Update 7-9-08: This post is pretty worthless compared to the COMMENTS. They are a ton more insightful.
Something smells fishy.
Virginia Realtors: What are you all seeing in regards to Bank Deficiency Judgments/ Judgements* in Virginia?
Disclosure: I am not a lawyer, this is a discussion and my understanding. This information is changing monthly, so please verify with a lawyer. When in doubt, ignore me. READ THE COMMENTS, ONE REALTOR SAID I WAS DEAD WRONG ON EVERYTHING.
My Understanding/Definition (ie correct me if I'm wrong): When a home goes to foreclosure* on the courthouse steps, the bank can either
- Buy it at the loan amount, or
- Let the price drop below the loan amount and then "win" the property for less.
- Let somebody on the courthouse steps win the property for less. (not/rarely occuring)
If they take the #2 or #3 option, they then have the right to go after the homeowner for a "Deficiency Judgment" where the borrower would still be responsible for the shortcoming (amount under the loan amount).
Ie, Home is bought for $1,000,000 with a $800,000 loan. The property happens to be worth $600k. The property is foreclosed on at the courthouse steps. The bank either 1) offers $800,000 and takes over the property, thus losing their right to go after losses or 2) Does not offer on the property and waits for the first bidder and buys for $600,000, or 3) Lets somebody buy it for $550k. In the #2 and #3 instance the bank can go after the previous owner for their $200,000 or $250,000 loss.
What I am finding is that the courthouse steps are vacant. (see Post's "No buyers, no bidders.") Why? Because the banks are taking them back at the loan amount (not the property value).
Now the big question is WHY!
Why would they take over the property at $200,000 OVER what is it worth and let the previous owner be releaved from further obligations?
- They don't have the time to figure out which properties are worth what. Sure it would cost $50 for a BPO (Broker's Pricing Opinion) or $300 for an appraisal that they will have to do at the next step anyhow.
- They figure it is a waste of time and effort for the banks to go after the homeowner since they are broke.
But the strange thing is it wouldn't cost the banks that much to bid LESS and file a Deficiency Judgment (I can see not letting somebody else win the place for less). I believe the bank would have something like 5 years to go after the money, or package it up and sell it to a debt collector.
Very strange that they are doing this.
Another thing to ask when a seller is considering a Short Sale, is if the homeowner has PMI. Private Mortgage Insurance covers the bank in the event of a loss in value and foreclosure (apparently not necessarily the entire loan amount). So watch out, it might be BETTER for the bank to foreclose and get the insurance, then it is to allow a loan restructure or a Short Sale, both of which as not insurable. Read this about PMI and Foreclosure)
Realtors, why do you think the banks are OVER bidding on these homes to buy them at the loan amount?
In California it seems like the bank can't go after the owner. Read this. Is that correct for VA too?
- Written by Frank Borges LL0SA- Broker FranklyRealty.com
*(50% of searchers misspelling this word as Dificiency Judgements, and forclosure) Other keywords: Bankruptcy, stop foreclosure, deed in lieu, Pre-foreclosure, 1099-C Debt forgiveness, loan modifications, Bank Liens, Maryland, Arlington, Alexandria, VA, DC washington, Maryland, MD.