PALM BEACH, Fla. – July 28, 2010 – With today’s reduced property values and increased unemployment, it’s tempting for some homeowners to just throw their hands up in defeat, allow the bank to take their home in foreclosure and rid themselves of the monthly mortgage burden.
Even suffering through the paperwork and stress of a short sale may seem too much for an overwhelmed borrower to handle.
But Florida homeowners should be aware of unique rules in the state that make the benefits of a short sale typically outweigh the ease of walking away in a foreclosure.
“I want to be very clear on this, short sales are a better solution than a foreclosure, even when all the options in a situation where you lose your house are not great,” said Mark Greene, owner and president of Short Sale Operations LLC in North Palm Beach.
The biggest difference between Florida and many other states when it comes to losing a home is the deficiency judgment.
While some states ban lenders from collecting the remainder owed on a loan after a foreclosure or short sale is completed, Florida law allows banks to go after borrowers for up to 20 years. That can lead to a garnishment of wages long after the home is gone.
In a short sale, where the bank agrees to take a lesser amount for the home than what is owed on a loan, lenders sometimes are willing to write off the deficiency on the front end.
Greene said in 90 percent of the cases he handles, the bank has waived its right to seek a deficiency.
That was the case with Jupiter resident Kathryn Lorello, who in 2008 found herself in a home she couldn’t afford.
Following a divorce, and with three children, Lorello bought a $408,000 home that she lived in comfortably for a year. But then she lost her job as a manager of a real estate company.
She remembers the day the bank served the notice of foreclosure.
“I cried my eyes out,” Lorello said. “That’s when I panicked because I really didn’t want it to happen.”
Lorello got advice from Greene on doing a short sale.
Her bank, Wells Fargo, waived its right to seek a deficiency even though it ended up taking $200,000 less than what was owed on the loan.
Also, if a bank refuses to waive the deficiency in a short sale, it still would have to go back to court to seek a judgment.
In a foreclosure, at the end of the proceeding, a deficiency judgment is automatically awarded by the courts and the bank is free to seek a claim.
“In the past, people just wanted to move from the property and get on with their lives and didn’t understand what the lenders’ rights were in terms of pursuing a deficiency claim,” said Paul Baltrun, director of loss mitigation at the LaBovick & La-Bovick law firm.
“I think people are more aware now about what can happen after the fact and that their nightmare can continue.”
Another consideration is the effect of a foreclosure or short sale on credit.
According to the Fair Isaac Corp., which developed the widely used measurement of credit risk called a FICO score, the negative effect of a foreclosure is only marginally worse than a short sale.
But in Florida, a deficiency judgment from a foreclosure is likely to have a much larger impact that will prohibit your ability to buy another home for many years.
Daniel Poulos, a mortgage broker with Elite Lending in North Palm Beach who has studied the effect of foreclosures and short sales on credit, said unless a borrower pays off the deficiency, it may be 20 years before someone is eligible for another mortgage.
“That’s the kind of information that’s not getting out in Florida,” Poulos said.
There are a few situations where some experts believe it is better for someone to go to foreclosure rather than do a short sale.
To do a short sale, a borrower must give all of his or her financial information to the bank before it will decide whether to allow the short sale. The idea is that if a person can afford to pay the mortgage, the short sale may be denied.
“Now the lender knows everything about your finances and they can better decide whether they will go after you or not,” said Jon Maddux, CEO of YouWalkAway.com, a company that advises people on strategic defaults.
If a lender doesn’t know your finances, Maddux argues, it reduces the chances it will go after you following a foreclosure.
“You might fly under the radar,” he said. “With the millions of people going through this, they are probably going to go after the low-hanging fruit.”
Short sale is most definitely better, though just signing over the deed doesn’t affect your credit while Short sale still does.