Real Estate – DOWN MARKET TIPS – Cleaning the Slate


Deficiencies are a big thing these days with values on a steady decline and mortgages staying put or even going up by leaps and bounds, especially when a borrower defaults and interest piles on, together with taxes, late charges and whatever. So … how can you figure the bottom line, that outer most number when all’s said and done? And what might it take to make a deficiency go away,  never to return? Here we go.

To Figure the Deficiency

Like foreign or domestic beers, don’t think you can mouth “deficiency”, swoosh it around and always arrive at one set formula for every single case. It doesn’t work that way.

If we’re talking a foreclosure sale with one mortgage only, then just take what’s due including principal, interest, late fees and whatever – back out property value and there you have it. Lots of issues for everyone to argue about, but the raw math isn’t complicated. Say it’s a subordinate mortgage that gets nothing at the sale – then arithmetic wise it gets even easier, all balances remain and that becomes the deficiency.

On short sales, “deficiency” will mean the amount being due after all’s said and done and your deal closes. On a first mortgage, it’s usually a small portion of the overall balance. As to second mortgages and subordinate liens like IRS or NYS, normally it amounts to a much greater percent.

How Deficiencies Arise

Deficiencies can come about in three ways:

1. Foreclosure – Property goes to foreclosure sale and lender goes back to court within 90 days to say the property wasn’t enough to cover what’s due, so give me a money judgment to cover the balance. Court hears evidence and decides. Ouch. But hey, if 90 days pass and lender lets it go, then you’re off the hook.

2. By Consent – Short sale takes place and lender delivers a release of lien, not a release of liability. Lender then has the option to either seek collection on the unpaid balance – the deficiency – or to walk and do nothing. Lender will have six years to make up its mind. Sometimes its possible to settle with a lender prior to closing on a short sale and to agree upon the terms of repayment, however this would most often happen on subordinate mortgages only, rather than on first mortgages.

3. Lawsuit for Money Judgment – Lender pursues collection under the promissory note by suing for a money judgment – rather than bringing a foreclosure. This might happen most commonly on a second mortgage when the property’s under water and little, if anything would remain after the first mortgage gets paid.

Curing a Deficiency

Fear no deficiency. They are very much curable if you follow our six point plan:

1. Short Sale – Get a short sale done and your deficiency will likely disappear. Your final result will depend upon several things like the sales price, BPO, HAFA approvals and your specific lender.

2. Standing and Other Defenses – Your lender may lack the legal ammo that’s necessary to proceed against you in court.  Will they admit it? Of course not. Though defenses may come in a variety of forms, “standing” has played a huge role over the last few years as lenders scramble for just the right papers to show they own the mortgage which they seek to enforce. If they come up dry – give them a kiss on both cheeks and say goodbye.

3. Compromise – Faced with a deficiency, you can always give in and settle – often for a fraction of what’s due with little or no interest.

4. The Ninety Day Wait – Lenders have 90 days after the foreclosure sale to seek a deficiency judgment. Beyond that – no deficiency, ever. So … should you hold your breadth and count the minutes? Play it safe and settle? Hmm … no rash moves.

5. Chapter 7 Bankruptcy – A complete liquidation in bankruptcy can wipe out all personal obligations, including a deficiency.

6. Bankruptcy Cramdown – A special procedure in a business reorganization to cut the mortgage in two, one being a mortgage for the property’s value and the other an unsecured debt for any excess – the deficiency. The unsecured portion will then get settled along with other unsecured creditors for cents on the dollars.

Income Taxes

From Forgiveness of Deficiency

No income tax if all your liabilities are greater than everything you own – value wise. And if it’s your principal residence and you fit the mold – no reporting to IRS. So, yipee and hip, hip hooray.

Signing off till next time. And here’s to your next closing.

To contact Kenneth B. Schwartz (Law Offices of Kenneth B. Schwartz) regards any Specializing in Real Estate at or calls him at 516-333-7020. Don’t miss out there is a FREE seminars. Contact them to find out more info.



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