Think of it as Act 2 of Florida's foreclosure crisis.
In the first act, borrowers lose their homes.
In the next, lenders come after them for the debt still owed.
Unlike a foreclosure, which homeowners dread but expect once they stop making payments, deficiency actions can sneak up on people who thought their problems were behind them when they handed over the house keys.
"People have no idea of all the trouble that's coming," said Margery Golant, a lawyer in Broward County who is handling a growing number of deficiency defense cases.
Here's how foreclosures can turn into a double whammy for homeowners: If, for instance, the mortgage balance was $200,000, but the house was appraised at $100,000 at the time of the court-ordered sale, the bank can ask a judge for permission to go after the borrower for the difference, or "deficiency," of $100,000.
The deficiency action can be brought by the primary lender, a second mortgage holder, a mortgage insurance company or a government entity like Fannie Mae or Freddie Mac.
In Florida, lenders have up to five years to file a deficiency action, so borrowers can be lulled into a false sense of security. Once a judge grants the deficiency, creditors have up to 20 years to collect the debt and the claim can be pursued even if the borrower moves to states with more restrictive collection laws.
Borrowers might be broke now, but creditors could come after them 20 years later when they have some money saved or a better-paying job.
If the deficiency is pursued by the same party that filed the foreclosure, the borrower is notified by mail, not by a process server. Borrowers who failed to update their addresses with the court might miss the notice entirely and lose the opportunity to challenge the motion. Lawyers say it's not unusual for borrowers to ignore dunning calls and letters, and only wake up to the dangers of deficiencies after their wages have been garnished.
Golant says seemingly unrelated parties can show up in court, seeking the right to chase down a mortgage debt. She recently defeated an effort by a mortgage insurer to pursue a client's deficiency on a Gainesville condo. She argued that the lender, not the insurer, had the right to collect.
"The insurer's motion was very generic, which makes me think they do it all the time," Golant said. "If my client hadn't seen the motion and asked me what the heck it was, she would have been toast."
Motions to pursue deficiency judgments are still so unusual in the Tampa Bay area that court clerks don't track them. But in Lee County, an early epicenter of foreclosures in Florida, the next ripples from the housing implosion are well under way.
In 2010, courts granted more than 270 deficiency judgments to lenders in a county that includes hard-hit Cape Coral and Fort Myers. That's five times more than in 2008. This year is promising to be even more active, with 33 deficiency judgments granted in February, more than double the number from a year earlier.
In the Tampa Bay area, lawyers said they're frequently seeing holders of second mortgages, who are usually wiped out when the primary lender forecloses, filing deficiency claims against borrowers in hopes of recouping some of what they lost. By filing quickly, they hope to be first in line to collect, ahead of other creditors who could come calling.
Small lenders and regional banks have also been aggressive in pursuing deficiencies on first mortgages. Of nine deficiency motions filed in Hillsborough County in the past six months, the most active plaintiff was Suncoast Schools Federal Credit Union, with one-third of the actions.
The three borrowers Suncoast is suing for deficiencies owe from $75,000 to $120,000 each. Two of the borrowers left Florida, one moving in the middle of the night. One pleaded for the credit union's patience during the foreclosure, writing, "We are going through a tough financial situation due to the economy and some unexpected medical problems." Six months later, his home was foreclosed.
Jim Simon, senior vice president of loss and risk mitigation for Suncoast, said the member-owned cooperative works diligently to keep borrowers in their homes. But if those efforts fail and the home's value is less than the debt, Suncoast always asserts its right to the deficiency.
"We're not looking to put them in financial hardship, but we owe it to the rest of our members to collect as much as possible," said Simon, who estimated Suncoast, with 500,000 members, is pursuing "hundreds" of deficiencies. "Prior to 2008, we never had a deficiency on a foreclosure. It's really being driven by what's happened to real estate values."
Simon and others said they think it's just a matter of time before bigger lenders begin filing for deficiencies. One indicator that more deficiency filings are on the horizon: Banks are increasingly unwilling to waive the deficiency in short-sale cases, where the sale price is less than the amount owed.
"Two years ago, a waiver of the deficiency was normal course, but it's been eroding ever since," said Richard Zaretsky, a lawyer in West Palm Beach. "Banks came to the conclusion they were throwing away the opportunity to collect funds. They weren't focused on the realization that there's a secondary market for this debt."
Indeed, Zaretsky said the resale marketplace for deficiency judgments is growing, with the debt being packaged, chopped up and sold to investors just like mortgages once were. Scott Stamatakis, a Tampa lawyer, said he recently learned through discovery in a foreclosure case that a collection company bought $18 million worth of deficiencies from one lender for $130,000. Many of the debts may be impossible to collect from broke or bankrupt borrowers, but the buyers of the deficiencies are betting they'll profit on the portfolio through at least partial payoffs.
Stamatakis, who defends home- owners in foreclosure cases, said he's frustrated that lenders are willing to take a loss when they sell the debt to a third party, but they're not willing to do it earlier in the process, when reducing a borrowers' principal would make it possible for them to stay in their homes.
"It's almost a slap in the face to homeowners when they won't write down the principal balance, but they'll sell the debt for pennies," Stamatakis said.
In Florida, deficiency judgments give the holder the right to demand the borrowers' financial information, including pay stubs, bank statements and tax returns.
Means of collection
To recoup the debt, creditors may be able to garnish wages and take money from bank accounts. They can also go after certain possessions, like jewelry, rental properties and boats. "And they do," said Golant, the Broward County lawyer.
Assets exempt from a creditor's reach include the debtor's home, 401(k)s and IRAs, as well as income below a certain amount.
If borrowers fail to comply with subpoenas and court orders, the creditor can seek sanctions, including bench warrants and contempt of court orders. A defiant debtor could even end up in jail.
Many attorneys expect an increase in deficiency judgments to trigger a rise in bankruptcy filings, which get homeowners off the hook from paying deficiencies.
"Bankruptcy is the hammer consumers have, if they qualify," said Stamatakis.
James Schmidt represents a Tampa man who is being sued by BB&T for a deficiency of more than $700,000, plus 6 percent interest annually, on a $1 million home loan. His partially constructed home in Lutz was appraised at about $400,000 at the foreclosure sale.
"You can't run because they can go after you anywhere," Schmidt said. "Bankruptcy is really the only way out. People need to get past this. You can't let a $700,000 judgment destroy the only life you have."
Times researcher Natalie Watson contributed to this report. Kris Hundley can be reached at firstname.lastname@example.org or (727) 892-2996.