A deficiency judgment is a court order giving the mortgage lender the right to collect from the borrower the deficiency--the balance of a mortgage that is not fully satisfied from the proceeds of a foreclosure sale. When a lender is awarded a deficiency judgment, the borrower is personally liable for the amount of the deficiency.
As an example, consider a borrower who took out a loan to purchase a single-family home. The balance on the loan is $150,000 when the borrower stops making payments. The lender forecloses on the property and sells the home in a foreclosure sale for $100,000. The deficiency is $50,000. If state laws allow, the lender may sue the borrower to recover the deficiency. If the court awards the lender a deficiency judgment, the lender may then start collections proceedings against the borrower to recover the $50,000 deficiency.
Read on to find out whether lenders are allowed to sue borrowers for deficiencies after a foreclosure, a short sale, or a deed in lieu of foreclosure in Michigan.
Nonjudicial foreclosure is the more common method of foreclosure in Michigan. In this type of foreclosure, if any mortgage debt remains unpaid after the foreclosure sale, the lender may sue the borrower to obtain a deficiency judgment. However, Michigan law provides borrowers a defense if the mortgage lender purchases the property at the foreclosure sale. If the borrower can show either that (1) the fair market value of the property at the time of the foreclosure sale was equal to the amount of the mortgage debt, or (2) the amount that the mortgage lender bid at the foreclosure sale was substantially less than the true value of the property, the homeowner is not liable for the deficiency either in whole or in part. Mich. Comp. Laws § 600.3280. This defense is an important protection for borrowers when the mortgage lender purchases the property at the foreclosure sale and prohibits lenders from entering a low-ball bid at the foreclosure auction.
Lenders are also entitled to a deficiency judgment in judicial foreclosures. In this type of foreclosure, the judgment ordering the foreclosure sale will provide that if the principal, interest, or costs ordered to be paid are left unpaid after applying the proceeds from the foreclosure sale, the court clerk will issue an execution for the amount of the deficiency once the lender’s attorney orders the clerk to do so. The borrower will then become personally liable for the amount of the deficiency.
These rules regarding deficiency judgments after foreclosure apply to foreclosures of both residential properties and investment, or commercial, properties.
A short sale occurs when the mortgage lender agrees to a sale of the mortgaged property at a price less than the mortgage debt. Typically, a lender agrees to a short sale when the amount owed on the mortgage is more than the value of the property or the borrower has experienced some sort of hardship, such as unemployment, divorce, or family illness.
In Michigan, the borrower may still be held liable for the amount of the deficiency even after a short sale. This is due to the fact that, although the short sale extinguishes the mortgage lien on the property, the borrower’s obligation to repay the debt secured by the mortgage remains. Thus, unless the lender agrees to release the borrower from having to repay the deficiency, the borrower may be held liable for the amount of the deficiency remaining after the short sale.
A deed in lieu of foreclosure is a negotiated settlement between the lender and the borrower in which the borrower conveys title to the mortgaged property to the lender. In exchange for ownership of the property, the lender typically agrees to release the borrower from liability under the mortgage. This procedure is used as a substitute for foreclosure.
A borrower may be liable for a deficiency after a deed in lieu of foreclosure. Michigan’s foreclosure statutes do not prohibit a lender from pursuing a deficiency judgment after a deed in lieu of foreclosure. Although it is unlikely that lenders will go through the time and expense of suing defaulting borrowers for the deficiency, a borrower should nevertheless get from the lender a written release from the obligation to repay the deficiency when negotiating a deed in lieu of foreclosure settlement.