Losing your home to foreclosure is not the worst thing that can happen to millions of Americans who have been unable to pay their mortgages: Banks are increasing suing for the difference between what they received from the sale of a foreclosed home and what was owed on the mortgage. That will result in many more bankruptcies and its spiraling impact and consumers and other lenders.
A story in today’s Wall Street Journal examines what it says is the next shoe to fall in the great American housing debacle.
“Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale. The economics of today’s battered housing market mean that lenders are doing so more and more,” writes Jessica Silver-Greenberg. “Foreclosed homes seldom fetch enough to cover the outstanding loan amount, both because buyers financed so much of the purchase price—up to 100% of it during the housing boom—and because today’s foreclosures take place following a four-year decline in values.”
“Now there are foreclosures that leave banks holding the bag on more than $100,000 in debt,” says Michael Cramer, president and chief executive of Dyck O’Neal Inc., an Arlington, Texas, firm that invests in debt. “Before, it didn’t make sense [for banks] to expend the resources to go after borrowers; now it doesn’t make sense not to.”
“Indeed, $100,000 was roughly the average amount by which foreclosure sales fell short of loan balances in hundreds of foreclosures in seven states reviewed by The Wall Street Journal. And 64% of the 4.5 million foreclosures since the start of 2007 have taken place in states that allow deficiency judgments.”
