The housing collapse is moving into its 7th year. It is taking with it many financial casualties by forcing people into to foreclosure, short sales and signing their homes back over to the bank. Chances are that you or someone you care about has or is currently dealing with it.
Many of those families have started to restructure their financial foundation with new jobs or lowered expenses. Some have started to accumulate savings again and pay off debt. Their overall belief is that they put a bad situation behind them and are able to look forward again.
Sorry, not so fast…
Debt collectors, banks and more importantly Fannie Mae and Freddie Mac may be coming after you to settle up your past debts. That has come as a shock to those who thought they had dealt with the consequences and the financial hardship so they could finally move on with their lives.
All of possible aftermath issues stem from one issue. Deficiencies. If you didn’t negotiate the proper terms in a short sale or deed in lieu of foreclosure or if the foreclosure didn’t fall under the correct statute, you could be a target. If any of these entities do come after you for a deficiency, they have the legal right to seize bank accounts, force the sale of assets and even garnish up to 25% of your wages. It is a serious situation and will be another huge setback for those affected.
In 34 states, a foreclosure comes with a deficiency judgment. That means that your lender/servicer/guarantor or the beneficiary of your loan has the right to come after you later for the money they lost on your deal. Depending on state law, they can chase you for years or even decades.
The banks, investors and guaranteeing agencies like Fannie Mae, Freddie Mac and FHA have absorbed over $1 Trillion in losses. Do you really expect them to sit back and not try to collect what they can? Not a chance.
We here in Washington are much better off than many other states. We have protections that either eliminate or make it much harder for you to be pursued for even more of your hard earned money. Here is some specific information that Washington homeowners need to know.
I thought Washington is a non-recourse state and they couldn’t come after me?
That is mostly true but there is more to the story. The devil is in the details, Lawyers = Details.
If your house was foreclosed in a non-judicial foreclosure -
Non-Judicial means you didn’t have to go to court. This is overwhelmingly the case here in Washington. State statue says that the foreclosing party cannot come after you for any of the money they lost if they use the non-judicial foreclosure method in getting your house. There is very little chance of a judicial foreclosure here in Washington because it is easier, faster and cheaper for the banks to use the non-judicial foreclosure method. Think of it as more of an administrative process.
That means if you only had one loan on your house and your house was foreclosed, you are in the clear. You are not going to get a letter in the mail that says you owe a huge amount of money. Take a deep breath. Well, sort of…
You are going to get a 1099-C for the amount of money the bank lost on the deal and it may mean you are liable and must pay income taxes on that loss. There are exceptions and exemptions, your tax preparer can help you with that and planning ahead could pay huge dividends for you at tax time.
If your house was foreclosed and you also had a 2nd mortgage -
It means that your house was foreclosed by the primary lender. The rules described above apply. That lender has to take the loss but the 2nd mortgage lender does not. Their loan became an unsecured loan by virtue of the loss of value in the collateral (the property). Even if both of your loans were with the same lender, it doesn’t matter. You will have to deal with that 2nd mortgage at some point.
So what happens now?
The 2nd mortgage lender will treat the entire amount like an unpaid credit card and eventually they will come after. We haven’t seen too much of this yet because they have 6 years in Washington to do it. They are patiently waiting for people to get back on their feet before they make their move. Many of these debts have been sold to collection companies so they will be the ones to come after you. The only way these debts will go away forever is with a bankruptcy or a settlement with the creditor. For bankruptcy information, contact a bankruptcy attorney or call us for a referral to a good one.
We have settled many lingering 2nd mortgage debts for our clients for far less than you would expect. Our experience shows that if handled properly, banks and collection companies will settle. If you settle your debt for less than is owed, you will possibly have that same tax issue we talked about earlier. You could be taxed on the debt the bank forgave in the settlement of the 2nd mortgage.
I did a short sale on my house so I am off the hook, right?
The foreclosure exemption does not extend to short sales. The only way you are going to get out of a deficiency with a short sale is if it is written into the agreement you signed with the bank to sell the house.
In most cases, your real estate agent or whoever negotiated your short sale made sure that the proper verbiage was included in the agreement. For your own peace of mind, go back and double check this. If you have doubts about the way it is written, call your agent or see an attorney. If for some reason you have left yourself open to a deficiency, you have some work to do. It is not a matter of if they will come after you, but when.
I did a short sale and I had a 2nd mortgage too –
Again there is no automatic release of liability in a short sale. It must be included in the agreement you signed. Make sure that the wording is in there and it is clear that there is no remaining deficiency on the 2nd mortgage.
I signed my house back over to my bank with a Deed in Lieu of Foreclosure –
A deed in lieu of foreclosure acts like a short sale in that the state statute does not exempt you from a deficiency. You need to make sure that your liability has been removed in the agreement. In most cases has been, but we have seen cases where the banks have reserved the right to come after you for a deficiency later. It is our belief that if they have reserved this right for themselves, eventually they will come after you or sell that right to someone else.
This all seems unfair that the banks which are making billions of dollars in profits, keep coming back to get paid again and again for loans that went bad in the housing collapse. As homeowners, this is what we signed up for when we took out a mortgage. Most of us didn’t anticipate the housing collapse and the economy crashing. We felt that we had to take a risk or be left out of the housing market forever. In hindsight, maybe it was a mistake on our part, it doesn’t matter now. We have to move forward.
When you decided on the solution you took or will take in the future, ideally someone told you all of this so that you could prepare yourself and you now have closure. Hopefully you will never have to deal with being chased for more money on a problem that you thought was long since settled.
If for any reason you have left yourself open, you still have some good, workable solutions available to you. There are effective ways to mitigate the future financial damage but you need to take some action. Unfortunately, the resources that are available are not centralized. You have to understand what is possible before you know who to call for the solution.
Call us for a free 15 minute phone consultation to discuss your particular situation. We’ll explain where you’re at and help you plan your next step. If you need a referral to an attorney, real estate or tax professional, we’ll tell you who can help you and put you in touch with them.
Call us at 425-259-2600 to schedule your free phone consultation.
No Cost. No Obligation.
Howard Bono is the Founder of the Financial Revival Group (FRGI). FRGI is a local company with expertise in all areas of dealing with underwater mortgages. The group consists professionals in every arena necessary to help you get the proper information and strategies so you can move on with your life. Whether you want to keep your house or let it go, we have solutions and proven plans to get you there. Every day we do things for people that they didn’t think were possible. You could be next, with a free phone call.