1. W
ith all the detailed coverage in the popular media regarding the economic downturn and
the foreclosure crisis,
one would think every related topic has been talked about to death. But
surprisingly, that’s not the case. n One topic that has remained under the radar is the increasing prevalence of
lenders beginning to pursue the deficiencies that result when a bid has been made at the foreclosure sale that is less than what is owed on the promissory note. n Short sales, walk-aways, strategic defaults, bankruptcies and other default-related
incidents have become all too familiar concepts. But what largely goes unreported (or at least under-reported) is what
happens to the increasingly significant disparity between the bid made at foreclosure sale and the amount still owed on the note. n That gap—that deficiency—has to be borne by
someone. Many lenders and servicers have become more determined to pursue that deficiency in order to obtain a money judgment as an important way to minimize the
financial damage and attempt to recoup some of their losses. So while it may not routinely make front-page news, inside
the mortgage servicing world, deficiency judgments are one of the hottest topics around.
What can seem like a fairly straightforward moral and
financial calculation is often not so clear-cut. Widely varying state-specific laws and regulatory inconsistencies mean it is not always possible (or advisable) to pursue a deficiency judgment.
Regulatory and logistical complications are not necessarily even the biggest hurdle. In the wake of a steady stream of media coverage that often portrays defaulting borrowers as victims, lenders and servicers are understandably worried about the perception they are somehow “punishing” defaulting borrowers who have already been through enough hardship.
So who is pursuing deficiency judgments, and under what circumstances? What role, if any, do an evolving regulatory landscape and the current legislative trends play in the decision- making process of whether to pursue a deficiency judgment? How does the process differ from state to state?
How successful are these judgments, and what cost-benefit calculations do they entail? What are some of the key factors for lenders/servicers to consider when pursuing deficiencies,
and what are some potential pitfalls that they could face if they pursue them in violation of any of the pertinent federal or
state statutes?
These are the questions that many lenders and servicers are asking themselves—or, at the very least, should be
asking themselves.
The resulting answers begin to fill in some revealing
contours of an industry in transition, touching on important
issues that will continue to resonate in years ahead.
An emerging trend
The fundamental dynamics behind the rise in deficiency judgments are fairly straightforward. When the housing market was on the rise, foreclosure sales would rarely, if ever, result in deficiencies. But the real estate collapse created a situation where
THE MAGAZINE OF REAL ESTATE FINANCE
OCTOBER 2012
MORTGAGE BANKING | OCTOBER 2012
CLOSING THE
DEBT GAP
Deficiency judgments are on the rise as a way to recover
unpaid mortgage debt. BY DOREEN HOFFMAN

2. many properties were worth less than the amount still owed
on the note.
With so many borrowers underwater, a number of foreclosures resulted in significant deficiencies. Someone
was going to have to absorb those additional losses, and it
was only a matter of time and accumulating financial impact before lenders and servicers began to see the value in
addressing those deficiencies in a more formal, strategic and concerted manner.
Another contributing factor to the upsurge in deficiency judgments is the ongoing post-crisis foreclosure slowdown.
In the wake of the robo-signing scandal and
other controversial procedural irregularities, foreclosure moratoriums and longer timelines created a backlog of foreclosures that are either on hold or not being processed.
With responsible servicers now required to jump through a
host of new regulatory hoops and hold off on current files,
many are pursuing (or at least considering) deficiency
judgments on past foreclosures and bankruptcies.
Complex considerations
Most servicing professionals regard the current regulatory landscape with some trepidation—not so much the current version as the potential for costly changes that might come
into play downstream. There is some concern that lenders
might have the rug pulled out from under them and have to
give up a certain percentage of deficiency judgments.
For the most part, however, concerns about whether to
pursue deficiency judgments (and, if so, how aggressively) revolve around the optics of such a course of action.
The legality of the pursuit is obviously the foremost consideration, but lenders and servicers have learned the importance of maintaining a positive brand image—in many respects, this is much less a regulatory issue than a public
relations one.
Some lenders are trying to sidestep these issues altogether by selling the paper to debt buyers, a strategy that may result in a smaller recovery but enables lenders to avoid any potential
public relations hit.
As a result of these concerns, one of the biggest areas for growth for recovery may be the pursuit of a money judgment as a result of home-equity lines and second mortgages.
Lenders have calculated, no doubt correctly, that there is clearly less of a headline risk in cases where borrowers had used
these vehicles of credit in an irresponsible or imprudent
manner if they were used to pay off a long list of creditors.
Unlike the situation where borrowers might find themselves in difficult financial circumstances as the result of a combination of medical expenses, job loss and a tough housing market, there tends to be significantly less media and public sympathy for borrowers who overextended themselves because they wanted to buy a boat, build a big addition on their house or were irresponsible with their credit cards.
Another advantage in the case of home-equity lines/second mortgages is that suit is generally filed on the promissory note itself, making the legal process “cleaner” and avoiding the complications of the foreclosure process.
Strategic defaulters and other borrowers trying to game the system are also obvious and increasingly popular targets for deficiency judgments. The discernible issue with this kind of targeted pursuit of deficiency judgments is identifying appropriate candidates.
Each lender has its own criteria for determining who is a strategic defaulter—a process that typically relies upon an “asset scrub,” which is a comprehensive financial assessment that may involve everything from credit checks and proof of income to employment verification and related analyses.
Lenders are not hesitating to file suit when they think a borrower is taking advantage or being unscrupulous, but it
is also worth noting that the vast majority of lenders are being selective about their deficiency judgment decisions. Even in cases where lenders are casting a large net, many are declining to pursue all but the most obvious candidates for recovery.
In cases where more aggressive strategies are in place, it is not uncommon for lenders, once they become familiar with potentially extenuating personal circumstances, to exhibit restraint and understanding with borrowers.
At the moment, smaller lenders are actually being more aggressive than bigger lenders with respect to pursuing
deficiency judgments. This is likely due to a combination of
size-related factors, most notably a corresponding need to pay closer attention to the bottom line; an ability to get to know
clients a little bit better (facilitating smarter and more strategic deficiency filings); and, because their smaller size enables them
to remain somewhat out of the media spotlight.
MORTGAGE BANKING | OCTOBER 2012
Widely varying state-specific laws and regulatory inconsistencies mean
it is not always possible (or advisable) to pursue a deficiency judgment.

3. Best practices
As more lawsuits are being filed to pursue recovery with the entry of a deficiency judgment, many lenders and servicers have learned to be smarter about the way they pursue these cases. Thoughtful lenders understand that something gained is better than nothing at all, and they are less likely to recover 100 percent of a large deficiency than they are to recover something if they
set their sights on more modest and feasible amounts.
The most successful lenders and servicing specialists pursuing deficiency judgments today are resolution-driven, operating under the principle that it often does no one any good to drive borrowers into bankruptcy. While aggressive legal recourse is possible in some states, lenders are generally becoming more willing to work with borrowers, when possible, to establish realistic and achievable payment plans and other structured compensation agreements.
While every file is different, lenders looking to make good decisions about who and how to file should follow a fairly consistent set of best-practice guidelines when pursuing deficiency judgments, including:
Understand the basics
Make sure you know the relevant statute of limitations that applies to each filing, familiarize yourself with exactly what type of mortgage products you can legally pursue, and have structural processes in place to ensure that your pursuit of deficiency judgments takes place in a strategic and coordinated fashion.
Locate the borrower
The location of the borrower is a basic, but critically important, detail that can be surprisingly difficult to pin down. Location not only helps make it clear where to file suit, but also enables you to engage in any mandatory regulation-minded formal communications with the borrower. You do not need to file
where the defaulted home/property is located, but it is vital
that the borrower is notified appropriately of any pending suit. A trusted search vendor can be a valuable ally in this process,
so remain diligent about working with a reputable professional and correct any errors immediately.
Follow the letter of the law
One of the most common snags in these proceedings is the failure of servicers or other lenders’ agents to inform the borrower at the beginning of any phone call that they are a lender
pursuing collections on a debt. If you have received an account when it was already in default, then you must follow the provisions outlined in the Fair Debt Collection Practices Act (FDCPA). Any failure to comply with FDCPA can compromise your efforts and expose you and/or your professional partners to unnecessary liability.
Don’t answer questions that you don’t know the answer to
Knowing what not to say is just as important as knowing what to say and when to say it. Do not make yourself vulnerable to people who are trying to manipulate the system by trying to be helpful and answering questions that you don’t really know the answer to. This helpfulness can come back to bite you.
Know your state
Finally, one of the single biggest hurdles to the successful filing and recovery of deficiency judgments is all about geography. Every state is different, with a long list of procedural dos and don’ts and a sometimes starkly different legal landscape.
What and how you can file may differ based on a range of factors that can include things like the type of home/property and the type of loan.
In Arizona, for example, the statute of limitations on when
to file for a foreclosure deficiency is just 90 days, in contrast
with other states where the filing window may be as long as 10, 15, 20 or even 30 years. Arizona also restricts deficiency judgments to properties that are greater than 2.5 acres and are used/occupied by two or fewer families. The complexities and restrictions are seemingly endless, and it is critically important that you understand the unique regulatory framework of the
state in question.
The procedures and possibilities for subsequently recovering funds also vary greatly. In Michigan, for example, there are an abundance of post-judgment remedies that can make recouping funds through a deficiency judgment a more viable and less uncertain process. Michigan permits wage garnishment up to 25 percent of income, bank garnishment of up to 100 percent of funds and a state tax garnishment on refunds.
Michigan allows lenders that have successfully secured
a deficiency judgment to file a seizure order to pick up
personal property (such as cars and boats) or even to get a lien on the borrower’s/debtor’s property. In contrast, the state
MORTGAGE BANKING | OCTOBER 2012
At the moment, smaller lenders are actually being more aggressive than
bigger lenders with respect to pursuing deficiency judgments.

4. of North Carolina, for example, permits no post-judgment remedies, making recovery a daunting, unappealing and
unlikely prospect.
The bottom line
Despite ongoing worries about negative publicity and a
complex thicket of state-specific regulations that makes
recovering on deficiency judgments almost as much art as
science, the pursuit of deficiency judgments continues to
grow. Lenders are literally and figuratively doing the math
and realizing that pursuing deficiency judgments when
appropriate simply makes the most bottom-line sense.
However, that bottom line is made up of more than just
dollar signs—there are larger principles at stake. Insisting that borrowers who have been careless or irresponsible remain accountable for their fair share of financial obligations is not heartless or inappropriate. It is consistent with the highest
ideals of personal accountability. It helps promote personal responsibility, which is a foundational building block of not
just this industry, but also of the larger economy.
Borrowers are finally realizing what they should have
known all along—that a house is not a piggybank, but as with
any investment it carries both potential risks and rewards.
And, like any other investment, it might not pay off.
In the meantime, the real estate crisis has created a
substantial debt load that many people will never be able to
pay off. To some extent, all U.S. taxpayers will be on the hook for these deficits, particularly if Fannie Mae and Freddie Mac continue to suffer outsized losses as a result of deficiencies.
And while the greater good may not be the sole or primary motivating factor for any lender or servicer, it may be
encouraging to consider the fact that the thoughtful and
strategic pursuit of deficiency judgments is not only the smart thing to do, it is the right thing to do. MB
Doreen Hoffman is managing partner of Trott Recovery Services PLLC, a Farmington Hills, Michigan-based debt collection law firm. She can be reached at dhoffman@trottrs.com.
Lenders are realizing that pursuing deficiency judgments
when appropriate simply makes the most bottom-line sense.
MORTGAGE BANKING | OCTOBER 2012