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Personal Income & Spending Up; DOW at lowest level since 1997; Deficiency Rules

The stock market opened today at its lowest level in twelve years. On the plus side, however, both consumer spending and personal income were up in January. Both rose by less than 1%, but the numbers exceeded expectations. Our savings rate has also been in positive territory for the first time in many years, indicating that consumers are actually spending less than they are earning for the first time in many years as well. This bodes well for the “cost of capital” (more savings means more capital available for investors to access), but it does not bode well for an economy that relies heavily on consumer spending.

When is a lender entitled to pursue a borrower for a “deficiency” after a foreclosure? A “deficiency” results when the foreclosed property is worth less that than the total amount owed against the property. If the loans are “purchase money” mortgages, then the lender may not pursue a deficiency in almost all cases. But, if the loan is a NON-purchase money mortgage, then the lender has two options. If the lender wants to pursue a deficiency it can foreclose “judicially” and sue for performance of the promissory note. Lenders rarely opt for this option, however, because of the time and expense. Lenders instead opt for the “Trust Deed Sale” option, which is a statutorily prescribed procedure for foreclosure that is much simply and cheaper for the lender, but it precludes the lender from pursing a deficiency.

Now just to make this more confusing, there are NON-purchase money lenders that can pursue a “deficiency” no matter HOW a property is foreclosed; 2nd Mortgage holders who are “shut out” from receiving any funds after a “Trust Deed Sale” foreclosure can and often due pursue deficiencies. We saw B of A do this frequently in the early 1990s in fact. Therefore, clients with non-purchase money 2nd mortgages and lines of credit should be warned that their lenders can pursue them for deficiencies if they walk away from an upside down property.
This is important to understand if you are advising clients who are thinking about walking away from a home that is deeply underwater. A more complete explanation, from our Attorney, is set out below.

If you have any mortgage related questions, please call Heejin Kim or Jay Voorhees at (855) 855-4491.

MORE COMPLETE EXPLANATION REGARDING DEFICIENCIES FROM OUR ATTORNEY:

1. There is no right to a deficiency judgment for the holder of a purchase money loan, regardless of priority. So, whether a first loan or a junior loan, the holder of a purchase money loan is not entitled to a deficiency judgment. The only “remedy” available to the holder of a purchase money loan is the proceeds of a foreclosure sale. A purchase money loan, as its name suggests, is a loan used to purchase or acquire a 1-4 unit residential dwelling which is occupied, in whole or in part, by the owner. Under some circumstances a refinance of a purchase money loan can enjoy purchase money protections, but that is rare. Under some circumstances, such as fraud in the inception, a lender can sometimes effectively skirt the purchase money restrictions, but that is even rarer.

2. The holder of a non-purchase money loan (i.e., any loan which is not a purchase money loan) is potentially entitled to a deficiency judgment. However, deficiency judgments are only available in connection with a judicial foreclosure. Judicial foreclosures are expensive, time consuming and potentially subject to a lingering right of redemption. Accordingly, lenders often elect to waive the right to a deficiency judgment by pursuing a non-judicial foreclosure, which is much faster, much less expensive and not subject to any right of redemption.

3. The holder of a junior non-purchase money loan whose security is rendered worthless by the foreclosure of a senior lien holder is referred to as a “sold-out junior.” A sold-out junior is entitled to pursue a claim on the resulting unsecured note by a personal lawsuit against the obligor on the note. This is a form of permitted deficiency judgment and is available to a sold-out junior, regardless of the foreclosure method followed by the senior lien holder who “wiped-out” the junior’s security. In other words, whether the senior forecloses judicially or non-judicially, if the result is to render the junior’s security worthless, the junior may sue the note obligor, personally, for a breach of the note obligation (essentially a breach of contract claim) and secure a personal judgment, if the junior loan was not a purchase money loan.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167