Philadelphia Weekly

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Desperation drives investor to risk credit, deficiency judgment

Benny Kass
Inman News

DEAR BENNY: I am retired. About 18 months ago (before the economic crash), I bought a fixer-upper and renovated it, but have been unable to sell it. If I let the property go into foreclosure, can/will the bank that gave me the mortgage try to get at my other assets (equity in my home, stocks, etc.)? --Irvine

DEAR IRVINE: You are asking about a legal concept known as a "deficiency judgment." Let's take this example: You owe the bank $200,000 when you go into default. The bank -- after trying to work something out with you -- forecloses on the property. At the sale, the property is sold for $150,000. The difference -- $50,000 -- is the deficiency.

Your state law will provide the answer as to whether your bank can seek a judgment against you in a court of law. Recently, the National Consumer Law Center, located in Boston, Mass., issued a comprehensive report entitled "Foreclosing a Dream." According to this report, "in 36 states and the District of Columbia, mortgage holders can pursue so-called 'deficiency judgment' claims against homeowners even after the foreclosed home has been sold at auction."

This report analyzes the foreclosure laws in all 50 states. It is available on the Web at www.consumerlaw.org.

However, even in those states that prohibit (or restrict) deficiency judgments, those laws apply to consumers but not investors. So in your case, it is possible that you are not protected. If you let your property go to a foreclosure sale, not only will your credit be ruined for a number of years, but you may be sued by your lender for any deficiency.

Please talk with both your lender and an attorney before you take any drastic actions.

DEAR BENNY: I have a family member living in a condo that my family paid off years ago. The only commitment to living in the property was to pay the condominium fees. If the payments stop, can my property be subject to foreclosure. What can they do to me? --Kim

DEAR KIM: My first question: Is someone paying the real estate tax to the state or county? If not, the property can be sold at a tax sale.

If the condo fees are not paid, yes, the condo association has a number of alternative remedies. They can sue the property owner for the amount owed, or they can foreclose on the property.

While I know that times are tough, if community association homeowners do not pay their assessments, that will seriously impact all association homeowners. The association does not have enough money to properly maintain the property, and property values will continue to decrease, making it more difficult to sell.

I strongly urge all community association homeowners to make their assessment payments timely. It's your property; don't let it go to waste.

DEAR BENNY: We did a reverse mortgage on our house in September. We could not keep up with our expenses. The total closing costs were more than $13,000. I read an article that HUD could not charge more than $6,000. When did that become effective? Also, our 49-year-old son and his wife moved into our house with us to pay the utilities and pay on the reverse mortgage. Their thoughts were that they want to buy the house. Can they do this before we pass away or do we both have to be deceased before they can take over the mortgage? --Jeane

DEAR JEANE: Recently, I wrote that reverse mortgage lenders could not charge more than $6,000, based on a new law recently enacted by Congress. I was wrong, and many mortgage lender readers sent me e-mails asking that I correct my statement.

Actually, the new law applies only to the "origination fee." Lenders cannot charge more than $6,000 for such a fee, but they can impose charges for other costs, including appraisals, title and escrow fees, recording charges, etc.

So your lender probably had the right to charge you that $13,000. This means that if you are interested in obtaining a reverse mortgage, you must shop around and compare costs before you sign up with any one lender. Closing costs are generally not regulated by federal or state law (although in many states title insurance is regulated by the state insurance commissioner) and can vary widely in price.

Your son and his wife have the absolute right to buy your house, but they will not be able to take over (assume) the reverse mortgage. They will have to get their own loan. Interest rates are quite low today, and if your son can qualify for a mortgage, I would strongly urge him to talk with several mortgage lenders.

A good reference for reverse mortgages can be found on the Department of Housing and Urban Development Web site at www.hud.gov. Here is what HUD says about when your loan must be repaid: