Those who borrow money are obligated to pay it back
A big item in the financial news deals with the proliferation of so-called “deficiency judgments” being entered against former borrowers whose homes were foreclosed.
What is happening, putting aside the legal jargon, is that the foreclosed properties, when ultimately sold by the lender, didn’t fetch enough money to cover the loan. The difference becomes a deficiency and is still owed by the borrower. In most states lenders can sue for this money, and if they prevail can aggressively go after it, freezing bank accounts and garnishing wages.
Unfair? Depends on how you look at it. The two primary documents in any real estate loan, whether it’s a cottage or a 70-story office building, are the note, which is a promise to repay the loan, and the security, which is either a deed of trust or a mortgage. The former obligates the borrower to repay the amount of the loan. The latter enables the lender to get its hands on something of value, the property, in the event that the borrower doesn’t keep the promise. Makes sense, doesn’t it?
When you lend money, you don’t need to tie up that something of value, the collateral, but you’d probably want to if you should be lending more than small change. For example, I come to you and ask for a $100 loan. If you didn’t know that I was once a banker, you might give it to me, and scratch out an IOU on a napkin. But, if I ask for $100,000, you’re going to want to get all, or at least some, of your money back if I don’t pay.
One ironic aspect of the rash of deficiency filings is that the big three banks, Chase, Bank of America and Wells Fargo, are shying away from the practice, except in “exceptional circumstances.” Whatever, they’re not initiating most of the judgments.
Rather, it’s our companies, the ones owned by us taxpayers, Fannie Mae and Freddie Mac, that are going after the money they’re owed. The taxpayers bailed out these GSEs (government-sponsored enterprises) during the great meltdown, and Congress has mandated that the two companies pay the money back to us. Just recently, a court ruled that preferred shareholders in the operations couldn’t share in current profits, which belong to the U.S. Treasury.
Sounds fair, right? However, being handed, say, a $50,000 judgment and an attachment on your bank account isn’t exactly what you had in mind when you rebuilt your life.
Then there are the “strategic defaulters,” borrowers who never intended to have to repay the loan because they’d sell the property first, or those who decided to just “give the house back to the bank.” They cost us all money, and probably shouldn’t be given a mulligan. The bank couldn’t take the house back, because it never had it in the first place, and certainly didn’t want it. All it wanted was its money back.
During the feeding frenzy that preceded the Great Recession, a lot of us lost sight of the fact that, when we borrow money, and we personally guarantee the loan, then we’re personally obligated to pay it back. Lenders expect to get it back, and when they don’t, they take measures to collect it.
The mob sends guys with baseball bats; Fannie Mae comes with a piece of paper in the hands of a process server.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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