POSTED: Wednesday, October 5, 2011 - 12:24pm
UPDATED: Thursday, October 6, 2011 - 11:12am
NBC NATIONAL NEWS — More and more homeowners caught up in the foreclosure mess are finding out it's not over, even after the banks take the houses back.
Instead, banks owed hundreds of thousands of dollars aren't walking away from the debt.
It's called a deficiency judgment, an order granting banks the right to collect the full amount the borrower loaned, even when the foreclosure sale leaves a shortfall.
The Wall Street Journal reports one hundred thousand dollars is the average amount by which foreclosure sales fall short of the loan balance, which is why smaller financial institutions like credit unions are being more aggressive going after the money.
Since 2007, the pace of banks going after the difference has increased.
In the first eight months of 2007, there was only one deficiency judgment obtained.
That number ballooned to 187 during the same period in 2009, and is similarly paced with 171 so far in 2011.
Only a small fraction of the foreclosure cases go this far.
Attorney Roy Foxall represents the distressed borrowers and notes many lenders waive the deficiency.
He says he doesn't think the strategy will yield the banks much money in the long-run.
"I can't see how it's cost-effective for these lenders to go after some of these people," Foxall notes. "I mean, the only way out is going to be bankruptcy."
Luis Rivera is an attorney representing the financial institutions.
"They're absolutely within their right to do it," says Rivera of the deficiency judgments. "A lot of institutions say, �well, this is something that we have to do because we have to protect our shareholders, we have to protect our members, so let's do it,'" says Rivera. "Whether we actually see a penny of it or if we actually undergo any collection efforts, that's a whole, completely different question."
Rivera notes the banks examine each case when deciding whether to pursue a deficiency judgment.
The banks look for borrowers with the ability to repay.
"I think the financial institutions are less interested in getting a judgment that's gonna be good for 20 years when your borrower might be in their early 50s or 60s and don't have 20 years of earning potential."