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Mortgage Walkaways Story Clarification:

There is an Associated Press story that has been running around the country on mortgage walkaways and state anti-deficiency laws. Here is the long version of the story. The story accurately quotes me but then provides a list of states that the reporter on the story claims are the "full list" of states that have anti-deficiency laws and the positioning of the list in the story makes it look like the reporter got the list from me. He did not. And based on my understanding, the list provided is highly inaccurate.

I've received several emails from people around the country asking about this list, and in particular, the inclusion of Florida on the list. Let me emphasize--the reporter did not get that list from me and based on my knowledge the list that is provided is incorrect. Based on my understanding, there are multiple errors both of inclusion and omission on the list. Please do not rely on the list provided in the story and if you have any questions you should check with a real estate specialist in the state in which the property is located (this would seem to be obvious, but I had one lawyer contact me who said she had been rebuked by a client who was upset and said that the lawyer was "obviously incompetent" because she didn't even know what was in the newspaper).

And please don't attribute this list to me--it isn't mine.

DiverDan (mail):
I can tell you that the list is inaccurate, or at the very least misleading, in listing Texas among the states with anti-deficiency statutes. Under the Texas Constitution, a Home Equity Loan (which is originated after the purchase money mortgage, and which, together with the first lien, cannot exceed 80% of the appraised value of the homestead) must be non-recourse to the borrower. However, the holder of a purchase money lien (including a mortgage company that refinanced purchase money debt) on a homestead is free to seek a deficiency judgment. The mortgagor (i.e., prior homeowner) can assert an affirmative defense to a deficiency claim under the Texas Property Code (Section 51.003 or 51.004, depending on whether it is a nonjudicial foreclosure or a judicial foreclosure), claiming that the fair market value of the foreclosed property on the date of foreclosure exceeded the amount bid at foreclosure, but the mortgagor has the burden of proof on that issue. So, in short, there is no anti-deficiency law in Texas for purchase money debt or debt from refinancing purchase money debt; no deficiency claim is allowed on home equity financing.
1.3.2009 11:06am
DiverDan (mail):
Just to clarify, if the homeowner succeeds on the affirmative defense, it doesn't necessarily eliminate the deficiency; it just limits it to the difference between the amount of the debt and the fair market value of the foreclosed property (as found by the Court) on the date of foreclosure. Also, at least 2 Texas appellate courts have held in commercial mortgage cases that the affirmative defense under 51.003 of the Texas Property Code can be contractually waived in the lien documents; it has not been addressed by the Texas Supreme Court, and has not been raised in a residential case.
1.3.2009 11:13am
TA:
From the linked article:

"Shackle doesn't fit that category. The single, first-time homebuyer bought a two-bedroom condo in Calimesa, Calif., in 2006 for $191,000. She wasn't required to put any money down despite her limited income as a waitress, thanks to a lofty credit score of 788."

I think I see the problem.
1.3.2009 11:31am
KenB (mail):
As a Texas lawyer who used to represent creditors, I concur with DiverDan in his statement of Texas law.
1.3.2009 11:35am
TerrencePhilip:
I had one lawyer contact me who said she had been rebuked by a client who was upset and said that the lawyer was "obviously incompetent" because she didn't even know what was in the newspaper).


Hahahaha, welcome to every other day of my law practice. I can never stop being amazed at what clients will come up with to be unhappy about. Nothing gets my goat worse than being accused of bad lawyering based on some crazy misinformed idea- and usually there is no use trying to convince the client that they are wrong. At some point, all you can do is laugh.
1.3.2009 12:28pm
Contractus:
Obviously a state can impose high hurdles to a lender who wants to write a loan with the ability to seek a deficiency judgment, and even prohibit such a loan from being written, or prohibit waiver of the protection against a deficiency judgment. Is this how such states put such provisions into practice? If it were legal to write a loan with explicit the right to seek a deficiency judgment, I would think the Contract Clause would be implicated if the state gave the borrower the ability to walk away from it.
1.3.2009 12:34pm
Esquire:
Todd, maybe I'm missing something here but I see that this "list" is mentioned in between a couple quotes from different people -- thus leaving no clear implication of whom (if anyone) it came from.

Still, I agree that it's an incorrect list nonetheless.
1.3.2009 12:56pm
Zywicki (mail):
Esquire:
From what I can tell, the article gets sliced and diced and reprinted in various forms around the country, so sometimes the location of the quotes and list gets moved around. And for the reasons you state it seemed obvious to me that the list didn't come from me, but I've gotten enough emails that apparently a few people drew that inference.
1.3.2009 3:29pm
fortyninerdweet (mail):
How sweet. Charging almost a $K up front to folks already having financial problems. Maybe I can set up a fee-paid counseling service for homeless folks needing to learn "how to beg".
1.3.2009 4:04pm
fortyninerdweet (mail):
Drat!  It's already been done.
1.3.2009 4:08pm
Patrick216:
Are you all fans of anti-deficiency statutes?

When commercial real estate deals go upside down in my state (which allows deficiency judgments), the parties typically do a workout deal that involves the borrower surrendering the property. The borrower and guarantors then submit to debtor's exams, and unless they have significant assets elsewhere, are released from their deficiency liability (or, at most, have to make a relatively small settlement payment). The reason the banks cut these deals is simple: the bank wants the bad loan off its books ASAP, wants the property sold ASAP, and doesn't want to pay me $50,000 to fight frivolous defenses or counterclaims.

In the past year, I've done a few deals (I represent banks) opposite borrowers who live in anti-deficiency states but who are real estate speculators/investors who bought property in my state and lent money from in-state banks to do so. Universally, these borrowers are much more difficult to deal with. They refuse to negotiate, fight you every step of the way, and do everything possible to drag out the process. Sometimes they do it so they can continue to collect the rent (which is pledged as collateral to the bank), other times it's just to be spiteful.

Either way, the basic attitude is: "I'm keeping the property, I'm not paying for it, and go to hell!" As a lawyer who bills by the hour, I don't mind fighting off frivolous defenses and counterclaims, nor do I mind domesticating a huge deficiency to the deadbeats' home state and chasing them into bankruptcy. But I guess my experience just makes me wonder if anti-deficiency laws create undesirable perverse incentives on the part of borrowers...
1.3.2009 4:52pm
JorgXMcKie (mail):
Gosh, a mistake of fact from the AP. Who would have guessed?
1.3.2009 10:50pm
Kevin Murphy:
California has a non-recourse provision for purchase-money owner-occupied home loans. I'm pretty sure that outside of that, it is all normal default.

As for Patrick... for every scamming house-flipper there is also someone who just needs out from under, and after their lender refuses to talk and/or (wrongly) threatens then with "domesticating a huge deficiency to the deadbeats' home state and chasing them into bankruptcy" they might feel pretty good about sticking them with it.
1.4.2009 2:38am
Sotos (mail):
A lot depends on where and how the loan was struck: in California and other states using trust deeds purchase money liens are usually non recourse: there is however the issue of fraud violating the trust shield, particularly in the case of fraud on the borrowers' side (e.g. signing a 1028 with falsified income) and if the holder of the instrument is a holder in due course(not the originator or original mortgagee). In states that use mortgages and notes, it's possible to ignore the mortgage and sue on the note: we did this for investor seconds that were completely out of the money. Then each state can have it's own weirdness: try the Land court in Mass that used to require getting a formal clearance from the soldiers and sailors relief act - this turned a publish and perish state into a quasi judicial foreclosure.

In short, a lot depends on where the loan was made, how the loan was made, who now owns the loan, how aggressive the servicer is in collecting the loan, etc. Anyone getting advice from a newspaper is an idiot.
1.4.2009 10:44am
David H. Fuller (mail) (www):
As a bankruptcy lawyer, I see clients who have been misled by inaccurate or flatly wrong news coverage. I've read a fair share of news stories that include information on the law that is just plain wrong. Frankly, it's damaging to the public. None of my consumer bankruptcy client are lawyers, many are not socially or familially acquainted with lawyers, and so they get their legal information from the media. I can't begin to count the number of client consults that are uphill battles because of the misinformation, particularly about bankruptcy, that is pumped into people's heads.

There was a story on NPR a month or two ago about how journalism schools don't teach business reporting classes anymore. I wonder if they teach legal reporting classes, or if they do, who is teaching them.
1.5.2009 12:32pm

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