Those who walked away without legal counsel may soon regret it as Lenders Start To Pursue Mortgage Payoffs Long After Homeowners Default.

When John King stopped making payments on his home in Coral Gables, Florida, two years ago, he assumed the foreclosure ended his mortgage contract, he said. Last month, a Miami-Dade County court gave collectors permission to pursue him for $44,000 stemming from the default.

King is among a rising number of borrowers who are learning that they can be on the hook for years after losing their homes. Amid a crisis that stripped $6.4 trillion, or 28 percent, from the value of U.S. residential real estate since the 2006 peak, lenders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors.

‘Next Big Crisis’

Deficiency judgments were rare in the 15 years since the last real estate slump, said Ben Hillard, a former investment banker who now is a real estate and corporate attorney at Hillard & Rogers in Largo, Florida.

“The banks have been too underwater with foreclosures to spend much time on deficiency judgments, but that’s beginning to change,” Hillard said in an interview. “This is going to be the next big crisis.”

In states such as Florida, courts give mortgage holders as long as five years to seek a deficiency judgment and, if granted, up to 20 years to collect. Usually, they have the option of renewing the judgment if it’s not paid off within 20 years.

About a third of U.S. states, including California and Arizona, prohibit collection efforts on primary residences after foreclosure. In some cases, homeowners waive that protection if they refinance. Most states allow collection on unpaid home equity loans.

It’s not just foreclosures that can trigger debt collections. Short sales also may lead to deficiency judgments years after former homeowners have moved on, according to Hillard, the attorney in Largo. In a short sale, lenders agree to let borrowers sell a home for less than the mortgage balance.

Brigitte and John Howard, sold their home in New Port Richey, Florida, almost two years ago without using a lawyer to check the bank’s short-sale agreement.

$20,000 Shock

“We got a call out of the blue saying we owed $20,000,” said Brigitte Howard, 45. “It was a shock. There was no mention in the short-sale contract that the bank might come after us for the difference.”

When I first started talking about “walking away” I encouraged people to get legal advice from an expert. Many of those who did not are going to regret it.

Had Brigitte and John showed their contract to a a competent attorney, that short-sale clause would have never been agreed to. Now they are stuck to the tune of $20,000.

Thinking about walking away or short sales?
Please Consult An Attorney Before Walking Away.

Thinking about bankruptcy?
If so, here’s How to Find a Bankruptcy Attorney

The Bloomberg article does not make walking away, short-sales, or bankruptcies a bad idea. However, it does provide strong evidence that they are a bad idea without proper legal advice.

Mike “Mish” Shedlock
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