Homeowners who default on their mortgage loans tend to view losing the property in foreclosure as the end of the process. They are often surprised when the lender later sues them for any unpaid loan balance after applying the foreclosure sale proceeds. In addition, the HOA for the foreclosed property might also sue the former owner if they failed to pay assessments due prior to the foreclosure.
Mortgage Deficiency Judgments
If the purchase price obtained at a foreclosure sale does not pay the entire amount owed to the bank, the remaining balance is called a deficiency. The lender can pursue the borrower for that deficiency unless the law in the state where the property is located prohibits a deficiency judgment for that loan. Depending on the method of foreclosure and applicable statutes of limitations in that state, the lender may have the right to wait several years before initiating a deficiency action.
Several states have foreclosure laws that protect homeowners from deficiency liability for certain types of residential mortgage loans. These laws are sometimes referred to as anti-deficiency statutes. Not all states have anti-deficiency statutes and the scope of their protection varies in each state that does have such a law. A homeowner with a mortgage loan that is subject to the anti-deficiency laws in Arizona might not qualify for protection if the same loan is made for a California property.
Liability Under Homeowners Association Laws
The CC&Rs for subdivisions that have a homeowners associations normally include language that both (1) secure payment of assessments with a lien on the house, and (2) make the property owner personally liable for any amounts that become due to the association during the period of that person’s ownership.
Foreclosure can take a long time to complete. The borrower continues to hold legal title to the house until a new owner receives a deed at the conclusion of a foreclosure sale. Until title transfers, the homeowner remains obligated to pay HOA assessments. Community associations can and do sue homeowners to collect assessments.
Lawsuits After Foreclosure
The first notice some people receive that they have continuing liability to a lender or homeowners association after foreclosure is a collection letter from an attorney. Short sales create the same problem because banks frequently reserve their right to go after the borrower for the deficiency after the short sale. A bank may be willing to release the homeowner from liability or settle for less than the full deficiency, but lender cooperation varies and borrowers need to be aware of the issue and actively seek a release.
According to Les Christie in the February 3, 2010 CNNMoney.com article “You lost your house - but you still have to pay," sometimes banks will obtain credit reports and decide to sue borrowers for a deficiency based on a determination that the foreclosure was a strategic default. Strategic default means the borrower who can afford to keep paying a mortgage makes a decision to default. The lender assumes a strategic default occurred and has assets to pay a deficiency if the borrower remains current on all obligations other than the mortgage.
Anyone in danger of foreclosure or contemplating a short sale should seek advice from a real estate attorney. An attorney can help the homeowner analyze their specific situation under applicable law (including liability for any deficiency) and explain the consequences of different courses of action.
Tony Meier - Based in Phoenix, Arizona, Tony Meier has been practicing law for over 10 years. He represents individuals, new companies and established ...
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