A few years ago, I wrote a post about how a subdivision in Florida called Lehigh Acres had so many deficiency judgments entered against foreclosed owners that it should be called “deficiency judgment acres.” Unfortunately, the same can now be said for the Chicago area.
Foreclosure cases are way down in Chicago. They have dropped almost 60% over since last year. But, with the slowdown, lenders are now entering deficiency judgments against homeowners on first mortgages in droves. Deficiency judgments were rare to nonexistent for the last 5 or 6 years (although they were always allowed by law in Illinois).
A deficiency judgment is a personal judgment against the homeowner for the difference between the market value of the property at the end of a foreclosure and the amount owed to the lender. The lender can try to collect the judgment by filing a wage garnishment or taking non-exempt assets from the homeowner. The only remedy for a homeowner is to settle the judgment, or to file a chapter 7 or chapter 13 bankruptcy.
In the last 5 years, I did not see a single deficiency judgment entered (on a normal residential mortgage). In the last 4 weeks alone I’ve seen these deficiency judgment entered:
Deutsche Bank $58,000.00 – Lake Co. condo.
Nationstar $50,000 – Chicago house
Nationstar $105,000 – Northwest suburban condo
Citimortgage- $25,000 – Northwest suburban house
Now, any time a mortgage company gets personal service on an owner in a foreclosure case (or substitute “abode” service on someone who answers the door) there is a real risk of a deficiency judgment being entered. If the lender is not able to personally serve you with the foreclosure complaint at the beginning of the case, then a deficiency judgment cannot be entered.
Why are so many deficiency judgment being entered? I don’t know the answer to this. For one thing, the volume of foreclosures is way down. Also FNMA and Freddie Mac have said that they intend to pursue strategic defaulters for deficiency judgments. Chancery court judges have clearly reversed course and now routinely enter them when they previously refused to do so.
So what does this mean to Illinois homeowners who have underwater properties?
- Strategic Default is dead. There used to be little to no risk in stopping payments on a first mortgage in Illinois. The 1099 issued at the end of the foreclosure was wiped out by the Mortgage Debt Forgiveness Act. That expires at the end of this year and I doubt it will be renewed. Also, the risk of deficiency judgment is now so high that it makes no sense to stop paying on a mortgage unless you plan to file bankruptcy.
- Short sales are close to dead too. A favored strategy was to attempt a short sale, because the homeowner could get a release of deficiency from the lender. But the Mortgage Debt Forgiveness Act is about to expire, meaning the homeowner will have to pay tax on the 1099 after the short sale closes AND if the short sales doesn’t close, the risk of deficiency judgment is way too high to try a short sale.
- Bankruptcy’s the only route. The only sure-fire way to get rid of a deficiency judgment is to file a chapter 7 or chapter 13 bankruptcy. Chapter 7 is cleaner than Chapter 13, but there is an income limit (called the “means test”) that has to be met and an asset limit. I’ve had to file several bankruptcies for clients lately after deficiency judgments were entered. Chapter 13 bankruptcies are less desirable because the creditors have to be repaid, but the income and asset limits are very broad and most people can easily meet them.