Article Courtesy of The Orlando Sentinel
By Michelle Conlin
Published November 5, 2014
Many thousands of
Americans who lost their homes in the housing bust, but have since begun
to rebuild their finances, are suddenly facing a new foreclosure
nightmare: debt collectors are chasing them down for the money they
still owe by freezing their bank accounts, garnishing their wages and
seizing their assets.
By now, banks have usually sold the houses. But the proceeds of those
sales were often not enough to cover the amount of the loan, plus
penalties, legal bills and fees. The two big government-controlled
housing finance companies, Fannie Mae and Freddie Mac, as well as other
mortgage players, are increasingly pressing borrowers to pay whatever
they still owe on mortgages they defaulted on years ago.
Using a legal tool known as a "deficiency judgment," lenders can ensure
that borrowers are haunted by these zombie-like debts for years, and
sometimes decades, to come. Before the housing bubble, banks often
refrained from seeking deficiency judgments, which were seen as costly
and an invitation for bad publicity. Some of the biggest banks still
feel that way.
But the housing crisis saddled lenders with more than $1 trillion of
foreclosed loans, leading to unprecedented losses. Now, at least some
large lenders want their money back, and they figure it's the perfect
time to pursue borrowers: many of those who went through foreclosure
have gotten new jobs, paid off old debts and even, in some cases, bought
"Just because they don't have the money to pay the entire mortgage,
doesn't mean they don't have enough for a deficiency judgment," said
Florida foreclosure defense attorney Michael Wayslik.
Advocates for the banks say that the former homeowners ought to pay what
they owe. Consumer advocates counter that deficiency judgments blast
those who have just recovered from financial collapse back into debt —
and that the banks bear culpability because they made the unsustainable
loans in the first place.
"SLAPPED TO THE FLOOR"
Borrowers are usually astonished to find out they still owe thousands of
dollars on homes they haven't thought about for years.
In 2008, bank teller Danell Huthsing broke up with her boyfriend and
moved out of the concrete bungalow they shared in Jacksonville, Florida.
Her name was on the mortgage even after she moved out, and when her
boyfriend defaulted on the loan, her name was on the foreclosure papers,
She moved to St. Louis, Missouri, where she managed to amass $20,000 of
savings and restore her previously stellar credit score in her job as a
service worker at an Amtrak station.
But on July 5, a process server showed up on her doorstep with a lawsuit
demanding $91,000 for the portion of her mortgage that was still unpaid
after the home was foreclosed and sold. If she loses, the debt collector
that filed the suit can freeze her bank account, garnish up to 25
percent of her wages, and seize her paid-off 2005 Honda Accord.
"For seven years you think you're good to go, that you've put this
behind you," said Huthsing, who cleared her savings out of the bank and
stowed the money in a safe to protect it from getting seized. "Then
wham, you get slapped to the floor again."
Bankruptcy is one way out for consumers in this rub. But it has serious
drawbacks: it can trash a consumer's credit report for up to ten years,
making it difficult to get credit cards, car loans or home financing.
Oftentimes, borrowers will instead go on a repayment plan or simply
settle the suits — without questioning the filings or hiring a lawyer —
in exchange for paying a lower amount.
Though court officials and attorneys in foreclosure-ravaged regions like
Florida, Ohio and Illinois all say the cases are surging, no one keeps
official tabs on the number nationally. "Statistically, this is a real
difficult task to get a handle on," said Geoff Walsh, an attorney with
the National Consumer Law Center.
Officials in individual counties say that the cases, while virtually
zero a year or two ago, now number in the hundreds in each county.
Thirty-eight states, along with the District of Columbia, allow
financial institutions recourse to claw back these funds.
"I've definitely noticed a huge uptick," said Cook County, Illinois
homeowner attorney Sandra Emerson. "They didn't include language in
court motions to pursue these. Now, they do."
Three of the biggest mortgage lenders, Bank of America, Citigroup,
JPMorgan Chase & Co and Wells Fargo & Co., all say that they typically
don't pursue deficiency judgments, though they reserve the right to do
so. "We may pursue them on a case-by-case basis looking at a variety of
factors, including investor and mortgage insurer requirements, the
financial status of the borrower and the type of hardship," said Wells
Fargo spokesman Tom Goyda. The banks would not comment on why they avoid
Perhaps the most aggressive among the debt pursuers is Fannie Mae. Of
the 595,128 foreclosures Fannie Mae was involved in – either through
owning or guaranteeing the loans - from January 2010 through June 2012,
it referred 293,134 to debt collectors for possible pursuit of
deficiency judgments, according to a 2013 report by the Inspector
General for the agency's regulator, the Federal Housing Finance Agency.
It is unclear how many of the loans that get sent to debt collectors
actually get deficiency judgments, but the IG urged the FHFA to direct
Fannie Mae, along with Freddie Mac, to pursue more of them from the
people who could repay them.
It appears as if Fannie Mae is doing just that. In Florida alone in the
past year, for example, at least 10,000 lawsuits have been filed —
representing hundreds of millions of dollars of payments, according to
Jacksonville, Florida-based attorney Chip Parker.
Parker is about to file a class action lawsuit against the Dallas-based
debt collection company, Dyck O'Neal, which is working to recoup the
money on behalf of Fannie Mae. The class action will allege that Dyck
O'Neal violated fair debt collection practices by suing people in the
state of Florida who actually lived out of state. Dyck O'Neal declined
In Lee County, Florida, for example, Dyck O'Neal only filed four
foreclosure-related deficiency judgment cases last year. So far this
year, it has filed 360 in the county, which has more than 650,000
residents and includes Ft. Myers. The insurer the Mortgage Guaranty
Insurance Company has also filed about 1,000 cases this past year in
Andrew Wilson, a spokesman for Fannie Mae, said the finance giant is
focusing on "strategic defaulters:" those who could have paid their
mortgages but did not. Fannie Mae analyzes borrowers' ability to repay
based on their open credit lines, assets, income, expenses, credit
history, mortgages and properties, according to the 2013 IG report.
"Fannie Mae and the taxpayers suffered a loss. We're focusing on people
who had the ability to make a payment but decided not to do so," said
Freddie Mac spokesman Brad German said the decision to pursue deficiency
judgments for any particular loan is made on a "case-by-case basis."
The FHFA declined to comment.
But homeowner-defense lawyers point out that separating strategic
defaulters from those who were in real distress can be tricky. If a
distressed borrower suddenly manages to improve their financial position
– by, for example, getting a better-paying job - they can be classified
as a strategic defaulter.
Dyck O'Neal works with most national lenders and servicing companies to
collect on charged-off residential real estate. It purchases foreclosure
debts outright, often for pennies on the dollar, and also performs
collections on a contingency basis on behalf of entities like Fannie
Mae. "The debt collectors tend to be much more aggressive than the
lenders had been," the National Consumer Law Center's Walsh said.
A big reason for the new surge in deficiency claims, attorneys say, is
that states like Florida have recently enacted laws limiting the time
financial institutions have to sue for the debt after a foreclosure. In
Florida, for example, financial institutions now only have a year after
a foreclosure sale to sue — down from five.
Once financial institutions secure a judgment, they can sometimes have
years to collect on the claim. In Maryland, for example, they have as
long as 27 years to chase people down for the debt. Financial
institutions can charge post-judgment interest of an estimated 4.75
percent a year on the remaining balance until the statute of limitation
runs out, which can drive people deeper into debt.
"This is monumentally unfair and damaging to the economy," said Ira
Rheingold, the executive director of the National Association of
Consumer Advocates. "It prevents people from moving forward with their
Software developer Doug Weinberg was just getting back on his feet when
he got served in July with a $61,000 deficiency judgment on his old
condo in Miami's Biscayne Bay. Weinberg thought the ordeal was over
after Bank of America, which rejected Weinberg's short sale offers,
foreclosed in 2009.
"It's a curse," said Weinberg. "It's still haunting me. It just doesn't