Loss Mitigation

• Pages: 61-82

Loss Mitigation

Chapter 9

61

Waiver of Deficienc y 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 doso. As notedin an Orlando-Sentinel column

by Beth Kassab, a new collection industry focusing on recouping

deficiency judgment funds is emerging.1Foreclosure 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.2Time 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 foreclo-

sure defense settlement agreement will always include an agreement

1.Beth Kassab, Walking Away From Home Isn’t Risk-Free ,O RLANDO S ENTI-

NEL, June 2, 2010.

2. Id.

3. Id.

62 CHAPTER 9

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 protect your

client’s rights. Your client should not be worse off than she was be-

fore the settlement. Be sure that your client is not waiving 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 prob-

lems with the loan, the bank cannot file another foreclosure action at

whim. Make sure the parties exchange mutual releases that resolve

and dismiss the current foreclosure action. 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 ex-

haust 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-

come on their credit report. A short-sale transaction usually involves