C’Mon Minnesota Legislature, . . Just Ban Deficiency Judgments

In some regards, the MN legislature was ahead of the curve on the mortgage and housing crisis. They regulated non-bank lenders and brokers in ways that other states hadn’t even considered. They got ahead of abusive practices towards distressed homeowners and shady loan modification companies. What they have unequivocally failed at is aiding homeowners who are upside down on their homes. Their greatest impact could be with those contemplating a short sale.

Other states have already taken steps. Perhaps the best example would be those taken in California. For some time now, CA has not allowed deficiency judgments in the case where a person doing a short sale was paying off a mortgage that they used to buy the home with. Now, they are extending the homeowner protection to include all short sales. Here is an example of such legislation:

“No judgment shall be rendered for any deficiency under
a note secured by a first deed of trust or first mortgage for a
dwelling of not more than four units, in any case in which the
trustor or mortgagor sells the dwelling for less than the remaining
amount of the indebtedness due at the time of sale with the written
consent of the holder of the first deed of trust or first mortgage.
Written consent of the holder of the first deed of trust or first
mortgage to that sale shall obligate that holder to accept the sale
proceeds as full payment and to fully discharge the remaining amount
of the indebtedness on the first deed of trust or first mortgage.”

This legislation almost passed unanimously. It’s a budget neutral proposition. This kind of thing passed in other states too (take North Carolina for example) and lenders didn’t raise their rates or refuse to lend in those jurisdictions. If anything, their loan originations have increased. It’s a no brainer.

Were Minnesota to not be left behind on this, there would be a lot of added benefits. Right now, a Minnesotan is free of deficiency judgment via foreclosure by advertisement. Minnesota Statute 582.30 affords no protection for short sales. Is foreclosure the choice we want people making? By facilitating short sales free of deficiency judgment, we might more expeditiously work our way off the list of America’s Most Underwater Cities. By getting rid of deficiency judgments from short sales, we’ll be preserving net disposable income that the Minnesota economy desperately needs. Closest to my heart, . . . by doing this we’d be preserving continuing homeownership by enabling homeowners to buy a home after a short sale using a FHA loan.

Buying a home after a short sale has been possible through FHA for some time now. While many investors are willing to purchase and securitize these loans, few have been originated because there are two difficult hurdles in the origination cycle. The first has been proving that the payoff of the lender being sold short served as satisfaction in full. The second hurdle in buying a home after a short sale is dealing with the FHA condition that stipulates that the buyer cannot, “take advantage of declining market conditions, and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.” This condition remains vague but penetrable. Getting past it takes considerable coordination between the Realtor and Mortgage Loan Officer. There isn’t a very graceful way of doing this other than having a well trained Mortgage Loan Officer pre-screen the list of properties that a buyer would like to have shown by their Realtor. This list must be scrubbed against this FHA guideline with the buyer’s original hardship (Letter of Explanation) in mind. If any of the properties even come close to resembling a similar or superior property within a reasonable commuting distance, an underwriter will kill the deal. Nonetheless, if the first hurdle were cleared, the second one is very manageable. Were Minnesota to enact this kind of legislation, an untold number of trapped homeowners would be freed up.

We encourage you to contact your state representatives and encourage them to introduce legislation that would indemnify it’s homeowners from deficiency judgments in the event of short sales. To find and contact your legislator, click on the image below:

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Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI

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