Correction:
An earlier version of this story incorrectly attributed
information provided by Evan Goitein, a foreclosure attorney, to Malloy
Evans, Fannie Mae's Vice President for default management. Goitein, not
Evans, made the point that most deficiency cases he sees involve smaller
banks. This version has been corrected.
Lenders seek court actions against homeowners years after foreclosure
Jose Santos Benavides, 42, lives with daughter Gloria, 6, and
the rest of his family in a Rockville apartment. The family left a
four-bedroom house in Rockville in 2008 when Benavides could no longer
afford to make mortgage payments. More than three years later, Benavides
was told that he still owed $115,000 on the house he no longer owns.
(Michel du Cille/The Washington Post)
Kimbriell Kelly
For Jose Santos Benavides, the ordeal of losing his home was over.
The Salvadoran immigrant had worked for years as a self-employed
landscaper to make a $15,000 down payment on a four-bedroom house in
Rockville. He had achieved a portion of the American dream, earning
nearly six figures.
Then the economy soured, and lean paychecks turned into late
mortgage payments. On Aug. 20, 2008, one year after he bought his dream
home for $469,000, the bank’s threat to take his house became real via a
letter in the mail. Just four days before the bank seized the property,
he moved out, along with his wife and their two young children.
That wasn’t the worst of it.
In November, more than three years after the foreclosure, he was
stunned to learn he still owed $115,000 — with the interest alone
growing at a rate high enough to lease a luxury car.
“I’m scared, you know,” Benavides said. “I can’t pay.”
The 42-year-old is among the many homeowners being taken to court
by their lenders long after their houses were taken in foreclosure.
Lenders are filing new motions in old foreclosure lawsuits and hiring
debt collectors to pursue leftover debt, plus court fees, attorneys’
fees and tens of thousands in interest that had been accruing for years.
It’s an aftershock of the foreclosure crisis, and most homeowners don’t know it’s coming.
“When people take out a loan, they generally think the home is
the security for the loan,” said Alys Cohen, an attorney in the
Washington office of the National Consumer Law Center. When they no
longer have that home, “people don’t expect that debt to follow them,”
she said.
It’s all part of a legal process known as a “deficiency
judgment,” which is allowed in the District and 40 of 50 states,
including Maryland and Virginia. Since the start of the mortgage
meltdown of 2008, at least 400 Maryland homeowners have been pursued in
court, according to a Washington Post analysis of state court data. In
the first four months of this year, 57 new court actions have been filed
against homeowners — on pace to exceed last year’s total of 120.
It works like this: A property with a $500,000 mortgage might be
worth only $300,000 following the housing crisis. The $200,000
difference, or what’s commonly referred to as the “underwater amount,”
is known to lenders as a deficiency balance.
It’s unclear how many people walk away from homes when they can
still afford to pay the mortgage. Likewise, there is little publicly
available data on how many people pay off their deficiency judgments. A
recent government audit found the recovery rate at one-fifth of 1
percent. But for those hit with the judgments, it can seem like
double-dipping on their pain.
“Deficiency judgments are absolutely devastating to the
foreclosed home buyer both as a matter of immediate financial impact and
income tax consequence,” said John Mixon, a recently retired professor
at the University of Houston Law Center who has studied deficiency
judgments for the past 30 years.
Among the lenders pursuing the judgments are Fannie Mae and
Freddie Mac, the two quasi-governmental lending agencies that have long
strived to open up home ownership to a wider segment of the population.
Officials at those agencies said the judgments are necessary to recoup
money lost in the crisis.
“Pursuing deficiency judgments has always been a remedy that we
have looked at to mitigate our losses prior to the recent housing
crash,” said Freddie Mac spokesman Brad German. “It is not a new thing.”
German said Freddie Mac is targeting “strategic defaulters,”
which the agency defines as “someone who had the means but chose to go
into default, that there were no extenuating circumstances that affected
their ability to pay. If you’re choosing not to pay off your mortgage,
but you’re paying other bills, we would consider that strategic
default.”
In 2011, Fannie and Freddie flagged 12 percent of 298,327
properties they had foreclosed on — more than 35,000 — for deficiency
judgments in an attempt to collect $2.1 billion in unpaid mortgage debt,
according to an inspector general’s report released in October from the
Federal Housing Finance Agency.
“Pursuing these collections against borrowers we believe have
the ability to pay but
who have decided not to helps us minimize our losses, which in turn
helps minimize taxpayer losses,” said Malloy Evans, an attorney and
Fannie Mae’s vice president for default management. “And we think it’s
our responsibility to try to minimize those taxpayers’ losses as much as
we can.”
Robert Van Order, who was a chief economist for Freddie Mac from
1987 to 2002, said he did not believe that targeting deficiencies would
produce much revenue.
“That may be a good business decision, but I don’t think that’s a
huge part of the market,” Van Order said. “Is it worthwhile to hire
some lawyers and some people to try to do it? It might be, but it’s not
going to make or break the companies.”
“Deficiencies are less lucrative than some other types of debt
recovery work. They tend to be larger and more complicated and more
paperwork-intensive than, say, a medical or credit card bill,” said
Michael J. Cramer, president of Dyck-O’Neal, a Texas-based firm that has
been collecting deficiencies for 25 years. “However, deficiency
recovery represents an important facet of the debt recovery industry.”
Fannie is also pursuing defaulting homeowners as a “deterrent”
for people who might be thinking about defaulting in the future, Van
Order said. Fannie Mae has hired debt collectors to pursue people in 38
states and the District, while Freddie Mac has taken homeowners to court
in 17 states and the District.
Banks and lenders have rarely resorted to pursuing people for
remaining debt once the home was taken. Before 2008, since property
values were consistently increasing, the value of the home usually
covered the mortgage amount, and lenders could make their money back by
reselling the properties.
Van Order said the agency did not pursue homeowners very often for deficiencies during his tenure.
But the mortgage meltdown changed the equation.
Suing people immediately after foreclosure was problematic. For
one thing, lenders usually could not get more money out of already broke
homeowners. But, if lenders waited a few years, some forecast that
people would have money again once the economy recovered.
The irony is not lost on Evan Goitein, a Bethesda-based foreclosure attorney.
“There is very little to be gained from the bank’s perspective to
be suing people for the money at this point,” Goitein said. “While
deficiency judgments are not really a problem right now, I can see it
being a big problem in the future. So seven years from now when my
client has recovered from his foreclosure, he’s got a job again, he’s
saved up enough money . . . [from the bank’s perspective], that would be
a great time for the bank to try to sue them.”
People are usually shocked when that happens, even though
mortgage documents state that lenders are entitled to immediately
recover the full loan amount upon default. Mixon said ordinary people
often do not realize what is contained in the arcane legal language.
“The thing that looks like it’s protecting them is biting them,” he
said.
Jose Santos Benavides learned in November — more than three
years after the bank foreclosed on his Rockville home — that he still
owed $95,500 from the mortgage and at least $21,000 in unpaid interest.
“I’m scared, you know,” Benavides said. “I can’t pay.”
(Michel du Cille/The Washington Post)
Benavides and his family had been living in a cramped,
two-bedroom Besley Court apartment for four years when the process
server handed him a document stating that collectors were coming after
him over the debt on his old house. He had 30 days to respond.
“He tells me, ‘You have to go to court,’ ” Benavides said. “I was just scared.”
The notice spelled out that he owed $95,500 from the $375,200
mortgage, plus at least $21,000 in unpaid interest. The letter said the
interest on the debt was $19 a day, roughly $577 a month. And the clock
had been running for more than three years.
Benavides tried to call his original lender, Lehman Brothers, but
it had filed for bankruptcy before being acquired by Barclays. He
called one of the attorneys in the suit. He called the process server
listed on the summons. Finally, he called a bank, and it said there was
nothing that could be done, he said. Freddie Mac, which declined to
comment on his case, had backed Benavides’s loan, but for $1 assigned
the note to Dyck-O’Neal.
Five days before Christmas, he filed for bankruptcy.
A long window for lenders
Lenders have an opportunity to forgive the deficiency. Most do
so, either through a short sale before foreclosure, in which the lenders
agree to accept an amount of money from a home sale that falls short of
the mortgage, or through a “deed in lieu,” in which the homeowner
merely gives up the deed to the house in order to get out quickly.
But even then, homeowners can be stuck with paying state and
federal tax on what the bank has forgiven. The Mortgage Forgiveness Debt
Relief Act waived taxes on that debt until 2012. That relief was
extended until December, but the act doesn’t exempt homeowners from
state tax, and it’s uncertain whether the federal relief will be
extended again. Most states forgive the taxes, said Annapolis bankruptcy
lawyer Tate Russack.
States have different statutes of limitation on how long they
allow lenders to pursue deficiency judgments, ranging from 30 days to 20
years. In Kansas, a deficiency judgment must be sought at the time of
foreclosure. If a judge feels the bid at foreclosure sale isn’t “fair
value,” the judge can deny or reduce the judgment.
In Maryland, it’s three years. However, there’s a little-known
exemption for most mortgage documents that gives debt collectors 12
years to sue homeowners, plus another 12 years to collect the debt and
on top of that a one-time renewal of 12 years for a total of 36 years.
“That’s 36 years that lenders have to go after people,” said
Russack, whose firm has taken on 80 bankruptcy cases in the past four
months, all of which involve deficiency judgments.
The rate of deficiency judgments has increased sharply in Maryland in recent years, The Post’s analysis shows.
In 2006, the owners of 19 properties in Maryland were ordered to
pay their deficiencies totaling at least $432,115. Six years later, the
owners of 120 properties were pursued for $13.6 million.
Since 2008, a majority of the cases pursued were in Prince
George’s County, with Baltimore City and Montgomery County coming in at a
close second and third. Those three jurisdictions had more homeowners
taken to court than the state’s other 21 counties combined. Those three
jurisdictions also represented nearly $3 of every $4 sought by lenders
and debt collectors, which totaled $45 million among all counties.
In Prince George’s, one homeowner was hit with a judgment of
$577,000, another with $563,000. All told, the median judgment for
Prince George’s homeowners was $98,000 — $10,000 more than the statewide
median of $88,000.
“It is a problem of monumental proportions,” Russack said.
Rep. Elijah E. Cummings (D-Md.) says he supports reform of deficiency judgments.
Rep. Elijah E. Cummings (D-Md.), who in the past has been a
defendant in foreclosure filings on his personal home, said he supports
deficiency judgment reform.
“I strongly support policies and aid initiatives that will
minimize or even waive deficiency judgments against borrowers to help
ensure that such judgments do not compound the harms borrowers have
already suffered,” he said.
Already-foreclosed homeowners won’t know that they’re being
targeted until they receive the court notice. In many cases, it is hard
to even know who owns the debt until the notice arrives. Often times,
the entity pursuing the debt is not the original lender, because that
debt can be sold by the homeowner’s lender to someone on the secondary
debt market for pennies on the dollar. Most of the deficiency cases that
Goitein said he sees involve smaller banks.
Because the debt is old, accruing interest becomes a major cost to homeowners.
According to The Post’s analysis, the median interest rate in
Maryland was $10 a day, $310 a month. One Germantown woman was charged
$40 a day, or $46,000 in total, for what was originally a $136,000
deficiency on a four-year-old foreclosure case.
A Montgomery County Circuit Court spokeswoman said courts do not
decide the amount of interest to be charged. The post-judgment interest
is governed by state statute, she said, which mandates a minimum of 10
percent interest per year, according to the statute.
Once a judgment is entered, it sticks with the homeowner until it
is paid off. In Maryland, it is filed with the land record in the
county where the homeowner lives and follows him each time he moves. A
lien is then attached to whatever future real estate the homeowner
purchases and prevents the homeowner from selling that new property
until the deficiency is paid off, Russack said.
In most cases, the only way out of a deficiency judgment is by
filing for Chapter 7 bankruptcy. But because of the Bankruptcy Reform
Act of 2005, that’s only available to people earning no more than the
state’s median family income by family size, which is $108,915 for a
family of four in Maryland. All others must file under chapters 11 and
13, where the debt is restructured, not eliminated.
The Post found 144 cases of bankruptcy filed after homeowners
received a court order for deficiency — nearly 20 percent of all cases.
Among them, 38 — more than a quarter — had some sort of garnishment of
wages or other assets. Another 113 cases also involved garnishment, but
there had not yet been a filing of bankruptcy.
‘Foreclosure fatigue’
In 2011, an attempt was made to pass a one-year nationwide cap on deficiency judgments, but it died in a House committee.
Last year, the Maryland Consumer Rights Coalition was asked to
make legislative recommendations to help ease the state’s foreclosure
crisis. Among other things, the commission recommended ending deficiency
judgments and mandating a statewide forgiveness of the debt. But that
recommendation was ignored, according to Marceline White, the
commission’s executive director.
The coalition considered making a renewed push for the
recommendation during the spring session, which ended April 8, but
ultimately held off.
“Frankly, I think there’s a little bit of foreclosure fatigue among lawmakers,” White said.
White said Bank of America recently announced it would forgive
deficiencies in exchange for credit as part of a federal and state
settlement of
a $25 billion national mortgage lawsuit. The settlement requires the
nation’s top five lenders to help people who are having difficulty
paying their mortgage.
As of March 31, Bank of America provided 599 deficiency waivers
in Maryland totaling $40 million, an average of $67,235 per deficiency.
The settlement terms end in 2014, and the bank says it will continue to
forgive the debts.
“I can confirm that we will continue to waive deficiencies even
after the monitor certifies us as having met our obligations under the
settlement,” said Bank of America spokeswoman Jumana Bauwens.
The wave of deficiency judgments had a prologue in Texas.
During the 1980s in Houston, the bottom went out of the oil
market, with the price dropping to about $15 a barrel. Homes that had
been assessed at $200,000 couldn’t be sold for $100,000. More than
200,000 people lost their jobs and could not pay their mortgages.
The lenders foreclosed on the homes and then pursued the homeowners for the outstanding balance.
Once a judgment was granted, debt collectors had 10 years to
collect, according to the Texas statute at the time, and another 10
years if the debt collector petitioned the court to renew the judgment.
“It was an absolute disaster,” Mixon said.
In response to the situation, the state passed laws increasing consumer protections in deficiency cases.
“It’s less an event in Texas today than it was back then,”
Mixon said. “But Texas still provides the object lesson of what could
happen.”
But for the moment, efforts to pursue deficiency judgments are ramping up rather than winding down.
Following the mortgage crisis in 2008, the Federal Housing Finance Agency
took over management of
Fannie Mae and Freddie Mac. The FHFA is now in private talks with the
quasi-private lending giants to ramp up their efforts to go after even
more homeowners for their deficiencies starting this September,
according to the inspector general’s report.
The FHFA inspector general’s
report showed that the return on the 35,000 deficiency judgments pursued in 2011 was less than 1 percent, or $4.7 million.
“Given a recovery rate of .22 percent, the Enterprises appear to
have room for improvement,” according to the audit. “Further, with 1.1
million seriously delinquent mortgages looming on the foreclosure
horizon — triple the Enterprises’ foreclosures in 2011 — FHFA’s timely
guidance on deficiency management processes may help the Enterprises
recoup future losses and protect taxpayers’ investment in their
financial health.”
By Sept. 20, the FHFA is expected to have drafted new guidelines for making the process more effective.
“Through our supervisory process, FHFA is working to implement
the Inspector General’s recommendations,” said Jon Greenlee, the FHFA’s
deputy director of the division of enterprise regulation.
Evans said Fannie Mae applies a specific methodology to determine
whom it will pursue, though he declined to elaborate, saying people
could use such information to thwart the process. He did say that Fannie
Mae does not pursue homeowners who have experienced certain financial
hardships, such as a job loss, medical issue, death of a spouse or
divorce.
But they do target people based on credit history and the
characteristics of their loans and properties. For example, a person who
pays their other bills but not their mortgage could be considered a
strategic defaulter, he said.
“We do the analysis first to really focus on the population that
we think has the ability to pay but hasn’t chosen to do so,” Evans said.
Arturo Ventura, 45, picks up his son, Manuel, 8, on March 15 in
Washington, where they live with Ventura’s brother after losing their
condo in Silver Spring.
(Michel du Cille/The Washington Post)
In 2012, Ventura was told that he owed nearly $100,000 on the
money he borrowed on Aug. 15, 2006, with interest growing at $16.21 a
day since Sept. 14, 2009.
(Michel du Cille/The Washington Post)
Coming to collect
Arturo Ventura, a 45-year-old food server at a restaurant in
Northwest Washington, had struggled long and hard to find his place in
America. The native of El Salvador had fled his homeland in 1983 during
the civil war there. He went to school to find out that his favorite
teacher had been slain. “They were killing all of the teachers at that
time,” he said.
After coming north, he moved in with his brother and started to
work delivering newspapers from Connecticut Avenue to 34th Street in
Cleveland Park, earning $150 each month.
Ventura eventually wanted to move into his own place, one
preferably in a school district that could cater to the special needs of
his 8-year-old son, who has Down syndrome. He began looking in Silver
Spring and was surprised when real-estate agents showed him properties
that he thought he could not afford.
But he learned from the agents that he was not required to provide a down payment.
In 2006, he found a three-bedroom condo and qualified for the
$215,920 mortgage. It would be roughly $2,000 each month plus $260 for
monthly condo association fees. He could pay for it, he said, by
combining the $2,000 a month he earned as a food runner for local
restaurants with the Supplemental Security Income payments for his son
and money from his longtime girlfriend’s part-time job.
Then the couple separated, and he could no longer make the payments.
He moved back in with his brother, let the condo lapse into foreclosure and eventually filed for bankruptcy.
Last year, on Sept. 13, a copy of a court action against Ventura
was mailed to his D.C. apartment explaining that he still owed nearly
$100,000 on the money he had borrowed on Aug. 15, 2006, with interest
growing at $16.21 a day since Sept. 14, 2009.
He cannot understand why they want him to pay for a house that someone else lives in.
“They still want me to buy the house they already sell?” Ventura said.
In 2006, Arturo Ventura found a three-bedroom condo on Normandy
Square Court in Silver Spring. Ventura said he was looking to live in a
school district that could cater to the needs of his son, who has Down
syndrome. After Ventura and his girlfriend, who helped cover the
mortgage, had separated, Ventura could no longer afford the payments.
(Michel du Cille/The Washington Post)
