Short Sale and Foreclosure – Is Everyone on the Same Page

Short sale transactions are traumatic and unpleasant events but can be the straw that saves many drowning homeowners. What happens though, in short sale and foreclosure cases where the lender still goes after the homeowner after the sale has been concluded?

This was the case for one Fredericksburg resident who, after the successful conclusion of her short sale, was horrified to receive a lawyer’s letter informing her she still liable for over $60,000. She had unwittingly become the victim of a "deficiency Judgment" and ended up filing for bankruptcy as a result.

According to North Carolina real estate attorney Don Lampe, this is not an uncommon occurrence with many similar cases being filed when homeowner’s short sales leave them with large deficiencies. In the case of the Fredericksburg case, the lender in question indicated that it was actively pursuing a number of deficiency judgments.

The question now is can lenders do this? Sadly the answer is yes. Richard Zaretsky, a certified real estate attorney from West Palm Beach says that the decision to pursue a deficiency judgment is basically up to the lender, and while some are fairly flexible others will pursue judgments ruthlessly.

In cases of foreclosure, deficiencies may be subject to judgment in over 30 states including New York, Texas and Florida. There are several states that have non-recourse legislation that does not allow for deficiency judgments except in specific cases such as loan refinancing.

When foreclosure is pre-empted by a short sale or in deed-in-lieu cases, the news is a little bleaker for homeowners. In these cases deficiency judgments are allowed in far more states. In most cases of short sale deficiencies the only course to follow is to negotiate for release with the bank.

Homeowners in this position just need to be painfully aware that it is really their responsibility to have their attorney request extinguishment of all excess debt. This part of any agreement needs to be clearly laid out in writing to avoid unpleasant surprises in the future.

At the end of the day financial institutions, just like the homeowners, have their own realities to contend with, but if there is to be any hope of containing the fall out of the recession all players need to pull in the same direction.