DEAR BENNY: I am retired. About 18 months ago (before the economic crash), I bought a fixer-upper and renovated it, but have been unable to sell it. If I let the property go into foreclosure, can/will the bank that gave me the mortgage try to get at my other assets (equity in my home, stocks, etc.)? –Irvine
DEAR IRVINE: You are asking about a legal concept known as a "deficiency judgment." Let’s take this example: You owe the bank $200,000 when you go into default. The bank — after trying to work something out with you — forecloses on the property. At the sale, the property is sold for $150,000. The difference — $50,000 — is the deficiency.
Your state law will provide the answer as to whether your bank can seek a judgment against you in a court of law. Recently, the National Consumer Law Center, located in Boston, Mass., issued a comprehensive report entitled "Foreclosing a Dream." According to this report, "in 36 states and the District of Columbia, mortgage holders can pursue so-called ‘deficiency judgment’ claims against homeowners even after the foreclosed home has been sold at auction."
This report analyzes the foreclosure laws in all 50 states. It is available on the Web at www.consumerlaw.org.
However, even in those states that prohibit (or restrict) deficiency judgments, those laws apply to consumers but not investors. So in your case, it is possible that you are not protected. If you let your property go to a foreclosure sale, not only will your credit be ruined for a number of years, but you may be sued by your lender for any deficiency.
Please talk with both your lender and an attorney before you take any drastic actions.
DEAR BENNY: I have a family member living in a condo that my family paid off years ago. The only commitment to living in the property was to pay the condominium fees. If the payments stop, can my property be subject to foreclosure. What can they do to me? –Kim
DEAR KIM: My first question: Is someone paying the real estate tax to the state or county? If not, the property can be sold at a tax sale.
If the condo fees are not paid, yes, the condo association has a number of alternative remedies. They can sue the property owner for the amount owed, or they can foreclose on the property.
While I know that times are tough, if community association homeowners do not pay their assessments, that will seriously impact all association homeowners. The association does not have enough money to properly maintain the property, and property values will continue to decrease, making it more difficult to sell.
I strongly urge all community association homeowners to make their assessment payments timely. It’s your property; don’t let it go to waste.
DEAR BENNY: We did a reverse mortgage on our house in September. We could not keep up with our expenses. The total closing costs were more than $13,000. I read an article that HUD could not charge more than $6,000. When did that become effective? Also, our 49-year-old son and his wife moved into our house with us to pay the utilities and pay on the reverse mortgage. Their thoughts were that they want to buy the house. Can they do this before we pass away or do we both have to be deceased before they can take over the mortgage? –Jeane
DEAR JEANE: Recently, I wrote that reverse mortgage lenders could not charge more than $6,000, based on a new law recently enacted by Congress. I was wrong, and many mortgage lender readers sent me e-mails asking that I correct my statement.
Actually, the new law applies only to the "origination fee." Lenders cannot charge more than $6,000 for such a fee, but they can impose charges for other costs, including appraisals, title and escrow fees, recording charges, etc.
So your lender probably had the right to charge you that $13,000. This means that if you are interested in obtaining a reverse mortgage, you must shop around and compare costs before you sign up with any one lender. Closing costs are generally not regulated by federal or state law (although in many states title insurance is regulated by the state insurance commissioner) and can vary widely in price.
Your son and his wife have the absolute right to buy your house, but they will not be able to take over (assume) the reverse mortgage. They will have to get their own loan. Interest rates are quite low today, and if your son can qualify for a mortgage, I would strongly urge him to talk with several mortgage lenders. …CONTINUED
A good reference for reverse mortgages can be found on the Department of Housing and Urban Development Web site at www.hud.gov. Here is what HUD says about when your loan must be repaid:
A HECM loan must be repaid in full when you die or sell the home. The loan also becomes due and payable if:
- You do not pay property taxes or hazard insurance or violate other obligations.
- You permanently move to a new principal residence.
- You, or the last borrower, fail to live in the home for 12 months in a row. An example of this situation would be if you (or the last borrower) were to have a 12-month-or-longer stay in a nursing home.
- You allow the property to deteriorate and do not make necessary repairs.
DEAR BENNY: I want to buy a second house. How much money do I need? I know you must be very busy so any pointers would be very much appreciated. –Julie
DEAR JULIE: I am never too busy to respond to questions in my Mailbag column. You raise an interesting question, not only for buying a second home but for any potential homebuyer.
My first suggestion is to talk with a couple of mortgage lenders first. Explain your financial situation and let them give you an idea of how much house you can afford. Clearly, you don’t want to waste your time (and that of any real estate agents involved in the home search) by looking at homes in the $750,000 range if you can afford to buy only in the $500,000 area.
Once you have a general idea of how much you can pay, then you should start looking for houses. Interest rates and home prices are quite low today, so this is a good time to start shopping around.
DEAR BENNY: A few years ago I listed my house with a real estate agent. It took a little over a year before he found a buyer. The buyer could not come up with the list price so the agent asked if I would carry the balance for the potential buyer. I agreed. The agent initiated a lien on the property, and we signed the papers and sold the house to the buyer.
After about 22 months of paying on the second mortgage, payment stopped. I tried to contact the buyer, but found he had moved. Later I found out that the bank was foreclosing on the property and the lien that I had wasn’t worth anything because the bank had more invested than me. The house was eventually sold to another buyer and I was out of the money that I put up for the second mortgage. Is there anyway that I can recoup my money? –Floyd
DEAR FLOYD: You took back a second trust (called a mortgage in some parts of the country). You indicated that your agent "initiated" the lien; did you use an attorney for this? You should have.
Your attorney would have explained the risks of a second mortgage. As its name implies, it is in second-place position. If the first trust lender forecloses on the property, it literally wipes out anyone in second place including you.
However, there may be some remedy. Normally, when anyone makes a mortgage loan (whether a first or a second) the borrower signs two documents: a promissory note — the IOU — and the deed of trust (or mortgage). Although your mortgage is no longer valid (there is no house to foreclose upon) the promissory note remains valid.
You have the right to file suit against your borrower for the balance owed on that promissory note. Your borrower may not have any money now, but if you can get a judgment against him, that judgment will remain for a number of years (state law will determine this) and you may ultimately be able to collect.
However, if your borrower filed for bankruptcy relief, you may be out of luck. But you are a creditor of that borrower and should have been notified of the pending bankruptcy filing. In fact, it is my understanding that in most states, when the first mortgage lender foreclosed, you should have been notified of the pending sale.
Talk with an attorney about your specific remedies. If your mortgage was not recorded on land records, you may have a case against your agent and/or the title company (also known as an escrow company).
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.
What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.