It's called a deficiency judgment and it's a nightmare for former homeowners who thought they were free of a mortgage after the bank foreclosed on their property.
Since foreclosed homes hardly ever sell for an amount that covers the outstanding loan, 41 states plus the District of Columbia allow lenders to sue the homeowners for the difference, making a bad financial situation worse for distressed homeowners and forcing some to consider bankruptcy. The deficiency judgment is good for up to 20 years.
And wouldn't you know, investors such as hedge funds and private equity firms are already eagerly eyeing these judgments, seeking ways to bundle and sell them as securities, according to the Wall Street Journal. The newspaper also reported that Florida has had more foreclosures since 2007 than any other state that allows deficiency judgments. Credit unions and smaller banks are the most aggressive pursuers of judgments.
The deficiency judgments are not just for unpaid mortgages. Condominium homeowner associations have been going after owners who fail to pay association fees.
Many of the homeowners whose homes went into foreclosure have purchased another home, but say they can't afford to pay the judgment, while others are so strapped they'll be forced to declare bankruptcy.
But there are homeowners who speak out in favor of deficiency judgments, especially those remaining in neighborhoods battered by numerous foreclosures who are outraged that they are left owning homes in areas where prices have been dragged down by distressed properties. The same goes for residents in condos who have to share the burden of unpaid association fees or suffer reduced services.
What do you think about deficiency judgments against owners of foreclosed properties, or against condo owners who fail to pay association dues?
Keep up with your wealth and follow me on Twitter.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.