WaPo on Deficiency Judgments

Historically lenders haven't pursued many previous homeowners for deficiencies after foreclosure because it wasn't worth their time. As the following article notes:

It’s unclear how many people walk away from homes when they can still afford to pay the mortgage. Likewise, there is little publicly available data on how many people pay off their deficiency judgments. A recent government audit found the recovery rate at one-fifth of 1 percent.
emphasis added

In judicial foreclosure states, the lender will frequently file for a deficiency judgment as part of the foreclosure case (they are in court anyway). Then the lender might sell the deficiency judgment to a debt collector for a pittance. Sometimes the debt collector will settle for pennies on the dollar (a nice return because they paid almost nothing) or the debt collector will force the former borrower into bankruptcy.

In non-judicial foreclosure states, the lenders rarely bothered to file for a deficiency judgment.  (Tanta and I wrote extensively about mortgage deficiency judgments several years ago).

Of course everything changes if the lender thinks the borrower has assets and "strategically defaulted".  In these cases the lender can recover some of their losses.

From Kimbriell Kelly at the WaPo: Lenders seek court actions against homeowners years after foreclosure

[Freddie Mac spokesman Brad German] said Freddie Mac is targeting “strategic defaulters,” which the agency defines as “someone who had the means but chose to go into default, that there were no extenuating circumstances that affected their ability to pay. If you’re choosing not to pay off your mortgage, but you’re paying other bills, we would consider that strategic default.”

In 2011, Fannie and Freddie flagged 12 percent of 298,327 properties they had foreclosed on — more than 35,000 — for deficiency judgments in an attempt to collect $2.1 billion in unpaid mortgage debt, according to an inspector general’s report released in October from the Federal Housing Finance Agency.

“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,” said Malloy Evans, an attorney and 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.”

There is much more in the article including a discussion of how long lenders can collect deficiency judgments (several decades in some states).

I think now would be a good time for a major overhaul of the foreclosure system. I think we could start with 1) a national system with a non-judicial option like California, 2) ban deficiency judgments on loans up to the amount of the original purchase loan (so the borrower can refinance without worrying about a deficiency judgment if they lose their home, but they will liable if they extract equity), 3) allow cram-downs in bankruptcy (this allows bankruptcy judges to reduce the amount of debt on a home in bankruptcy).