Banks Pursue Mortgage Payoffs Long After Homeowners Default

By Kathleen M. Howley

Bloomberg, Jan. 28 -- When John King stopped making payments on his home in Coral Gables, Florida, two years ago, he assumed the foreclosure ended his mortgage contract, he said. Last month, a Miami-Dade County court gave collectors permission to pursue him for $44,000 stemming from the default.

King is among a rising number of borrowers who are learning that they can be on the hook for years after losing their homes in foreclosure. Banks are exercising their rights to pursue unpaid mortgage balances.

To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors. Judgments such as the one levied against King usually tack on court fees, fines and interest.

The Federal Deposit Insurance Corporation (FDIC) tracks the amount banks collect after defaulted loans were written off. These mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period.

The federal government spent $230 billion in the year ended in September to support homeowners facing foreclosure, according to the Congressional Budget Office in Washington. Those efforts didn't help people who had already walked away from their houses.

In states such as Florida, courts give mortgage holders as long as five years to seek a deficiency judgment and up to 20 years to collect. Deficiency judgments are not allowed in Missouri according to Kathy Swift, Integrity First Consulting.

The likeliest candidates for deficiency judgments are so-called rational defaults, according to Larry Tolchinsky, a real estate attorney in Hallandale Beach, Florida. In those cases, people who are current on their mortgages decide to walk away from a property because its value has sunk far below their loan balance.

"Walking away from a property comes with a cost, especially for people who otherwise have good credit," Tolchinsky said. "The bank is going to pull your credit report, and if you're current on your other bills they are going to come after you."

Short sales also may lead to deficiency judgments years after former homeowners have moved on, according to Ben Hillard, real estate attorney with Hillard & Rodgers, Largo, FL. "Banks are being very careful to preserve their rights, either outright in the short sale agreement or by using vague language that leaves that door open," Hillard said. About 90 percent of people who do a short sale think they are "off the hook."

That was the case when two of his clients, Brigitte and John Howard, sold their home in New Port Richey, Florida, almost two years ago without using a lawyer.

"We got a call out of the blue saying we owed $20,000," said Brigitte Howard, 45. "It was a shock. There was no mention in the short-sale contract that the bank might come after us for the difference."