In some states, including Maine, a mortgage lender is allowed to sue to recover the deficiency from the borrower by obtaining a deficiency judgment. A deficiency is the amount that remains if the proceeds from a foreclosure sale do not pay off the entire mortgage debt. For example, if a homeowner owes $250,000 to the lender and the property sells at the foreclosure sale for only $200,000, the deficiency is the $50,000 difference. Once the lender is granted a deficiency judgment from the court, the lender can try to collect the judgment by garnishing the borrower’s wages or levying the borrower’s bank accounts.
Foreclosures in Maine are typically judicial, meaning they are handled through the court system. The lender files a complaint which starts the lawsuit against the borrower, obtains a judgment, and holds a foreclosure sale. A deficiency judgment is obtained in the same action as the foreclosure but is limited to the amount established as of the date of the sale. Maine Rev. Stat. Ann. tit. 14, § 6323(1). If the lender is the purchaser at the foreclosure sale, the deficiency is further limited to the difference between the fair market value of the property at the time of the public sale, as established by an independent appraisal, and the total amount due to the lender as established by the court, including interest, sale costs, and fees. Maine Rev. Stat. Ann. tit. 14, § 6324.
In Maine, there is no law prohibiting a lender from obtaining a deficiency judgment after a short sale or deed in lieu of foreclosure. Short sales and deeds in lieu of foreclosure almost always result in a deficiency. In a short sale, the borrower sells the home for less than the outstanding mortgage debt. With a deed in lieu of foreclosure, the borrower signs over ownership of the home to the lender, and the lender agrees to release the borrower from its obligations under the mortgage.
If you hope to complete a short sale or deed in lieu of foreclosure and want to avoid a deficiency judgment, you need to negotiate with your lender to include in the short sale or deed in lieu of foreclosure agreement language releasing you from all liability after the closing of the transaction. Without this language, the lender may attempt to obtain a deficiency judgment at some point in the future. If your lender refuses to release you from liability for the deficiency and is later awarded a deficiency judgment, your lender may be willing to negotiate a reduced lump sum payment or a payment plan.
To read the laws that govern Maine foreclosures, see the Maine Revised Statutes, Title 14, Sections 6101 through 6325, which you can find on the website of the Maine Legislature at www.mainelegislature.org/legis/statutes.