FLORIDA FORECLOSURES: Defending Deficiency Actions
In 2013, the Florida legislature gave banks a deadline for filing their deficiency actions in old cases: July 1, 2014. For new cases, banks will have just one year from the time the case is completed–i.e. when the certificate of title issues to the bank–to reopen the case or start a new case to recover the difference between what the homeowner owed on the loan and the market value of the property. In response, FannieMae and a company called MGIC filed thousands of deficiency actions prior to the deadline and, presumably, will continue to do so as new cases are completed. What can you do to protect yourself?
Bankruptcy may not be a good solution for some people either because they have too many assets or because they need to protect their credit rating; however, it is the most obvious solution, so let’s start there.
It is true that a mortgage is secured debt, which cannot be discharged in bankruptcy . . . with certain caveats. First of all, when the amount of the mortgage is greater than the value of the home–a situation we call being “upside-down” or “under water”–then you can think of the mortgage as having two parts: the secured portion and the unsecured portion. In bankruptcy, we call this an “undersecured” mortgage.
The secured portion of the loan is the amount equal to the value of the property. Theoretically, the lender will resell the property at that price and recover that portion of the mortgage. The portion the lender won’t recover, the unsecured portion, is the difference remaining on the mortgage after resale of the property. The amount of that difference is often called the “deficiency.”
The good news is the unsecured portion of the debt, or the “deficiency,” is dischargeable in bankruptcy. So, if you are worried about a deficiency action, filing a bankruptcy will certainly solve the problem. If bankruptcy is not a good option for you, don’t despair. You have other defenses.
Determining the Amount of the Deficiency
In order for a judge to issue an order requiring you to pay a deficiency, the judge has to be convinced as to what the amount of the deficiency is. That can be very hard to do.
Let’s take a scenario where the final judgment is entered for $200,000. Then, the property is sold at a judicial auction for $100,000. That would mean the deficiency is $100,000, which is the remaining difference, right? Well . . . probably not.
First of all, just because the property was auctioned for $100,000 does not mean that is the true market value of the property. In fact, it almost certainly means the property is worth more than $100,000 because no bidder would pay the actual market value at a judicial auction. (These days, in some parts of the state, the bidding has gotten so competitive that some bidders might actually pay the full market value. Nonetheless, the argument is still good.)
So, if the auction price is not good evidence of the market value, how can the lender establish to the satisfaction of the court the correct value? An professional appraisal would probably work, as long as it is done right after the final judgment. Even though the real estate market has been on the rise, you have no control over the property once the foreclosure goes through. What happens if the property is neglected? Unkept landscape, code violations, unpaid association assessments, mold resulting from no air conditioning, vandalism, and many other conditions arising after you lose the property could unfairly lower the market value.
The same argument would work against BPOs (broker’s professional opinion) and CMAs (comparative market analysis) as well, which are more likely to be used by the bank because they are less expensive than a full appraisal.
In most cases, the lender will be the winning bidder at the judicial auction and will take over the property. Institutional lenders are slow-moving behemoths that usually take a long time to get around to doing something with foreclosed properties. That delay can give you an excellent defense.
This lack of certainty regarding fair market value is what lead the appellate court in Empire Developers Group v. Liberty Bank to reverse a deficiency judgment. Never forget that the lender has the burden of proof, not the borrower. If you are the homeowner, you do not have to prove the market value was higher than what the bank says. You simply have to show the bank’s evidence is unreliable.
That leads to the last point. My firm has been defending foreclosure actions since the housing crisis first began, so we have a good sense of how many judges feel at this point. There are some bank-friendly judges who would probably sign off on just about whatever the bank puts in front of them. You may have to appeal if you get one of those judges. However, by and large, that is not the case. In fact, I think most judge’s have had just about enough of the robosigning, fraudulent documents, predatory lending, bailouts and overall unsavory character of the lending industry. Not to mention they do feel some compassion for homeowners.
In my opinion, most judge’s will be resistant to granting deficiency judgments and will welcome any excuse you give them to deny the bank’s request. It should not be too difficult to cast doubt on the evidence the bank presents, and that is all you need to do.
~ Jeff Harrington, Esq.