People with problem mortgages ask me frequently what the mortgage lender and their attorneys will do if they walk away from their upside down home mortgage. What can they do to get a release of liability and what are the chances the lender will pursue a deficiency judgment? These are common questions. This past weekend I got a glimpse into mortgage lender strategies by speaking with an attorney friend named Norman Farquhar who has worked for a large mortgage foreclosure firm in Tampa for two years. He recently left the firm. Norm Farquhar is an experienced real estate litigator. He says he is typically assigned the most contentious and heavily defended foreclosure cases. Over the past two years he said his firm took in about 1,500 new foreclosures each and every month.
I asked Norm how many first mortgage deficiency judgments he or his firm pursued in the past two years. Zero. Not one. None of his clients have ever asked his firm to file for a deficiency. He also said he was unaware of any of his client banks selling deficiency claims to investors. His firm never received any inquiries from investors about purchasing their clients’ deficiency claims. Asked why there has seen no deficiency claims to date, Norm speculates the reasons are first, that the banks and the law firms are still swamped with work(he said his firm is farther under water than the homeowners mortgages) and second, because it is much more difficult and expensive to pursue and collect a mortgage deficiency judgment than it is to foreclose and take back title. Norm says he hopes some banks will pursue more deficiency claims when the market settles down because it would mean more work for attorneys who do what he does.
Next, I asked Mr. Farquhar what determines whether or not a mortgage lender will release homeowners from personal liability to settle a contested foreclosure. He said it depends mostly on the policy of the bank and the investor. He says that some of his larger bank clients never releases homeowners to settle foreclosures (with few exceptions) while smaller banks are more flexible. That does not mean the non-releasing lender will sue for a deficiency judgment; they just do not want to give up their right to do so. The skill of the homeowner attorney defending the foreclosure has some impact on liability releases but the foreclosure defense is not as important as the overall policy of the mortgage lender in determining whether a homeowner will still have personal liability after a foreclosure.
I expect additional conversations with friend Norman and will pass on useful insights into lender foreclosures as they are offered.