Floridians who lose a home to foreclosure may be more doggedly pursued for their unpaid mortgage debt after a federal audit that says lender losses can be recovered by demanding payback.
That kind of collection process, called a deficiency judgment, is allowed in Florida, but has so far been rare.
The report, released Wednesday by the inspector general of the Federal Housing Finance Agency, says that recouping the debt can increase revenue to mortgage backers Fannie Mae and Freddie Mac, which own or guarantee about half of all U.S. mortgages.
“In addition,” the report notes, “pursuit against such borrowers may deter others who are considering default despite being financially able to make their mortgage payments.”
Florida law gives lenders five years to file for a deficiency judgment and up to 20 years to collect payment on that judgment. The amount is typically the difference between the unpaid loan balance owed by the borrower and how much the home fetches at foreclosure auction or resale.
Whether because lenders are too overwhelmed to pursue the debt or don’t feel it’s worth the effort, foreclosure defense attorneys report seeing few deficiencies filed.
“Given the way the market has been the last two years there has been more interest in pursuing them, but they still seem to be the minority of cases,” said John Bancroft, executive editor of the trade publication Inside Mortgage Finance. “I think in the past banks didn’t feel the success rate was going to justify the effort.”
In 2011, Fannie Mae and Freddie Mac pursued 35,231 deficiencies nationwide with a combined total value of about $2.1 billion. Of that, just $4.7 million, or 0.22 percent, was actually recovered, according to Wednesday’s audit.
Fannie and Freddie were taken over by the government in 2008 to prevent their financial meltdown. The two enterprises buy up home loans from banks, guarantee them against default and sell them to investors. Their nearly 31 million home loans are worth $5 trillion.
Fannie Mae has 1.2 million loans in Florida, of which about 167,000 are delinquent. Freddie Mac has 724,000 Florida loans with 96,000 that are delinquent.
Wednesday’s report says it should not be “construed as encouragement to aggressively pursue borrowers who do not have the ability to pay their mortgages.” But it also notes that other such government agencies that have housing programs as the Department of Agriculture and Department of Housing and Urban Development emphasize seeking deficiency judgments against so-called “strategic defaulters.”
A strategic defaulter is defined as someone who can afford to make their mortgage payment but chooses to go into foreclosure for other reasons, such as the home’s value has decreased. Seeking repayment of their debt is an “opportunity for (Fannie and Freddie) to strengthen their financial positions and to reduce the need for future taxpayer support.”
“They are talking about some moral obligation but I don’t see them talking about that when folks on Wall Street strategically default,” said South Florida foreclosure defense attorney Roy Oppenheim. “For them to go after the homeowners like this, I find it offensive.”
Federal Housing Finance Agency officials agreed with the report’s recommendations that it should standardize and oversee how deficiency judgments are sought. They said they also will assess the ability to identify strategic defaulters.
In 2010, Fannie Mae announced it would bar strategic defaulters from getting a new loan for seven years and pursue them for the unpaid debt. A Fannie Mae spokesman said Wednesday it was not releasing any information on how many strategic defaulters it has identified.
Joanne Epstein, a Realtor with the Keyes Company/Ragbir Team, said many homeowners don’t even know about the deficiency judgment when they’re making a decision on whether to short sell their home or go into foreclosure. Epstein, a short sale specialist, said most lenders will waive the deficiency in a short sale.
“People aren’t considering the consequences or that it will be a mark on them for years and years to come,” she said about foreclosure.