Florida law provides a mortgage lender several avenues to recover against a defaulting borrower. The lender’s first and most important avenue of recovery is to foreclose on the property pledged by the borrower as collateral for the loan (typically, the borrower’s house). A successful foreclosure suit culminates in a court-supervised sale of the pledged property at an auction on the courthouse steps. Once the foreclosure sale occurs, the lender may also file a claim for a deficiency judgment if the borrower owes the lender more than the greater of the sale price of property or the property’s “fair market value.”
Historically, banks have profited handsomely from enforcement of deficiency judgements on foreclosed properties. During the Great Depression, for example, most states’ laws did not have a “fair market value” requirement and permitted a mortgage lender to obtain a deficiency judgment against a borrower for any difference between the foreclosed property’s sale price and the amount owed by the borrower. Lenders took advantage of the situation by buying properties for nominal prices at the foreclosure auction (due to the economic situation, there were few other bidders), and then suing and obtaining personal judgments against the dispossessed borrowers for the significant deficiency that resulted.
During the real estate boom prior to 2007, deficiency judgments were not common in Florida because rising real estate values brought home values above the note balance of defaulting mortgages. Deficiency liability is a potential problem, however, in a declining market. After the 2008 real estate crash, lenders suffered huge losses. Subsequently, the rate of filing deficiency judgment appears to have increased dramatically nationwide.
While there is no organization that keeps track of this figure nationwide, some lender-specific figures suggest a substantial increase. Fannie Mae, the government- created mortgage insurer, for example, was involved in 595,128 foreclosures between January 2010 and June 2012, and referred 293,134 to debt collectors for potential pursuit of deficiency judgments (according to a 2013 report by the Inspector General for the Federal Housing Finance Agency). The biggest private mortgage lenders, including Bank of America, Wells Fargo, and Citigroup, by contrast, claim that they only pursue deficiency judgments in a minority of cases. Factors that may predispose a lender to pursue a deficiency judgment include borrower ability to repay, mortgage insurer requirements, and the type of hardship that caused the foreclosure. Also, some states have imposed significant restrictions on foreclosure-related deficiency judgment actions.
Florida Deficiency Judgment Process
Foreclosures in Florida are judicial, which means the lender must use the state court system to foreclose.
I. Lender Has a Choice of Forum. In Florida, the lender may obtain a deficiency judgment as part of the foreclosure suit if the borrower was personally served with the foreclosure complaint. Alternately, the lender may file a deficiency action against the borrower in a general civil court pursuant to Florida Statute 702.06 unless the foreclosure court has already granted or denied its deficiency claim.
II. Adjudication of the Claim: The court determines the amount of the deficiency judgment. The foreclosure court has considerable flexibility to decide the judgment amount and may take into account principles of equity (such as fairness and comparative negligence) in addition to substantive law. A general civil court, however, only considers the statutory law in determining the deficiency judgment amount (for this reason, lenders often seek deficiency judgments in this forum). No matter which forum adjudicates the claim, the amount of the award cannot exceed the difference between the judgment amount and the fair market value on the date of sale, if the property is:
- owner-occupied, and
III. Time to Seek a Deficiency Judgment: As of July 1, 2013, the period of time during which the lender may seek a deficiency judgment is one year from the date of the foreclosure sale for residential properties with no more than four dwelling units.
Who Can Get a Deficiency Judgment
Generally, a senior lienholder who forecloses on a borrower will also sue any junior lienholders, which will cause those parties to lose their security interest in the property when it is sold to satisfy the senior lien. If the fair market value of the property on the date of sale isn’t high enough to satisfy the junior liens on the property, the junior lienholders can then sue the borrower for the deficiency. Thus, a borrower may be held liable fordeficiencies for junior liens in addition to any senior lien deficiency.
Defenses to Deficiency Judgment Claims
I. Fair market value – the lender has the burden of proving the fair market value of the foreclosed property. A lender is required to provide testimony from an expert to support the alleged value of the property on the date of sale. Borrowers have successfully attacked the lender’s alleged fair market value when the value determination was not based on the verifiable work of an appraiser, and also when the determination did not occur on or very close to the date of sale.
II. Jurisdiction – As stated above, the lender can choose to pursue a deficiency judgment claim in two different courts. However, there is currently ambiguity in the case law as to what actions constitute a choice of forum.
For example, in many cases the lender asks the foreclosure court for jurisdiction to grant a deficiency judgment in the foreclosure action and the foreclosure court reserves jurisdiction to do so, but the lender then pursues a separate deficiency judgment action at common law. Some borrowers have contested the jurisdiction of the common law court under these circumstances, arguing that the lender had a “binary” choice of forums, had already chosen the foreclosure court to adjudicate the claim, and should not be allowed to pursue the claim at common law. In this situation, some courts have dismissed the deficiency judgment actions for lack of jurisdiction, while others have held that the lender’s choice of forum is valid.
Needless to say, this is a complicated and evolving area of the law. If you are facing a deficiency judgment, it is important that you speak to an experienced real estate attorney concerning all your potential defenses.
Deficiency After Short Sale
A short sale is a common foreclosure alternative. The borrower sells the mortgaged property for less than the amount due under the note, and the lender, in exchange, agrees to release the lien on the property. While a borrower who short sells his property avoids the negative mark of a foreclosure on his credit report, he still has potential liability to pay the resulting deficiency.
In order for the borrower to completely avoid this scenario, the lender must waive its right to a deficiency in the short sale agreement.
Contact John Clarke at Clarke Law Today
If you are facing a deficiency judgment, mortgage foreclosure, or any other legal issue with a creditor, contact John Clarke today for a free consultation!
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