LENDER SUES FOR JUDGEMENT

First Mortgage Lender Sues For Deficiency Judgment

As a general rule, mortgage lenders have not been pursuing deficiency judgments during the real estate recession. Second mortgage lenders have sued borrowers individually in cases. Until this week I have not spoken with any client who had been sued for a deficiency claim by a first mortgage lender after or as part of a foreclosure. I have spoke to many attorneys who defend mortgage foreclosures none of whom have reported seeing a deficiency claim by a first mortgage lender in any of the cases they are handling. This week, I saw my first deficiency judgment by a first mortgage lender. Whether this is an isolated incident by one bank in one real estate development, or an indication of changing bank policy and greater risk for mortgage borrowers is unclear.


The particular client retained me to file Chapter 7 bankruptcy because of large amounts of unsecured credit card debt. The mortgage deficiency was just one of his credit problems and was not the main problem behind the bankruptcy. The client had borrowed money to buy an investment lot in a Ginn community from Branch Banking and Trust ("BBT") secured by a first mortgage. There was no second mortgage. The lot was unimproved. BBT filed a Motion for Deficiency including a purported property value supported by a copy of an appraisal attached as an appendix to the complaint. The debtor did not respond to the Motion so BBT did not have to prove property value at an evidentiary hearing; the court entered a judgment based on the values alleged in the Motion.

Many of my clients over the past two or three years have been fearful of mortgage deficiency judgments because they had non-exempt assets with equity. These people believed that their relative wealth made them a target for a deficiency judgment. The BBT judgment does not support the theory that mortgage lenders will pick deficiency targets based on whom they believe own collectable assets. This particular debtor is insolvent; he has no non-exempt assets which makes bankruptcy the preferred solution to all his debt problems. This debtor was not targeted based on his net worth.

This case is significant because it shows that at least some lenders involved in some investment projects may pursue investors for individual liability. Whether mortgage lenders will begin pursuing mortgage deficiencies for loans made for primary residences, as opposed to investments, remains to be seen.




posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida