Is this really something to think about and plan for? There may be two schools of thought on the subject. Doubters would point to the subprime crisis and say too many borrowers are in deep distress; they just don’t have any money. And deficiencies are bad for public relations.
The reverse posture is that for the very reason of properties’ severe decline in price, deficiencies are now often assured. Some borrowers who defaulted did so not necessarily because they were unable to pay, but precisely because the property was worth less than the mortgage. They may very well be able to make good on a deficiency judgment. Then too, while certainly there are borrowers with no assets, there are still more than a few defaulting mortgagors who may indeed be able to pay some or all of the balance of the deficiency: the speculators; the divorcing couple who had the money but were too busy fighting each other; the borrower whose financial setback was temporary.
Nor should lenders forget that once a deficiency judgment is obtained (in New York) it remains a lien on real property for ten years (and it is renewable) and on personal property (stocks, autos, boats, jewelry, etc.) for twenty years. So if the borrowers happened to have a vacation home, that could possibly be sold to satisfy the judgment. Or if they ever decided to buy other property, the deficiency judgment would be revealed and would have to be disposed of by that borrower.
In short, there may very well be sound business reasons to pursue deficiency judgments determined on a case by case basis. If the deficiency is substantial enough to underwrite the cost of seeking it (which is modest in New York) with the associated expense of an appraisal, then the effort could be worthwhile, so long as the persons liable for the deficiency can be located, and either now or in the future, will have assets reachable upon execution. Of course, understanding these viewpoints requires a good sense of what deficiency liability is and how it is measured. In a brief version here is that perspective.
WHO IS LIABLE FOR THE DEBT?
In the typical, simple mortgage transaction (as in the usual residential case; commercial matters can have further nuances), the borrowers sign two major documents. One is the note – a promise to pay the debt. The other is the mortgage – the pledge of property as security for the debt. It is the note which makes the signers personally liable for the debt. Should there be guaranties, the guarantors are also personally responsible for the debt.
HOW MUCH IS THE DEBT?
What composes the debt depends upon the documents and some circumstances of the case, but generally speaking it is the aggregate of the principal, interest, late charges (with default interest if applicable), prepayment penalty (usually found only in commercial cases), lenders’ advances for taxes, insurance and payments to prior mortgagees (if the mortgage being foreclosed is in a junior position), legal fees and disbursements in the foreclosure action together with expenses authorized by the mortgage, for example, inspection fees and the like.
In New York, it is the judgment of foreclosure and sale which quantifies this sum. (The referee computed most of that earlier in the action, but interest and expenses have accrued and in any event the judgment must confirm the referee’s calculations.) Interest runs upon the sum decreed in the judgment up to the moment of the foreclosure sale – the auction – and that is the debt.
HOW IS THE DEFICIENCY MEASURED?
Under New York law, the deficiency is the difference between the sum due the lender (the debt as assessed in the judgment of foreclosure and sale) and the greater of the amount bid at the foreclosure sale or the value of the property on the date of the sale.
An example will clarify the point:
Sum due Lender: $500,000.
Amount bid at sale: $300,000.
Property value on sale date: $400,000.
Credit Borrower: – $400,000.
PLANNING AHEAD – WHAT THE SERVICER SHOULD DO
Even though actual deficiencies are becoming more common, a servicer cannot always be sure in advance whether it will exist. Even if there will be such a shortfall, whether it is worth pursuing the particular borrowers may yet be unknown. But it rarely costs more to preserve deficiency liability in the foreclosure action. Therefore, counsel should always be instructed to preserve that liability. (They typically would without direction, but being certain is prudent.)
As the sale approaches, obtain an estimate of the property value. If it is less than the debt, avoid bidding above value, because that diminishes surplus.
Once the sale is conducted, and if the numbers yield a deficiency, the lender has a strict ninety days to move for the deficiency (actually serve the motion). It is a post sale motion with the obligation to prove the value as of the date of the auction sale, i.e., via appraisal or broker’s price opinion. This needs to be done with some dispatch to avoid running over the critical ninety days.
As can be seen, it does not elicit enormous preparation to be armed to obtain a deficiency judgment. It should be something to think about.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.