declined to say how often they pursue deficiencies. But many said they try to collect the debt if they conclude the borrower can repay all or part of it.

"Lenders are not going after people who face a hardship," said John Mechem, a spokesman for the Mortgage Bankers Association. "If they can't pay their mortgage because they have a loss of income, there is no point in going after them."

There may not be much point in going after these people today, but once their circumstances improve after the recession, lenders will come looking for that money, and many borrowers who may have long forgotten the house debt are going to be shocked.

Those who had a second mortgage, such as a home-equity line of credit, in addition to their primary mortgage may find themselves particularly vulnerable, especially if they tapped into the equity line for cash.

Second lenders are last in line to get paid when a distressed property is sold. There's usually little or no money left over for them, making it more likely that they will pursue large deficiencies, several attorneys said.

The gold in second mortgage debt is in future collections. These loans have little or no value today — which makes them attractive purchases to distressed debt buyers — but these loans may have considerable value in the future as the financial circumstances of debtors improves. California Ponzis are going to be drained for years by these old debts.

Gretchen Somers said she and her husband understood the risks last year when they completed a "short sale," a transaction that allowed them to sell their Manassas home for about $150,000 less than they owed on it. But they felt they had no other options.

Somers said her family hung onto the house as long as possible. They tried but failed to sell it when her husband was transferred to Arizona for his job in early 2006, just as home prices were softening. They moved back into the house then tried to sell it again in 2008, after their adjustable-rate mortgage reset and their monthly mortgage payment nearly doubled. But home prices had plunged further by then, making it even tougher to sell.

Last year, their first lender and their home-equity line lender granted permission for the short sale. But the second lender reserved the right to come after the couple. Six months later, a collection agency called demanding $85,000 for related losses.

There must be more to this story. In early 2006, prices were not softening, they were at the peak. If they were going to sell at that time, they must have owned for a while meaning they had equity to lower price and close the sale if they wanted to. The only reason someone could not sell would be due to greed and foolishness. Since they were paying on a time-bomb toxic mortage due to explode two years later, failure to sell the home reveals just how foolish they were.

In hindsight, Somers said she and her husband should have just walked away from the house. "We took care of the house because we wanted it to sell," Somers said. "If they were going to come after us anyway, we shouldn't have done them the favor of making sure it looked good and cutting the grass even after we moved out, We should have mailed them the key and said: 'Here you go.' "

I have never understood why people bother with short sales. Their credit is already trashed, and most short sale agreements have language slipped into them where the borrower agrees to repay the shortfall thus giving up any non-recourse protections. I don't see the upside of a short sale. Lenders are hoping to utilize short sales to increase their loan loss recovery. If underwater owners fail to see a benefit, there will be fewer short sales and more foreclosures.

Carlos Cortez and his wife managed to escape that fate after their second lender came after them for $70,000 when their short sale was completed on his Manassas Park townhouse in 2008.

Cortez knew that was a possibility, but he went through with the sale because his real estate agent said the lender was engaging in scare tactics.

This guy took legal advice from his realtor? It is foolish to take investment advice from a realtor, but it is even more foolish to take legal or tax advice from one. It amazes me that realtors get away with this behavior.

James Scruggs, an attorney at Legal Services of Northern Virginia, said the lender appears to have backed off after Cortez argued that that the loan officer falsely qualified him and his wife for a home-equity line by fabricating key details about their finances.

Liar loans to the rescue….

A handful of states do not allow lenders to pursue deficiencies, nor does a federal program that took effect April 10. Lenders participating in that initiative are paid for approving short sales and as a condition, they cannot go after outstanding debt.

In many states, lenders can go after deficiencies, though laws vary widely, said John Rao, an attorney at the National Consumer Law Center. Some states limit how long the banks have to file a claim or collect the debt. Others may calculate deficiencies based on the fair-market value of the house, Rao said. For instance, if a home sells for $200,000 yet its fair market value is $250,000, "the borrower who owes $240,000 on the mortgage would not have a deficiency," he said.

Borrowers should get a waiver in writing from their lenders to protect themselves, said Diane Cipollone, an attorney at the nonprofit Civil Justice. "Nobody should assume the deficiency is forgiven," she said.

Nobody should assume a deficiency is forgiven, but almost all borrowers make that assumption.

I can foresee circumstances were new converts to financial prudence are punished for their good behavior. Many people will dutifully save for that 20% down payment that is now required only to see that money taken away by a collection company in the future.

People who default on recourse debt should also declare bankruptcy to make sure the slate is wiped clean. Denial of the debt problem will only serve to create more problems later.

Bought late, squeezed out a few bucks, and squatted

  • This property was purchased on 11/3/2005 for $1,434,000. The owners used a $1,145,000 first mortgage, a $143,800 HELOC, and a $145,200 down payment.
  • On 1/4/2007 they refinanced with a $1,293,750 Option ARM, and a $86,250 stand-alone second.
  • On 1/31/2007 Washington Mutual gave them a $250,000 HELOC as a third mortgage. No wonder WAMU bit the dust.
  • Total property debt is $1,630,000.
  • Total mortgage equity withdrawal is $196,000.
  • Total squatting time is at least 11 months.

Foreclosure Record

Recording Date: 09/02/2009

Document Type: Notice of Default

Irvine Home Address … 29 ANTIQUE ROSE Irvine, CA 92620

Resale Home Price … $1,350,000

Home Purchase Price … $1,434,000

Home Purchase Date …. 11/3/2005

Net Gain (Loss) ………. $(165,000)

Percent Change ………. -11.5%

Annual Appreciation … -1.3%

Cost of Ownership


$1,350,000 ………. Asking Price

$270,000 ………. 20% Down Conventional

4.80% …………… Mortgage Interest Rate

$1,080,000 ………. 30-Year Mortgage

$273,201 ………. Income Requirement

$5,666 ………. Monthly Mortgage Payment

$1170 ………. Property Tax

$300 ………. Special Taxes and Levies (Mello Roos)

$113 ………. Homeowners Insurance

$142 ………. Homeowners Association Fees


$7,391 ………. Monthly Cash Outlays

-$1448 ………. Tax Savings (% of Interest and Property Tax)

-$1346 ………. Equity Hidden in Payment

$495 ………. Lost Income to Down Payment (net of taxes)

$169 ………. Maintenance and Replacement Reserves


$5,261 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$13,500 ………. Furnishing and Move In @1%

$13,500 ………. Closing Costs @1%

$10,800 ………… Interest Points @1% of Loan

$270,000 ………. Down Payment


$307,800 ………. Total Cash Costs

$80,600 ………… Emergency Cash Reserves


$388,400 ………. Total Savings Needed

Property Details for 29 ANTIQUE ROSE Irvine, CA 92620


Beds: 5

Baths: 5 full 1 part baths

Home size: 4,100 sq ft

($329 / sq ft)

Lot Size: 6,949 sq ft

Year Built: 2005

Days on Market: 15

Listing Updated: 40332

MLS Number: P737893

Property Type: Single Family, Residential

Community: Northwood

Tract: Arbr


Exquisite model perfect home in gated Northwood II. Highly sought after floorplan with fully built loft on third floor; perfect for a home office, game room or additional bedroom. Large kitchen with granite countertops, stainless appliances and center island that opens to welcoming family room with fireplace. Crown moulding, custom paint, window shutters, thick upgraded carpet and gorgeous travertine flooring throughout the downstairs. Spacious backyard is perfect for entertaining with a built in BBQ, relaxing patio with fire pit, lush landscaping and upgraded hardscape. Association amenities include clubhouse, park area and exercise facilities. Excellent location near great schools and shopping.

45 thoughts on “Lenders Aggressively Pursue Short Sale and Foreclosure Deficiencies

  1. Worried

    So what happens in CA when a home is bought with an 80/20, the value goes down by 50%, the owner walks, the first mortgage holder forecloses and the second holder gets nothing? The second mortgage is purchase money so it is non-recourse but they have not had their “one action”. Can a deficiency judgement be sought or are they still held to the non-recourse rules of purchase money loans?

    1. RahRahGrl

      On a related note – is there some statute of limitations on how long these lenders can go after the debt? I’m sure it varies state-by-state, but after some period of time I would imagine the debt becomes “forgiven”.

      1. MrSlappy

        “…I’m sure it varies state-by-state, but after some period of time I would imagine the debt becomes “forgiven”. ”

        Not likely…. See article below…

        Firms profit off Florida homeowner defaults

        ” ….In Florida, a claim must be filed within five years, but the lender has up to 20 years to collect.

        So even if a borrower has no money today, he or she may rebound within the collection time frame.

        “People are broke right now, but they won’t be broke forever,’’ Greene said. “


        Have a nice day. 🙂

          1. Alan

            If the banks, or rather, the bankers are running the country, then it would make sense that they would have better terms for themselves compared to merely the IRS. And don’t forget “compensation” taxed at capital gains rates instead of income tax rates.

            I am so glad that I didn’t take a ride on the CA housing market train.

          2. MrSlappy

            “I am so glad that I didn’t take a ride on the CA housing market train. ”

            Same here! I remember being totally laughed at
            back in 2006 by many coworkers, and friends for
            not buying a house back then…

            Now, no one is laughing, except for me. 🙂

          3. AZDavidPhx

            Now, no one is laughing, except for me

            And all the squatters who are gaming the system and living rent free at society’s expense now while renters continue to pay on time each month or be evicted within a month or two.

          4. MrSlappy

            “And all the squatters who are gaming the system and living rent free at society’s expense now while renters continue to pay on time each month or be evicted within a month or two. ”

            That maybe be true, but I’ll never have to worry
            any aggressive lenders comming after me for years, and years for the amounts OWED.

          5. darms

            Brutal? No that’s the plan, screw Uncle Sam? Seven years or less. Screw Big Brother aka the real leaders, corporate amerikkka? Twenty years & counting. My scary words – “Hi, I’m from the finance* industry & I’m here to help”…

            * = “fill in the blank”

          6. Swiller

            After the hundreds of posts whining, bitching, and crying…..who is laughing?

            Surely it’s the ones getting free rent and not us suckers for paying our bills. If the public was smart, they would revolt against the banksters and throw off the chains of debt slavery and actually use the U.S. Treasury….but the majoirty of the sheeple like things this way so suck it up people…..some get away scot free, you don’t. Your system, keep voting republican or democrat, it’s working SO WELL!!!

          7. lowrydr310

            Same here! I remember being totally laughed at
            back in 2006 by many coworkers, and friends for
            not buying a house back then…

            Now, no one is laughing, except for me.

            I’m not glad. I’m pissed off that I missed the train.

            I immediately recognized a Ponzi scheme in the making back in 2002 when I started to look into real estate, and heard stories of co-workers selling their homes (in 2002/3) for double what they paid just five years earlier. I thought that was madness, until I saw those homes double again from 02-07!!!!

            I was always taught to be responsible; don’t buy what you can’t afford. My mistake was treating a house like any other regular consumption purchase, and not looking at it as an investment.

      2. Jim Jones

        It is four years in CA. This article over states the pitfalls.
        If you are in trouble talk to a lawyer, stop paying and change your cell number. Either that or pay hundreds of thousands of dollars for your underwater house which you could spend elsewhere.
        The quicker people stop paying the quicker the collapse and the market clearing happens. Moral hazard be damned – that happened already. Now its just about how we get back to normal.

    2. IrvineRenter

      A non-recourse second cannot seek a deficiency judgment after a foreclosure. The only available “action” for a non-recourse loan is foreclosure, so if the first has already foreclosed, the second has no options.

      I don’t know what the statute of limitations is on such a debt, but there are probably a series of extensions that debt holders have available to stretch out the timetable. At some point, the extensions are exhausted and the debt dies statutorily. Perhaps one of our attorneys can provide the details from California law.

  2. awgee

    The attraction of a short sale over foreclosure is the chance to negotiate not only how the loan is extinguished with regards to deficiencies, but also how the transaction is reported to credit agencies.


    Tanta had much to say about the lenders suing for deficiency judgement. It was her opinion that very few lenders will actually sue when the borrower’s lender points out the negligence or fraud associated with the loan.

  3. es

    IR- Don’t forget that in California forgiven mortgage debt is still considered income for tax purposes. Close friends of mine walked on their $420K townhouse when they failed to sell it for $220- and it was sold short for $200.

    That difference of $220K is income as far as California is concerned.

    1. AZDavidPhx

      The headline should read:

      House Debtors With Liar’s Loans Give Up (Blame Obama)

      Of course they are dropping out. Amazing how having to prove your income is such a hardship for some people. I love these stories that call the program “troubled”. Anything that is not a principal reduction is going to be “troubling” to these bleeding hearts.

      1. ochomehunter

        ” Amazing how having to prove your income is such a hardship for some people.”

        Now you can wonder why so many small businesses in Gulf States affected by Oil Spill are going to get a doughnut from BP as most of small business show little income or losses at best to tame IRS taxes, now they cannot claim loss of income they never documented, LOL

        What goes around comes around

  4. Soylent Green Is People

    What happens if you file BK? Isn’t everyone wiped out?

    I know there is a greater stigma in BK versus SS’s and Foreclosures, but what is stopping people from going “all in” when things are pretty much farked over to begin with? Why quit while the goings good?

    My .02c

    Soylent Green is People.

    1. newbie2008

      I’ve not a lawyer nor gone through the process. I think the debt is “restructured” based on the debts and all assets including some forms of retirement plans. So best to get advise from a good BK lawyer and CPA before acting. Know your rights and consequences of your actions. The debt can be wiped out or lowered by the judge, but BK is not the answer to all debt problems.

      I know of one, who thought that the down payment loan was non-recouse, but due to refinancing only the downpayment portion, the lender called 6 months after the jingle mail and wanted $100,000. After some haggling, they reduced balance by 65+% and allowed payment over a few years.

      She felt bad about paying the $35,000. She needed to realize that she got off easy. Could of been the first was also recourse and the second didn’t negotate down the loss. BTW: she was a CA REA.

  5. Mark

    I think if I received a letter like that one I would most likely collapse to the floor, but not before cracking my skull open on brand new granite kitchen counter tops. They would be wise to send a heart defibrillator in a box alongside each letter with a sign that says: “Open Me First”.

    Then again I’m probably underestimating the high number of collection letters that Californians already receive on a daily basis from their credit card companies, including Nordstrom’s, Baby Gap, Target, etc. charge cards too.

    I don’t think banks and thrifts own the patent on “extend and pretend”.

    1. scottinnj

      I can’t now find the link but I read a post somewhere last week that more people are now behind on their home loan payments than their credit cards – first time in history. It is worth keeping my Target credit line open so I can buy food so I’ll make the min payments.

    2. AZDavidPhx

      Perhaps now is the time for me to start that Singing Clown Process server business that I have been thinking of for awhile now.

      We have clowns drive to the debtor in one of their little tiny cars, ring the door bell, and do some song and dance to add some humor to the situation before handing them the letter For an extra 9.99, the clown will ask the debtor to smell a flower which promptly squirts them in the face with a jolt of Kool Aid.

      Much cheaper than including defibrilators with each note.

      We need to get our unemployed clowns working again, I say.

  6. HydroCabron

    Most of them should be treated according to legal principles: no need for stocks, public humiliation through tarring and feathering, or use of their remains for fertilizer.

    However, if there is any record that these individuals have leased or purchased a Mercedes or BMW during their period of debt acquisition, then they should be thrown in prison camps. The United States has several facilities used to intern the Japanese during WWII, at places such as Manzanar and Tule Lake which can be refurbished and used for a just purpose this time.

    If these sorts of collections pick up, it will put a severe strain on my monthly food budget: popcorn ain’t free, you know.

  7. AZDavidPhx

    If anyone were to mosey on over to the whitepages website and enter the first and last name of Ms. Somers, there is 1 match to a residence in Tucson, AZ. Zilow doesn’t list any historical sales info on the address though so it is hard to know if the matching name is just a coincidence or not. Maybe IrvineRenter’s source of information would have better information (if it was purchased in 06 or 07)

    1. AZDavidPhx

      The original Manassas house might be found on on this web page (search for the last name).

      According to Zillow, the house was purchased in ’04 for 330K and sold in ’08 for 227K ( nice haircut! ) after being initially listed for 375K

      If this is the house then they must have taken out 50K or so as the article says the short sale was for 150K what they owed on the house. If the purchase price was 330 and ss price was 227K then we are talking a difference of 100K not 150K.

      This is all assuming that this is the actual house though.

      1. IrvineRenter

        The numbers sound about right, but as you say, there is no way to be sure. If it is the same house, there was certainly a period where they were “in the money.”

        1. AZDavidPhx

          I bet 1$ that the Manassas house is the correct house in question. The timeline of the sales and numbers are pretty much line up exactly with the info from the article.

          Can you see the loan and downpayment on it? Perhaps a zero down, negative amortization ARM? That could also explain the jump in what was owed.

  8. ochomehunter

    Nice, we need some type of accountability here and articles and laws like this should come from Federal level to shakeout the strategic defaulters who cashed out HELLOC and bought themselves luxury cars or run-away hideouts/homes in their spouse’s names. LOL, let see how far this one goes.

    1. newbie2008

      CA also has the one action rule. So that’s almost as good as non-recourse on the first. What I see in Irvine was shocking, but after looking into some NPB HEW, Irvine HEW’s are chump change. Might be the older Asian aversion and also older American aversion to debt in Irvine verse the beautiful people’s new thinking in NPB, NPC and CDM.

    1. ground hog day

      Only AZDave is laughing at that 🙂 that’s a good one to rub in Irvine debtors face.

      Even Bill Murray broke out of the ground hog day sequence by now.

  9. RobE


    Speaking of squatters, you might want to check out something that is happening up in the Pacific Northwest because this is what’s happening now as part of the fallout from the waves of foreclosures and securitization of mortgages(just take your blood pressure medication before you read it):




  10. winstongator

    Battles in California Over Mortgages

    For years, a house in California was a machine for building wealth, and few were the families that could resist temptation. They refinanced their loans to pay for vacations, operations, tuition or, frequently, investments in more houses. Many of these households ended up struggling after the crash.

    This explains the geographic factor of the bubble. Places where people thought of houses as investments – for resale or refi – were the places where prices soared, just because. It is still hard for me to understand why in some places people would pay 2-3X to be ‘owners’ (100% I/O or neg-am loan is not owning), while in other places prices can be below rental parity – even with rental parity at the peak.

    1. winstongator

      The Irvine (or any other place) is special explains high prices for owners and renters, and does not explain price increases – unless a place is getting more and more special…

      1. tonye

        OK, I won’t try to explain Quail Hill, TRidge or those places out by Irvine’s Moreno Vally, BUT… most of Irvine is a pretty reasonably nice place.

        You got to admit that.

        Even much maligned UP has a very nice feel to it. Sort of like the Brady Bunch.

        Does it justify 300 per square foot? I don’t think so, but when Dana Point went for 300, I think a place like UP (which I like more than Dana Point) did justify more.

        It’s all a relative Ponzi scheme, and most of “older” Irvine was priced relatively cheap at the bubble peak.

        Would I have bought at those prices? Hell no, we ran away from the TRidge models.

  11. tonye

    Speaking of dead cat bounces.

    A realtor knocked at my door on sunday and handed me a list of recent sales in my TR neighborhood.

    I was surprised at the prices. Well into the 400 per square foot range. Maybe I should sell this summer?

    Problem is, it’s my home and the mortgage and taxes are low and very manageable. Since my daughter is still at UNI (see? I changed the spelling!!) I need to stay in the area and my mortgage is less than a rental.

    Oh well…. just surprised the prices in TR are holding up so well. I guess that as TRidge dives from their stupid overpriced ranges they are helping TR hold up (we were lots cheaper than them at the peak…).

  12. CA

    I haven’t seen any judicial foreclosures lately…seems like most lenders opt for non-judicial and go through their one-action that way.

    Anyone know how to market a house post-judicial FC with a one-year right of redemption? That’s gotta be an awkward thing to go over during disclosures, even if it probably won’t happen. Is it even marketable?

  13. brindils

    Obviously, you might have submitted your application with a lender that only accepts customers with good credit.

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