A major concern for borrowers following foreclosure is whether or not the lender has obtained, or will be able to obtain, a deficiency judgment against them. A deficiency judgment is a personal judgment against the borrower that is granted to the lender if a foreclosure sale does not bring in sufficient funds to pay off the entire debt. The deficiency judgment allows the lender to collect the debt after the foreclosure has been completed.
Whether or not a lender can obtain a deficiency is based upon state law. Some states prohibit deficiency judgments, while in other states deficiency judgments are obtainable as part of the foreclosure process or in a separate action thereafter.
In Maryland, the lender may obtain a deficiency judgment. If the proceeds of the foreclosure sale are insufficient to pay off the entirety of the mortgage debt, the lender may file a motion for the deficiency judgment within three years after court confirmation of the auditor's report following a foreclosure sale. Maryland Rule 14-216[b]. (A separate law states that a creditor can pursue a deficiency based on a promissory note within 12 years. This time period will be reduced to three years as of July 1, 2014.)
A short sale is a transaction where the homeowner sells the property for less than is owed on the mortgage, and the lender agrees to accept this lessened amount rather than foreclosing on the property. In a short sale, the proceeds fall “short” of paying off the total mortgage debt. This creates a deficiency and the lender is able to obtain a deficiency judgment following the transaction unless the short sale agreement states otherwise.
Certain states, such as California, have laws prohibiting a deficiency judgment following a short sale. However, Maryland has no such prohibition. A lender may pursue a deficiency judgment following a short sale in Maryland.
Oftentimes with short sales, the lender will refuse to give up its right to the deficiency. If this is the case, it is possible for the borrower to bargain for a reduced deficiency or a lump sum amount to settle the deficiency when negotiating the terms of the short sale.
A deed in lieu of foreclosure (deed in lieu) is a transaction where the homeowner agrees to sign over, and the lender agrees to accept, the deed to the property without a foreclosure. In most cases, a deed in lieu fully satisfies the outstanding mortgage debt. However, with more and more lenders looking to recover losses, it is possible that a deed in lieu transaction may not fully satisfy the debt. While one state (Washington) has explicit case law that prohibits a deficiency judgment after a deed in lieu, Maryland, on the other hand, does not have any protections for the borrower against a deficiency judgment following a deed in lieu. In Maryland, if the deed in lieu documentation clearly states the consideration is for less than a full satisfaction of the debt, then that means the lender has the right to pursue a deficiency judgment against the borrower after the transaction is completed.
To avoid a deficiency with a deed in lieu, the borrower must get the lender to agree in writing to forgive any deficiency (the fair market value of the property less the total mortgage debt that is owed to the lender). As with short sales, it is also possible to negotiate a reduced deficiency amount or pay a lump sum to settle any remaining debt with a deed in lieu.
Once a deficiency judgment has been obtained, the lender is entitled to collect upon it and may do this by garnishing wages, placing a lien on any other real property owned by the debtor, or seizing nonexempt assets. The existence of a deficiency as the result of a foreclosure, short sale, or deed in lieu transaction does not necessarily mean that the lender will pursue a deficiency judgment or even try to collect on it. However, with high numbers of foreclosures, short sales, and deeds in lieu (and lenders facing mounting losses due to a distressed real estate market), it is becoming more common and lenders are becoming more motivated when it comes to pursuing deficiency judgments and collecting on deficiencies.
See How Deficiency Judgments are Collected for more information.
The laws governing Maryland foreclosures can be found in Maryland Rules 14-201 through 14-218 and Md. Code Ann. Real Prop. § § 7-101 through 7-111.