Once a property is sold at foreclosure or when the property is sold as a short sale, there will be a remaining deficit of what is owed to that lender. Usually, the deficiency will be the difference between original loan amount, past due interest, along with costs the banks incurred while the property was liquidated.
Example: $400,000 home is sold on a short sale for $230,000. The net proceeds to the bank on this sale were $200,000. This creates a $200,000 deficiency amount.
If the state the property is located such as my state, Nevada, the loan is likely a recourse loan and the bank experiencing the deficiency has the right to pursue that borrower after the property is sold. In the case of a foreclosure, the time here in Nevada is 6 months, and after a short sale, 6 years. Don’t despair homeowners, in many cases, a good REALTOR® or attorney can get that deficiency waived for you.
Getting a deficiency judgment is not a simple matter for the banks. They actually have to take you to court and win a lawsuit against you. Not only is this costly to the bank, but it has yet to proven whether the banks have the legal ground and case law behind them to pursue devastated homeowners on a large scale, especially in the case of the banks holding the primary mortgages. Remember all of those hastily written mortgages that were bought and sold over and over during the real estate boom?
A more likely pursuer will be the creditor associated with a 2nd mortgage. If the 2nd mortgagor is wiped out, their debt may be considered an unsecured debt, the same as a credit card or personal loan. Those creditors could be pursuing you for years; however, there are some bright spots. First, many of those deficiency amounts are much lower in most cases then the primary loan, and those banks will also come to you in many cases to work out a settlement prior to legal action.
In either case, just because there is a total deficiency amount, that doesn’t mean the banks will automatically pursue you for the full amount. It could be a smaller amount; after all, how many people will ever be able to pay back the kinds of deficiencies we are seeing in this market?
Your lender may not choose to pursue you at all. If they issue a 1099C (cancellation of debt); then the bank is officially taking a loss on their books. The 1099 would then show as an income gain to the borrower. In order to determine what kind of impact that might have on your taxes, you’ll need to consult a qualified tax professional such as a CPA. On primary residences, many homeowners will qualify for a full tax exemption courtesy of the Mortgage Debt Relief Act of 2007. This exemption is currently in place through 2012 and I would not be surprised to see that extended given the slow recovery.
To learn more, feel free to attend our Short Sale Seminar. The seminar will be held at North American Realty of Nevada’s Henderson office located at 3007 Horizon Ridge Pkwy #201 in Henderson on October 6th at 6:30pm in our conference room.
Paul Rowe lists and sells shorts sales for the Sena Team at North American Realty of Nevada. He can be reached at 702-376-0088.