After foreclosure, you still could owe mortgage debt

Ball and chain attached to man's legs

You might think the millions of homeowners who have lost a house to foreclosure are off the hook once the judge signs the foreclosure order and the keys go to the sheriff.

Indeed, this belief has led to the phenomenon of strategic default, where a homeowner who can pay stops paying a mortgage because the property value has declined.

But in many states, the mortgage lender could add insult to injury by pursuing the defaulting homeowner for the difference -- called a deficiency -- between what they owed on the mortgage and the price at which the bank eventually sells the home.

In the past several years, with so many homes underwater, deficiencies have become the norm. But that doesn’t mean suing to make up those deficiencies has increased proportionately.

The Wall Street Journal recently reported that lawsuits occur in "a small minority of cases where they legally could." Some believe lenders target those who they think are strategic defaulters.

Generally speaking, whether a bank can pursue a borrower for a deficiency after a foreclosure depends on the state where the foreclosure occurred.

While most states allow lenders to pursue a deficiency judgment, a handful of states have laws that make it difficult, if not impossible, to sue successfully, including Alaska, Arizona, California, Hawaii (for mortgages executed after July 1, 1999), Minnesota, Montana, Nevada, North Carolina, North Dakota, Oregon and Washington.

In Arizona, for instance, if the property that was foreclosed on was a single- or two-family home on 2.5 acres or less and was occupied by the owner as a residence, the state's anti-deficiency statute applies.

Many states that allow deficiency judgments place limits on what lenders can collect. Some states, for example, only allow lenders to collect the difference between the sale price and the fair market value.

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