Lenders will file a tidal wave of lawsuits against homeowners in the next few years as a way to counter losses when home sales or foreclosure auctions don’t result in enough money to pay the mortgages in full, according to real estate and legal analysts. “It will be a dramatic problem because the borrowers will not know it’s coming,” said Frank Alexander, a law professor at Emory University in Atlanta.
The laws vary from state to state. For example, in Florida, banks have five years from the date of the sale to file for so-called deficiency judgments and up to 20 years to collect. Lenders can then garnish wages or make claims on borrowers’ assets.
As the next wave of the housing crisis plays out, those most in danger of getting slapped with lawsuits include angry homeowners who ransack properties they’re losing in foreclosure and borrowers who walk away from “underwater” mortgages. In both cases, analysts say, banks will want to discourage other people from such behavior.
Mortgage companies typically won’t sue homeowners who negotiate in good faith or those who default on their loans because of job losses or other unforeseen circumstances, said one executive at a company working with lenders on the resale of foreclosed homes. Still, borrowers shouldn’t rely on a lender’s verbal commitment, he said. “Get something in writing." Banks are often reluctant to put anything in writing, but insist upon it.
Under new government guidelines for short sales that took effect this spring, lenders aren't supposed to hold homeowners responsible for any remaining mortgage debt. But not all short sales fall under the guidelines, while some lenders choose not to implement them.
