Loss Mitigation

• Author: Rebecca A. Taylor
• Pages: 67-88

Loss Mitigation

Chapter 9

67

Waiver of Deficiency Judgments

A deficiency judgment is what a bank will often seek when it sells

the property and the proceeds aren’t enough to pay off the fore-

closed loan. The bank will then pursue the former homeowner for

the difference between what the home was sold for and what the

borrower owed.

Unless there is a specific, binding agreement that prevents the

bank from pursuing the homeowner for a deficiency judgment, the

bank may very well do so. As noted in an Orlando-Sentinel column

by Beth Kassab, a new collection industry focusing on recouping

deficiency judgment funds is emerging.1 Foreclosure attorney Matt

Englett believes that in the coming years, banks will sell off these

debts to collection companies, which will aggressively pursue the

judgment funds.2 Time is also on the banks’ side in pursuing a defi-

ciency judgment, as they have five years to seek the judgment and

20 years to collect.3

If your client is not seeking to keep her property, a good fore-

closure defense settlement agreement will always include an agree-

1. Beth Kassab, Walking Away From Home Isn’t Risk-Free, ORLANDO SENTI-

NEL, June 2, 2010.

2. Id.

3. Id.

68 CHAPTER 9

ment by the bank to waive any deficiency amount against her. If

the bank does prepare a proposed settlement agreement, be sure to

carefully review it and make corrections and revisions to it to pro-

tect your client’s rights. Your client should not be worse off than

she was before the settlement. Be sure that your client is not waiv-

ing all of her defenses to foreclosure if the settlement fails; that the

bank cannot still pursue your client for a deficiency judgment; that

the settlement agreement, if followed by your client, reinstates her

loan, etc. It might be good to add an arbitration clause so that if

there are future problems with the loan, the bank cannot file an-

other foreclosure action at whim. Make sure the parties exchange

mutual releases that resolve and dismiss the current foreclosure ac-

tion. You may not be able to have the bank release all future claims

against the homeowner in the event she defaults on the loan at some

point down the road, but you can have the settlement agreement

provide that the parties must exhaust alternative dispute resolution

methods first.

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure involves the tender of the subject prop-

erty deed back to the lender in return for settlement of the case. The

bank will often want to know whether there are any other liens

against the property which would prevent it from receiving market-

able title. If the title is clear and the bank is reasonable, a deed-in-

lieu may be a better option for a homeowner who is not seeking to

retain the property. A homeowner who wants to obtain a deed-in-

lieu should obtain his own title report, which he can present to the

bank in support of his proposal. Common sense would dictate that

this would be a win-win situation in most cases; the bank gets to

recover the house, and the borrowers can salvage their credit a bit

and move on with their life.

Short Sale

A short sale is frequently sought as a solution to foreclosure by

those homeowners who are willing to give up the property; they

can sell it with the only consideration usually being release from

the mortgage debt and any deficiency, and hopefully a better out-