Anti-Deficiency Statutes Protect Mortgagor

Property law declares that a defaulting mortgagor can suffer serious consequences. If she can’t pay her debt, she’ll lose her property in a foreclosure sale. The winning bid will almost surely not be as much as the property would be worth if sold normally.

Not only that, but if the winning bid is less than the outstanding debt, the defaulting mortgagor may still be subject to a lawsuit to recover the rest of the unpaid debt.

States have an interest in protecting borrowers from such consequences. Not only do states want to avoid unfair losses to a person who has paid a substantial amount of money to buy property and then is unable to complete the purchase, but states also want to avoid the economic consequences and public burdens that may result from foreclosures.

Many states therefore have adopted various statutes intended to protect mortgagors. The following sections clue you in to three common statutory protections:

  • Anti-deficiency statutes

  • One-action statutes

  • Statutory rights of redemption

Selling the property at auction to the high bidder is intended to maximize the value paid for the property and thus reduce the mortgagor’s debt as much as possible. Often, however, the mortgagee is the only bidder at the sale.

Not only may the mortgagee bid less than the property is actually worth, but the mortgagee may bid even less than the amount of the unpaid debt, intending to try to collect the remainder of the unpaid debt in other ways.

To encourage higher bids and avoid unfairness to the mortgagor, states have adopted several kinds of statutes that limit deficiency judgments. Some statutes prohibit deficiency judgments altogether in certain situations, such as the following:

  • If a seller finances the purchase herself, taking a mortgage from her buyer, the seller can’t sue for a deficiency after foreclosure.

  • If the mortgagor resides on the property, the mortgagee can’t get a deficiency judgment after selling the property at a foreclosure sale.

  • If the mortgagee sells the property by a nonjudicial foreclosure, the mortgagee can’t get a deficiency judgment. So if the mortgagee thinks the property may sell for less than the debt and wants to get a deficiency judgment, it should instead foreclose judicially.

Other statutes don’t prohibit deficiency judgments, but they do limit the amount. One common version allows the lender to recover a deficiency judgment only to the extent the unpaid debt exceeds the fair market value of the mortgaged property at the time of the foreclosure sale.

So if the property actually isn’t worth enough to secure the unpaid debt, the statute allows a deficiency for the difference. But if the property is worth enough to pay the debt, the lender can’t bid less than the debt and the fair market value of the property, get the property to resell, and sue the mortgagor for a deficiency, thereby getting more value than the unpaid debt.

The same limitation applies if a junior mortgagee purchases at the foreclosure sale. A junior mortgagee who is the high bidder at the foreclosure sale has the same temptation and opportunity to bid low to get the property for less than it’s worth and then still get a judgment for the remainder of the debt against the mortgagor. So the same limitation applies.

Another version of fair value legislation requires a court to certify that the winning bid at the foreclosure sale is equal to the fair market value of the property in order for the mortgagee to get a deficiency judgment.

So if the winning bid was less than fair market value, the mortgagee can’t recover any deficiency judgment. Some states also have statutes that limit the time period within which a mortgagee can bring an action for a deficiency judgment.

A mortgagee might try to avoid the limitations of an anti-deficiency statute by suing the mortgagor for damages resulting from waste rather than suing for breach of the contract to repay the debt. Courts have held that an anti-deficiency statute still applies to such an action if the waste is the result of the mortgagor’s not having the money to maintain the property or make required payments.

Even if the mortgagee would otherwise have an action for waste, if the mortgagee is the high bidder at the sale and bids the full amount of the debt, the mortgagee hasn’t suffered a loss from the waste and can’t recover anything for waste.

A mortgagee also might try to avoid an anti-deficiency statute by requiring the mortgagor to waive the protections of the statute in the original mortgage agreement. In general, courts hold such waivers to be void.

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