Each state is different when it comes to deficiency judgments. In Minnesota, if the mortgage holder in the first position forecloses by advertisement, they cannot pursue a deficiency judgment. It’s something like 98-99% of all foreclosures in Minnesota are done by advertisement rather than foreclosure by action (law suit) whereby the lender can pursue a deficiency.
If you go through foreclosure and you have a second or even third mortgage on your property, those lenders can, and likely will pursue you for the deficiency. In Florida, since they have gone through this foreclosure crisis before we have, they will be a good state to look at to see what our future looks like. They are just at the very early stages of these deficiencies coming due. Usually they catch the former home owner by surprise.
Where this becomes more problematic for the housing market is that these home owners who were foreclosed on six years previously and perhaps have since recovered with their credit score and their ability to get a mortgage, all of a sudden they are slammed again. The deficiency judgment will hurt their credit and of course their ability to get a mortgage. The creditor might even be able to get a judge to approve garnishment of wages up to 25% in most cases until that debt is paid. I suspect if most people had their wages garnished by 25%, they would have a hard time making their other payments including rent or a mortgage.
So now what happens? Many of these people will just have to file bankruptcy at that point. The creditor can pursue the deficiency for decades so if you don’t get rid of it, it will be around your neck possibly for the rest of your life. I believe in Minnesota, the creditors must file a deficiency within six years of the debt being owed and then they can extend the deficiency for two more ten year terms. So, if you have a deficiency, they can pursue you for 26 years in Minnesota.
Once these folks have to file bankruptcy, they won’t be buying a home again for another 4-5 years. They probably also won’t have much appetite for ever buying a home again in their lifetimes.
The Minnesota Home Ownership Center for a brief overview of deficiency judgments in Minnesota.
- Foreclosure: It’s Not a Get Out of Jail Free Card (annarborundressed.com)
- C’Mon Minnesota Legislature, . . Just Ban Deficiency Judgments (iloanminnesota.com)
- Minnesota Foreclosures (propertypro911.wordpress.com)