Losing Your House To Foreclosure Doesn’t Necessarily Mean You No Longer Owe Money To The Bank

There’s a commonly held notion that losing one’s home to foreclosure is the final act in a sad drama, that the homeowner has hit bottom and has nowhere to go but up. But thousands of foreclosed-upon homeowners are finding out, years after turning their keys over to the bank, that they may still be on the hook — sometimes for hundreds of thousands of dollars.

In 40 states and Washington, D.C., lenders are allowed to sue former homeowners if the seized property fails to recover the balance of the mortgage at auction. So if someone still owed $450,000 on his mortgage but the house only sells for $375,000, the lender can seek a deficiency judgement to recoup the difference.

“Pursuing deficiency judgments has always been a remedy that we have looked at to mitigate our losses prior to the recent housing crash,” a Freddie Mac spokesman tells the Washington Post. “It is not a new thing.”

However, it may be an increasingly popular thing, at least in some areas. According to the Post, there were 57 lawsuits filed against foreclosed-upon homeowners in Maryland during the first four months of 2013. At that rate, the number of suits will surpass the 2012 total of 120.

People who lost their homes to foreclosure, especially those who walked away because they were simply unwilling to pay the mortgage, should be mindful of the time period that lenders have to file such lawsuits. That time period can range anywhere from a few days after foreclosure to 20 years.

For example, lenders in Maryland have a base time period of three years to sue, but there are exemptions that extend that to 12 years. In several states — including Pennsylvania, Rhode Island, Delaware, and Georgia — exemptions stretch that time period out to 20 years. So lenders could continue to file for deficiency judgements in these states for decades to come, long after the old homeowner has moved on.

Freddie Mac and Fannie Mae, both of whom have been very active in attempting to collect deficiency judgements, claim they are primarily targeting people who could have chosen to stay in their homes but opted to walk away when the value of their property plummeted. In 2011 alone, these two bailed-out mortgage-backers sued around 35,000 former homeowners in an attempt recoup $2.1 billion.

However, a recent report from the Federal Housing Finance Agency, which has managed Fannie and Freddie since the companies were bailed out by taxpayers, found that those 35,000 lawsuits have only thus far brought in $4.7 million.

“Pursuing these collections against borrowers we believe have the ability to pay but who have decided not to helps us minimize our losses, which in turn helps minimize taxpayer losses,” explains Fannie Mae’s vice president for default management. “And we think it’s our responsibility to try to minimize those taxpayers’ losses as much as we can.”

Lenders seek court actions against homeowners years after foreclosure [Washington Post]