In many states, including New Mexico, a lender can obtain a deficiency judgment against the borrower if the sale price at a foreclosure auction fails to fully satisfy the mortgage debt. A deficiency judgment is the difference between the outstanding mortgage and the foreclosure sale price. For example, if a homeowner owes $150,000 to the lender and the property sells at the foreclosure sale for only $100,000, the deficiency is $50,000. After the foreclosure sale, the lender may sue the borrower to recover the deficiency, and the court may grant a deficiency judgment (a personal court judgment against the borrower for the amount of the deficiency).
New Mexico’s deed of trust statute was amended in 2006 to remove a prohibition on nonjudicial foreclosures of residential deeds of trust. (Previously, only commercial properties with a loan amount exceeding $500,000 could be foreclosed nonjudicially.) However, lenders still often choose to utilize the judicial process for residential foreclosures, even through nonjudicial foreclosure is an option.
Most foreclosures in New Mexico are judicial, which means they are handled through the courts and are initiated when the lender files a lawsuit against the borrower. The lender will then obtain a foreclosure judgment allowing it to sell the property. The deficiency judgment will be included as part of the foreclosure judgment.
Nonjudicial foreclosures are allowed in New Mexico but less commonly used. When a power of sale clause is included in a deed of trust, a trustee is allowed to foreclose without suing the borrower in court. In New Mexico, the lender may obtain a deficiency judgment following a nonjudicial foreclosure by initiating a lawsuit for the deficiency within six years after the date of the trustee’s foreclosure sale. New Mexico Stat. Ann. § 48-10-17(A).
However, no deficiency judgment is allowed after a nonjudicial foreclosure of a residential loan made to a low-income household. New Mexico Stat. Ann. § 48-10-17(E). A low-income household is defined as a household in which the current annual income is at or below 80% of the area median income adjusted for family size as determined by the United States Department of Housing and Urban Development (HUD). New Mexico Stat. Ann. § 48-10-17(G)(1). The determination of whether a household is a low-income household is made as of the time the loan originated on the basis of information obtained during the loan application process. New Mexico Stat. Ann. § 48-10-17(H).
In New Mexico, there is no law prohibiting a lender from obtaining a deficiency judgment following 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 the lender’s permission. With a deed in lieu of foreclosure, the borrower signs over ownership of the home to the lender and the lender releases 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. Once the lender obtains a deficiency judgment, you may have the deficiency debt eliminated by filing bankruptcy. (For more on eliminating deficiency debts in bankruptcy, see our article How Are Deficiency Judgments Collected?)
The relevant statutes that govern judicial foreclosures are in Chapter 48, Sections 48-7-1 through 48-7-24 of the New Mexico Statutes Annotated. New Mexico’s nonjudicial foreclosure statutes are located in Sections 48-10-1 through 48-10-21. The Home Loan Protection Act can be found in Chapter 58, Sections 58-21A-1 through 5-21A-14. All statutes can be accessed on the website of the New Mexico Legislature at www.nmlegis.gov/lcs/statutes.aspx.