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When Foreclosure Isn't the End of the Nightmare

An underwater homeowner decides to walk away from his house, which then goes into foreclosure. The bank takes the house and then sells it. End of story, right?

Maybe not. Some banks are suing "strategic defaulters" for the amount of money they lost:

Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.

In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71.

It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest.

The result was a foreclosure hangover that homeowners rarely anticipate but increasingly face: a "deficiency judgment."

So what, you think - they can't squeeze blood out of a turnip. Ah, but there's money to be made. Lots of money:

Because most targets have scant savings, the judgments sell for only about two cents on the dollar, versus seven cents for credit-card debt, according to debt-industry brokers.

Silverleaf Advisors LLC, a Miami private-equity firm, is one investor in battered mortgage debt. Instead of buying ready-made deficiency judgments, it buys banks' soured mortgages and goes to court itself to get judgments for debt that remains after foreclosure sales.

Silverleaf says its collection efforts are limited. "We are waiting for the economy to somewhat heal so that it's a better time to go after people," says Douglas Hannah, managing director of Silverleaf.

Investors know that most states allow up to 20 years to try to collect the debts, ample time for the borrowers to get back on their feet. Meanwhile, the debts grow at about an 8% interest rate, depending on the state.

Link


"holding people to their obligations" is incredibly subjective. Especially when you're talking about their obligations in a financial system they may not agree with or have been tricked into partaking in.

"holding people to their obligations" is exactly the same thing a loan shark, drug dealer, pimp or many other nefarious professionals would say to sound just. Though the obligations may not have been justly accrued in the first place.

Not that the phrase itself is toxic. But the indiscriminate use of it is more like propaganda than a belief.
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How does this sort of loan work?
Here in Australia you borrow from the bank an amount of money that covers the cost of the house (minus any deposit you have up front) - the contract between you and the bank is that amount of money. If you can't pay the bank seeks to recover the remainder of that loaned money through such things as sale of assets (the house is first of course), re-arranged payment plan, or seeking out the person that guaranteed your loan if the bank thought the risk was too high and asked for a guarantor. The loan is purely over money which the borrower is obliged to repay.
I don't see how walking away form a loan and a house can legally work? Is the agreement different to a loan of money?
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DeCaff has a good point. This "walk away from the mortgage" mentality is part of what is killing the US economy. Someone, somewhere, somehow has to pay.
Hello USA, welcome to the rest of the world.
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Debt collectors are one step down the food chain from ambulance chasers...making ones living on the misfortune of others...
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You can't just walk away from a mortgage. When you owe the bank $100,000 and they foreclose on the house then sell it for only $75,000 you still owe them the $25,000 difference and they continue to charge interest. The only way to stop this is to file for bankruptcy and surrender the house or if the bank agrees to a short sale (good luck with that).
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@Scotchdrnkr - actually it depends on the loan, whether it's a recourse or a non-recourse loan.

Typically, though not always, your primary loan is a secured loan - it's secured with the title of the house you bought. So if you walk away from that loan, your bank gets the house (but nothing else - even if that house is worth less than the loan).

Secondary loans are almost always recourse loans - so your bank will go after you for every penny of their money.
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They're going to come after you if you don't pay, just like with a car loan. I don't feel sorry for the people in the story. One guy let his house go without payments for 9 months, then bought another house right before the first one foreclosed? The other guy had a vacation home that was foreclosed on. If you own a second home, they will most certainly come after you for the difference, because you have assets that can be liquidated. Losing a job and not being able to pay your mortgage is one thing, and I truly feel horrible for the people in that situation, but the people this story covered makes me feel no remorse for them.
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Alex has it pretty much. A secured loan can have a deficiency amount owed to the bank, it becomes an unsecured debt after foreclosure and can be discharged in a Chapter 7 bankruptcy. On the recourse/non-recourse loans, sometimes those are cross-collateralized to other property. If you have a vacation home with a loan, the bank might also attach some of that debt to your primary residence in case of default. I've seen that with second homes before, and I've also seen it on multiple secured debts with the same bank. Think car, motorcycle,boat, etc. (I used to do bankruptcy law....man, it sucked.)
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The way it works in Canada is like how DeCaff described for Australia; you pretty much can't walk away from your mortgage obligation without declaring bankruptcy. You also can't deduct the interest on your mortgage. This drives a generally debt-adverse behaviour by borrowers. Canadian home prices dropped in 2008, but recovered quickly and since late 2009 have been higher than ever before (but are slowing down again.)
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