'Pennies on the Dollar' : Reallocating Risk and Deficiency Judgment Liability

Many homeowners are unaware that they face the prospect of crushing personal financial liability if they default on their mortgage loans. While owners may appreciate that they can lose their homes to the lender if they fail to make payments in accordance with their loan terms, many do not fully comprehend that the exposure they have under such circumstances does not end with relinquishing the financed property. In what are known as recourse states, if the lender forecloses and the foreclosure sale does not yield an amount sufficient to cover the borrower's outstanding debt balance, the lender may file for a deficiency judgment against the borrower to make-up the difference. Whereas in the past, in many jurisdictions, lenders have resorted to this remedy, sparingly, there are signs that this lax approach is being abandoned. First and second mortgagees and private insurance companies are increasingly opting to aggressively pursue foreclosed homeowners for fear of leaving money on the table. To make matters worse, even in those situations where lenders determine that it is not economical for them to follow-up on collecting the debt from mortgagors where a deficiency exists, they are selling the deficiency judgment or the claim to debt collectors for pennies on the dollar. Looking at a representative sample of mortgage laws and practices in California, Illinois, and Florida, this paper argues for the prohibition of deficiency judgments in the residential mortgage loan context. The article also offers a proposal for anti-deficiency legislation. Homebuyers and lenders are not equal players in the mortgage loan transaction. The disadvantages of homeowners are particularly apparent in times of severe economic crisis, like the current great recession. Excising the option of deficiency judgments from the loan negotiation will help to address the glaring inequities between parties