The Washington Post is good to notice a shift among lenders, who have become more aggressive about going after borrowers to recover money lost with short sales. That’s coming as a surprise to people who thought that foreclosures meant they were finished with their real estate woes—and may signal that, with millions more foreclosures still expected, some banks are toughening their stance.
As the Post tells it:
In many localities — including Virginia, Maryland and the District — lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency.
Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.
That’s a nice clear explanation, and the piece also notes that a few states prohibit lenders from going after these borrowers; some put limits on how long banks have to file a claim or how they calculate the sums they can try to collect. There’s also an important tip for borrowers who might find themselves in this situation: get a waiver in writing from your lender!
The story is short on stats, though, and, if this is another one of those areas where lenders aren’t required to disclose what they’re up to, it would have been good for the Post to make that clear.
But the piece is rich in anecdotes, like this man:
The bank sold the home for far less than Palacios owed on it, as often happens with foreclosures. What Palacios did not see coming was the letter from his lender demanding that he pay the shortfall: $148,064.02. “I really thought I was through with this house,” said Palacios, who fell behind on payments when the economy soured and his cleaning business stumbled.
Palacios said he was committed to staying in his house, which he bought in 2005. He sunk $20,000 into improving it and hoped to raise his children there. But his lender refused to modify his loan, he said. To avoid personal liability for the deficiency, Palacios is filing for bankruptcy protection, as many people do who are in similar situations, said Nancy Ryan, his bankruptcy attorney.
“I am definitely seeing more people come through my door who walked away from houses a year or two ago and thought they were as free as the dead,” Ryan said. “They’re stunned when they realize they’re not.”
Stunned is probably putting it mildly.
As Barry Ritholtz points out, despite the more than 5 million foreclosures already completed, there are millions more on the way. But as he reads the Post story, the shift among lenders could mean we’ll end up seeing fewer than some had expected:
It seems some banks have realized that they have made it too easy for borrowers to wash their hands of a bad home purchase, and they are pushing back. Many are pursuing borrowers in recourse states for any short falls after a Foreclosure or Short Sale.
This may make some of the marginal walkaways and short sales that much less desirable — and hence less likely to occur.
Ritholtz thinks the shift in attitude that the Post noticed could become a national trend. “The next leg down in Housing is upon us, and banks do not want to take the full hit for the losses.” He sees consequences for second lien holders, too. There usually isn’t any cash left over for second lenders after a distressed property is sold, but, he writes, “Expect to see more of these holders using the courts to pursue larger deficiencies in the future.”
So well done to the Post for noticing the banks’ changing behavior. It’s a real life issue for readers, and a story that’s still unfolding.Holly Yeager is CJR's Peterson Fellow, covering fiscal and economic policy. She is based in Washington and reachable at email@example.com.