By: Lance T. Denha, Esq.
Here’s a startling statistic: The average borrower experiencing delinquency on their mortgage hasn’t made a mortgage payment in 17 months. This is up nearly 11 months from just two years ago! The reason for the increase is in large part due to the delays experienced by Banks and mortgage servicers in completing foreclosure packages. In effect, the large volumes of default mortgages create a significant backlog that cannot be handled in a timely fashion. In addition to the foregoing, other factors include the reviews of loan modifications and possible review of improperly filed foreclosure documents.
Experts predict that this delay may very well translate into higher prices in some markets for the foreclosed homes as inventory dissipates. They will also push some foreclosures further into the future, meaning they’ll weigh heavier on the housing market longer. However these units will have to be foreclosed, therefore defaulting homeowners must understand although they may be living in the home rent free during this time period, the mortgage and note associated with the homeowner are not going anywhere fast therefore it is likely that they are going to owe more money to lenders down the road.
Since 2006, foreclosures in Michigan have more than doubled to nearly 136,000 last year, and the state has recorded nearly 500,000 filings for homes in or near foreclosure. This has resulted in property values significantly decreasing. Prior to the recession in Michigan, foreclosed homes had enough equity in the home that banks could recoup the amount they were owed plus legal costs in the event of a foreclosure. During that time period, lenders would bid the amount they were owed on the mortgage, sell the property and then both banker and homeowner could move on. Now that many homes in the region are worth far less than their mortgages, lenders aren’t bidding what’s owed. In fact, they enter bids for the current value of the home or, sometimes, even less. Under the laws of the state of Michigan, the lenders can then pursue the homeowner for the shortfall between what was owed and what the lender got when the home was sold, plus legal fees and interest.
Lenders have up to six years to sue for the bad debt and, once they obtain a judgment, lenders can pursue the borrower for 10 years. In addition lenders also have the ability to renew the judgment for another decade, repeating the process indefinitely. During that time, interest can build on the debt at the default rate stated in the original mortgage. Is this likely to happen? Only time will tell. Moreover homeowners in distress need to understand that a short sale transaction may allow the lender to pursue a deficiency amount against the homeowner. This is why it’s imperative that competent counsel be engaged to altogether minimize or eliminate that as a possibility. Each situation varies on a case by case basis.
The best way for borrowers to avoid the problem is to get a release from the lender in a short sale or, in the case of a foreclosure, file for bankruptcy. If they file for bankruptcy soon after a foreclosure, when they have only a few assets, they can generally get a fresh start in a Chapter 7 bankruptcy. As always it is advisable to work with an experienced attorney so that they are able to assess the debtor’s overall liability and create a roadmap and game plan moving forward.