House Is Gone But Debt Lives On

Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale, also known as a deficiency judgment. The economics of today’s battered housing market mean that lenders are doing so more and more. Lenders still sue for loan shortfalls in only a small minority of cases where they legally could. Public relations is a limiting factor, some debt-buyers believe. Banks are reluctant to discuss their strategies, but some lenders say they are more likely to seek a deficiency judgment if they perceive the borrower to be a “strategic defaulter” who chose to stop paying because the property lost so much value. Some close observers of the housing scene are convinced this is just the beginning of a surge in deficiency judgments. Sharon Bock, clerk and comptroller of Palm Beach County, Fla., expects “a massive wave of these cases as banks start selling the judgments to debt collectors.” Lenders typically have five years following a foreclosure sale to sue for the remaining mortgage debt.

Wall Street Journal  October 2, 2011