We are seeing some mortgage lenders bypassing foreclosure and suing borrowers directly for default on the underlying mortgage note. Given the low value of some of the mortgaged properties, it seemed all to apparent to me a couple of years ago that this was inevitable. The rules have changed, These lenders don't even want the property many of the times. So why bother with a foreclosure?
When you buy a house you sign a promissory note to evidence the obligation to repay the house loan. The mortgage is a security instrument that gives the lender an interest in the house which he can foreclose if you default. Your personal obligation to the lender is based on the underlying note. A lender has the option to sue you for repayment under the note without foreclosing the mortgage. If the lender sues on the note, you, the borrower, will have a personal judgment against you for your default under the note, and the lender still retains his mortgage security in most jurisdictions. So, why would a lender chose not to foreclose a mortgage on your home and sue you directly on the note?
There are some good reasons why mortgage lender should not foreclose a home loan. Frankly, I was always surprised they did not think of this sooner:
1. The government has given homeowners more rights under the government mortgage modification program (HAMP) which regulations make foreclosures slower and more expensive for banks.
2. Recently enacted Florida laws and local court rules require mediation proceedings in all foreclosure cases which further delays foreclosure proceedings.
3. Banks who take back properties on foreclosure have to deal with delinquent HOA bills, unpaid taxes, and house repairs.
4. House values are declining again. Banks recover less money than before on repossessed property, whereas costs of maintaining the properties is not going down.
5. Legally, its much easier for a bank to get a personal judgment against the borrower through a suit on the note than it is to get a personal judgment in a deficiency claim after foreclosure.
6. Many foreclosures involve ocean front condos and houses. The BP spill’s damage to the shoreline may result in environmental damage to ocean front property. Banks do not want to foreclose and take over ownership of potential environmental liabilities.
Could it be that government programs designed to protect homeowners from foreclosure by requiring mandatory mediation and loan modifications have in fact damaged homeowners by giving banks the incentive to sue for personal liability when they mostly have not to this point pursued large scale deficiency claims? It would not be the first time that government programs have had unintended consequences. In any event, if my mortgage defense colleague is correct subsequent mortgage defaults may have more serious consequences for homeowners.