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OLSON GALLEYPROOFS2 6/22/2018 10:28 AM
KICKED WHILE THEY’RE DOWN: DEFICIENCY
JUDGMENTS AND THE GREAT RECESSION
ABSTRACT
In the District of Columbia and forty-two states, if a borrower defaults on
her mortgage payments, the lender may be able to take more than just her home.
If the foreclosed property sells for less than the total amount of outstanding debt,
the lender can file a claim for the outstanding balance to obtain a deficiency
judgment.
When the economy is in crisis and housing prices are depressed, deficiency
judgments can reach hundreds of thousands of dollars. Lenders can wait to
collect these judgments until interest has accrued, further increasing the
hardship on the defaulting borrower. For most borrowers who default because
they can no longer afford their loans, a deficiency judgment is unmanageable—
their only option is to file for bankruptcy.
State legislatures enacted various forms of anti-deficiency laws after the
foreclosure crisis of the Great Depression, with the goal of protecting borrowers
from losing their homes and being forced to file for bankruptcy by deficiency
judgments. However, fewer than ten states currently have laws that achieve this
goal for all residential borrowers who default due to financial hardship.
Although some scholars argue that prohibiting deficiency judgments will
lead to increased strategic default by borrowers who still have the financial
resources to make their monthly payments, several recent studies discount this
hypothesis. The ability of lenders to predict and protect themselves from losses
related to borrower default, as well as the increase in predatory lending
practices leading unsuspecting borrowers to take out unsustainable loans,
necessitate a legislative response. This Comment argues that states have a valid
interest in protecting their citizens from financial ruin—and in encouraging
recovery over punishment—and should enact legislation prohibiting deficiency
judgments for residential borrowers.
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1274 EMORY LAW JOURNAL [Vol. 67:1273
INTRODUCTION ............................................................................. 1275
I. BACKGROUND .................................................................... 1278
A. Mortgage and Foreclosure Basics ............................. 1278
B. Borrower’s Rights of Redemption .............................. 1281
C. Evolution of State Mortgage Law ............................... 1283
D. The Great Recession ................................................... 1284
II. S
TATE LAWS ...................................................................... 1287
A. The Three Broad Categories ...................................... 1288
B. Anti-Deficiency Variations ......................................... 1289
C. No Limit: New Hampshire & Maryland ..................... 1292
D. Confirmation Requirements & Statutory Redemption:
Georgia & Iowa .......................................................... 1295
E. Prohibitions: Oregon & North Dakota ...................... 1299
III. R
ESIDENTIAL BORROWERS NEED PROTECTION FROM
DEFICIENCY JUDGMENTS ................................................... 1303
A. The Original Goal of Depression-Era Statutes Remains
Important .................................................................... 1303
B. Borrowers Do Not Walk Away Willingly .................... 1304
C. Borrowers Are Still Vulnerable to Predatory
Practices ..................................................................... 1307
D. Modified Anti-Deficiency Laws Do Not Protect
Borrowers ................................................................... 1309
C
ONCLUSION ................................................................................. 1310
OLSON GALLEYPROOFS2 6/22/2018 10:28 AM
2018] KICKED WHILE THEY’RE DOWN 1275
INTRODUCTION
Jose Santos Benavides had finally achieved the American dream.
1
After
emigrating from El Salvador to the United States, he worked for years as a
landscaper before he had saved enough money to make a down payment on a
four-bedroom home in Rockville, Maryland in 2007.
2
Unfortunately, the
economy took a downturn over the next year, and Benavides was unable to make
his monthly mortgage payments.
3
By the end of August 2008, Benavides and his
family moved out of their dream home and into a cramped two-bedroom
apartment, just days before the bank foreclosed on their home.
4
In 2011,
Benavides was shocked to learn that he still owed $115,000—for a mortgage on
a home his family had not set foot in in over three years.
5
In the District of Columbia and forty-two states, if the sale of the foreclosed
home does not yield enough money to cover the entire mortgage debt, the lender
6
can sue the borrower in a personal action to recover the remaining balance, also
called the deficiency.
7
If the lender succeeds, it is awarded a deficiency
judgment, and can collect from any of the borrower’s other assets or income.
8
Many borrowers, Benavides included,
9
do not understand that they may lose
more than their homes if they cannot make their mortgage payments.
10
In times
1
Kimbriell Kelly, Lenders Seek Court Actions Against Homeowners Years After Foreclosure, WASH.
POST (June 15, 2013), https://www.washingtonpost.com/investigations/lenders-seek-court-actions-against-
homeowners-years-after-foreclosure/2013/06/15/3c6a04ce-96fc-11e2-b68f-dc5c4b47e519_story.html.
2
Id.
3
Id.
4
Id.
5
Id.
6
In this Comment, the term “lender” refers to the party who loaned funds and is synonymous with
“mortgagee” or “creditor.” The lender is also known as the mortgage originator. “Borrower” refers to the
individual who receives the loaned funds, synonymous with “mortgagor” or “debtor.” Often, the lender will sell
the mortgage after origination. In that case, a third party will be the one to file the deficiency action. Except
where otherwise noted, lender will be used generally to refer to the party seeking to recover the mortgage debt,
even if that party was not the originator of the loan. For further discussion, see infra Part I.
7
In some states, lenders can sue the borrower in a personal action before foreclosing on the mortgaged
property. The laws that enable this option are discussed in further detail, infra, Part II.
8
Some states do not allow lenders to garnish wages to collect a deficiency judgment. See, e.g., S.C.
CODE ANN. § 37-5-104 (2015).
9
See Kelly, supra note 1.
10
See Debra Pogrund Stark et al., Dodd-Frank 2.0: Creating Interactive Home-Loan Disclosures to
Enable Shrewd Consumer Decision-Making, 27 LOY. CONSUMER L. REV. 95, 126–27 (2014) (surveying
borrowers’ knowledge of the actions available to mortgage lenders in case of default).
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1276 EMORY LAW JOURNAL [Vol. 67:1273
of economic crisis, this loss may be insurmountable:
11
in 2011, for example, the
average deficiency balance remaining after foreclosure in seven states was
$100,000.
12
Although the market has recovered in part since the worst of the financial
crisis,
13
deficiency judgments remain a serious problem for many residential
borrowers.
14
They have a harmful effect on borrowers like Benavides who
default on their mortgage payments due to job loss or other financial hardship.
15
When the process server gave him notice of the $115,000 deficiency, Benavides
was terrified.
16
He explained, “I can’t pay.”
17
Shortly thereafter, just five days
before Christmas, Benavides filed for bankruptcy.
18
Some scholars argue that lenders must be allowed to pursue deficiency
judgments to deter borrowers from engaging in what is known as strategic (or
“ruthless”) default.
19
A borrower is said to engage in strategic default when she
decides to stop making her mortgage payments despite having the financial
11
See JOHN RAO & GEOFF WALSH, FORECLOSING A DREAM: STATE LAWS DEPRIVE HOMEOWNERS OF
BASIC PROTECTIONS 3, 5 (2009).
12
See Jessica Silver-Greenberg, House Is Gone but Debt Lives On, WALL ST. J. (Oct. 1, 2011),
http://www.wsj.com/articles/SB10001424053111904060604576572532029526792. Even in a stable housing
market, a house sold at a foreclosure sale usually fetches a lower price than it would if listed through traditional
channels. See infra Part I.
13
See Andrea Riquier, The Lopsided Recovery in the Housing Market, MARKETWATCH (Dec. 19, 2016,
4:06 PM), http://www.marketwatch.com/story/the-lopsided-recovery-in-the-housing-market-2016-12-19; see
also BD. OF GOVERNORS OF THE FED. RESERVE SYS., FINANCIAL ACCOUNTS OF THE UNITED STATES: THIRD
QUARTER 2016 i (2016) (noting an increase in household net worth since 2008). Riquier argues that the financial
accounts released by the Federal Reserve in early December 2016 show an incomplete picture of the U.S.
housing market: although net worth reached an “all-time high,” and home equity rose to “just a hair below its
level in 2006,” this overlooks the “hollowed-out middle class” and borrowers with mortgages almost underwater.
Riquier, supra.
14
This Comment focuses on a narrow group of borrowers: those with a mortgage loan secured by the
borrower’s primary residence. Mortgage loans made to purchase investment properties or vacation homes are
excluded, unless otherwise noted.
15
See generally Ron Harris & Asher Meir, Non-Recourse Mortgages—A Fresh Start, 21 AM. BANKR.
INST. L. REV. 119 (2013) (discussing the advantages of state laws that prohibit deficiency judgments).
16
See Kelly, supra note 1.
17
Id.
18
Id.
19
See, e.g., Grant S. Nelson & Gabriel D. Serbulea, Strategic Defaulters Versus the Federal Taxpayer:
A Brief for the Preemption of State Anti-deficiency Law for Residential Mortgages, 66 ARK. L. REV. 65 (2013);
Dov Solomon, From the Great Depression to the Great Recession: On the Failure of Regulation in the Mortgage
Market, 42 J. LEGIS. 162 (2016).
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2018] KICKED WHILE THEY’RE DOWN 1277
resources to do so.
20
These scholars argue that without the threat of deficiency
judgments, borrowers will simply walk away from their mortgages when the
value of the home drops too far below the outstanding debt balance.
21
However,
the most recent empirical studies addressing this subject find that borrowers are
not more likely to engage in strategic default in states that prohibit deficiency
judgments.
22
This Comment proposes that the lender’s remedy after a residential borrower
defaults should be limited to foreclosure of the mortgaged real estate.
23
A few
states already have laws to this effect: what are commonly called anti-deficiency
laws, or non-recourse laws.
24
Anti-deficiency laws emerged during the Great
Depression to help alleviate some of the financial hardship faced by borrowers
nationwide.
25
The goal was to protect borrowers from losing their homes and
being pushed toward filing for bankruptcy by the imposition of a deficiency
judgment.
26
This rationale remains sound. Even when the economy is relatively
stable, deficiency judgments work an unnecessary hardship on residential
borrowers. Lenders are in a better position to reduce their exposure to losses
20
See Nelson & Serbulea, supra note 19, at 66. Nelson and Serbulea note that strategic default is often
defined more narrowly to require a borrower to go from current on her mortgage payments to 180 days late,
while remaining current on all her other non-mortgage debts. Id. at n.6 (citing Brent T. White, Take This House
and Shove It: The Emotional Drivers of Strategic Default, 63 SMU L. REV. 1279, 1284 (2010)).
21
See, e.g., Nelson & Serbulea, supra note 19. When the value of the home is below the total outstanding
debt balance, the home is said to have “negative equity.” This is also referred to as being “underwater.”
22
See, e.g., Neil Bhutta et al., Consumer Ruthlessness and Mortgage Default During the 2007 to 2009
Housing Bust, 72 J. FIN. 2433, 2436 (2017); Wenli Li & Florian Oswald, Recourse and Residential Mortgages:
The Case of Nevada 3 (Fed. Reserve Bank of Phila., Working Paper No. 15-02, 2015); Tien Foo Sing et al.,
Impact of Foreclosure Laws on Mortgage Loan Supply and Performance 6 (Sept. 11, 2016) (unpublished
manuscript), http://ssrn.com/abstract=2837333. This is because household default decisions are based on more
than just equity and the legal remedies available to the lender.
23
This proposal is limited to residential borrowers with mortgages secured by single-family, owner-
occupied primary residences. Although this will typically involve a purchase money mortgage—where the
loaned funds were used to finance the purchase of the residence—it should also apply to refinanced loans. For
further discussion of purchase money mortgages, see infra Part III. Guarantor liability, however, is beyond the
scope of this Comment.
24
In this Comment, the term “non-recourse state” will refer to a state that prohibits lenders from seeking
deficiency judgments after foreclosing on a residential borrower’s mortgaged real estate.
25
See FRANK S. ALEXANDER ET AL., GEORGIA REAL ESTATE FINANCE AND FORECLOSURE LAW § 9:1,
Westlaw (database updated Oct. 2016).
26
See id.
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1278 EMORY LAW JOURNAL [Vol. 67:1273
from default prior to originating residential mortgage loans.
27
Lenders are also
better able to absorb post-default losses due to declining property values.
28
This Comment proceeds in three parts. Part I describes the basic attributes
of mortgage loans and state foreclosure procedures that make deficiency
judgments possible. Part I also discusses the origins of anti-deficiency laws
during the Great Depression and explains the rationale behind the laws at the
time. Finally, Part I concludes by briefly explaining why deficiency judgments
were particularly staggering in the wake of the 2008 financial crisis. Part II
reviews in more detail the different types of anti-deficiency laws that have
remained in place since the Great Depression. Part II also discusses the laws of
six jurisdictions in more detail to highlight the disparities in borrower protection
between different statutory schemes. Part III presents the most compelling
arguments for prohibiting deficiency judgments after residential foreclosure.
Finally, Part III analyzes and responds to the main arguments offered against
such prohibitions.
I. B
ACKGROUND
This Part first describes the two components of a mortgage loan, the process
of foreclosure, and the two most common types of foreclosure used in the United
States. Next, it describes redemption, the process by which a borrower may save
her home, both before and after a foreclosure sale. It then discusses the origins
of anti-deficiency laws during the Great Depression. Finally, it reviews the
factors that contributed to increased instances of deficiency judgments during
the Great Recession.
A. Mortgage and Foreclosure Basics
A mortgage is created when a lender provides funds to a borrower in
exchange for two assets: the borrower’s promise to repay the loan, and the
transfer of a security interest in real property as collateral for that promise.
29
This
27
See, e.g., Kristen Barnes, “Pennies on the Dollar”: Reallocating Risk and Deficiency Judgment
Liability, 66 S.C. L. REV. 243, 246 (2014); Ron Harris & Asher Meir, Recourse Structure of Mortgages: A
Comparison Between the US and Europe, CESIFO DICE REP., Winter 2015, at 15, 17; cf. John Mixon, Deficiency
Judgments Following Home Mortgage Foreclosure: An Anachronism that Increases Personal Tragedy, Impedes
Regional Economic Recovery, and Means Little to Lenders, 22 TEX. TECH L. REV. 1, 11 (1991) (“Mortgage
lenders as a class have more money and power than borrowers. They dictate the terms of the particular contract
and use law to force compliance by the less-powerful home buyer.”).
28
See Mixon, supra note 27, at 17, 19–20.
29
See GRANT S. NELSON ET AL., REAL ESTATE FINANCE LAW 1 (6th ed. 2014). Although a mortgage can
be created when funds are loaned in exchange for a promise to repay, coupled with a security interest in personal
OLSON GALLEYPROOFS2 6/22/2018 10:28 AM
2018] KICKED WHILE THEY’RE DOWN 1279
is evidenced by two distinct legal instruments: a promissory note
30
and a security
interest.
31
The promissory note represents the borrower’s promise to perform an
obligation—in this case, repay the money loaned by the lender.
32
The security
instrument represents the lender’s interest in the borrower’s home—the real
estate as collateral for her performance.
33
In the absence of any anti-deficiency
laws, these instruments give rise to two different forms of liability if the
borrower defaults. The promissory note gives rise to personal liability, which
means that a judgment on the note can be collected from any of the borrower’s
assets or income.
34
The security instrument gives rise to an action in rem, which
the lender exercises by foreclosing on the mortgaged property.
35
There are two major methods of foreclosure used today: judicial foreclosure
and nonjudicial foreclosure.
36
Judicial foreclosure is available in all United
States jurisdictions,
37
and is the only method prescribed by statute in fifteen
states.
38
Judicial foreclosure is usually more expensive and time-consuming than
property, rather than real property, this Comment will not discuss the former. Specifically, this Comment will
focus on mortgage loans created to fund the borrower’s purchase of real property, in exchange for both the
borrower’s promise to repay, and a security interest in that same property. This type of mortgage is also known
as a purchase money mortgage. See id.
30
The Restatement notes that it can also be a contract or a bond. RESTATEMENT (THIRD) OF PROP.:
MORTGS. intro. (AM. LAW INST. 1997).
31
See, e.g., NELSON ET AL., supra note 29, at 1. The security instrument has different names (and slightly
different functions) in different jurisdictions. It is most commonly called a mortgage, a security deed, a deed of
trust (or trust deed), or deed to secure debt. This Comment will use the term “mortgage” to generally refer to all
security instruments, unless otherwise noted.
32
See id.
33
Id.
34
See id. at 705–06.
35
Cf. id.
36
Id. at 8. A minor form, called strict foreclosure, provides for a direct transfer of the mortgaged property
to the lender if the borrower does not have money to pay off the total balance owed by a certain date. See id. at
7–8. Only two states still commonly use a strict foreclosure proceeding: Connecticut and Vermont. See CONN.
GEN. STAT. ANN. § 49-24 (West 2017); VT. STAT. ANN. tit. 12, § 4941 (West Supp. 2017); RESTATEMENT
(THIRD) OF PROP.: MORTGS. § 3:1 cmt. a (AM. LAW INST. 1997).
37
See BAXTER DUNAWAY, LAW OF DISTRESSED REAL ESTATE § 13:3, Westlaw (database updated Nov.
2017).
38
These states are: Connecticut, Delaware, Florida, Illinois, Indiana, Kentucky, Louisiana, Maryland,
New Jersey, New York, North Dakota, Ohio, Pennsylvania, and Wisconsin. See CONN. GEN. STAT. ANN. § 49-
24; DEL. CODE. ANN. tit. 10, § 5061 (West Supp. 2018); FLA. STAT. ANN. § 702.01 (West 1994); 735 ILL. COMP.
STAT. ANN. 5/15-1405 (West 2011); IND. CODE ANN. §§ 32-29-1-2 to -3 (West 2013); KY. REV. STAT. ANN.
§ 426.005 (West 2006); LA. CODE CIV. PROC. ANN. arts. 2631, 3721, 3722 (2002 & 2003); MD. CODE ANN., REAL
PROP. §§ 14-204, -207(2) (West 2012 & Supp. 2017); N.J. STAT. ANN. § 2A:50-2 (West 2014); N.Y. REAL PROP.
ACTS. LAW § 1301 (McKinney 2009); N.D. CENT. CODE ANN. § 32-19-01 (West 2008); OHIO REV. CODE ANN.
§§ 2323.07, 2329.01 (West 2017); PA. R.C.P. NO. 1141(a); WIS. STAT. ANN. § 846.01 (West 2007). New Jersey
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1280 EMORY LAW JOURNAL [Vol. 67:1273
nonjudicial foreclosure because it requires the “normal incidents of litigation”:
service of process, filing a complaint, a full trial, and a court-supervised sale.
39
Nonjudicial foreclosure requirements vary by state: some only require notice by
publication,
40
while others require mailed notice to all parties with a junior
interest in the mortgaged real estate.
41
Lenders usually foreclose through
nonjudicial foreclosure pursuant to a “power of sale” provision
in the mortgage
document.
42
For that reason, nonjudicial foreclosure is often referred to as power
of sale foreclosure.
Judicial foreclosure is thought to offer better protection to borrowers during
the foreclosure process for several reasons.
43
First, because it usually has a
longer timeline than nonjudicial foreclosure,
44
the borrower has more time to
find alternate housing.
45
Second, because a full judicial hearing is required, the
borrower is better able to defend against improper or fraudulent foreclosure, or
cure the default before judgment, if financially possible.
46
Third, because of the
allows a lender to foreclose without sale under certain circumstances. See N.J. STAT. ANN. §§ 2A:50-63, -73
(West 2014). Maryland technically allows foreclosure pursuant to a power of sale, but requires the mortgagee to
file an order to commence proceedings. See MD. CODE ANN., REAL PROP. § 7-105(b) (West 2012); MD. CODE
ANN., MD RULE § 14-207(1) (West 2015). North Dakota only allows foreclosure of mortgages containing a
power of sale provision if they are held by the state or state agencies. See N.D. CENT. CODE ANN. § 35-22-01
(West 2008). Although Maine and Vermont provide by statute for a nonjudicial foreclosure process, both states
prohibit its use to foreclose a mortgage secured by a residential dwelling. See ME. REV. STAT. ANN. tit. 14,
§ 6203-A(1) (Supp. 2016); VT. STAT. ANN. tit. 12, § 4961 (West Supp. 2017).
39
See GRANT S. NELSON ET AL., LAND TRANSACTIONS AND FINANCE 320 (5th ed. 2016). Judicial
foreclosure is thought to produce “the most marketable title.” Id.
40
See id. at 320, 329. A sheriff or other public official often conducts the sale. Id. If the mortgage form
used is a deed of trust, then a trustee will conduct the sale. Id. at 320, 333.
41
See id. at 320, 329. These are called necessary parties. See id. at 322–23. A necessary party is anyone
with an interest in the property that will be terminated by proper foreclosure; any creditor who holds a lien on
the property that is subordinate to the mortgage being foreclosed is considered a necessary party. See id. at 323.
These creditors are most often other lenders that originated a second or a third mortgage on the property. The
reason that subordinate, or junior, liens are terminated by foreclosure is to allow the foreclosure sale purchaser
to acquire the land in the same state it was in when the borrower acquired it, just before the first mortgage was
created—i.e., completely unencumbered. See id. at 322–23. If junior lienors are not made parties to the judicial
foreclosure proceeding (or not given notice of a nonjudicial foreclosure sale) they are said to be omitted junior
lienors (OJLs), and their interests are not terminated by the foreclosure. Id. at 325. OJLs can either foreclose on
their liens or exercise their right to redeem by paying off the senior mortgage; redemption gives them ownership
of the senior debt, not the land, as it would if the mortgagor was the redeeming party. Id. at 326.
42
See id. at 320. Some states do not require a power of sale provision for the lender to foreclose
nonjudicially. See, e.g., VA. CODE ANN. § 55-59(7) (West 2010); W. VA. CODE ANN. § 38-1-3 (West 2002).
43
See RAO & WALSH, supra note 11, at 12, 42–43.
44
See NELSON ET AL., supra note 39, at 320–21.
45
See supra note 39 and accompanying text.
46
See RAO & WALSH, supra note 11, at 11–13, 20–22, 29, 30.
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2018] KICKED WHILE THEY’RE DOWN 1281
judicial supervision, the sale price may be higher than it would be with a
nonjudicial foreclosure.
47
Several states only allow deficiency actions after
judicial foreclosure to discourage mortgagees from selecting the less borrower-
friendly nonjudicial foreclosure.
48
In practice, both judicial and nonjudicial foreclosure proceedings usually fail
to bring an adequate sale price for the foreclosed property.
49
The lender has
several advantages over potential third-party bidders, and is frequently the only
party in attendance at the sale.
50
The lender can bid up to the amount the
borrower owes without using any cash, while the third party will incur an “out-
of-pocket expense from the first dollar bid.”
51
Although foreclosure statutes
require the lender to advertise the sale, in many areas the notice is published in
a legal newspaper that is not widely read.
52
Even if the advertisement includes
all of the information required by statute, it may still be too technical for the
average third party to determine what property is being offered for sale.
53
Third
parties may also be discouraged from bidding on foreclosed real estate because
they doubt the quality of the title being auctioned.
54
They may also have a
difficult time inspecting the property prior to the sale if the borrower occupying
the property is uncooperative.
55
Statutory rights of redemption, discussed in the
next section, can also discourage third-party bidding.
B. Borrower’s Rights of Redemption
Whether the lender uses judicial or nonjudicial foreclosure, the borrower
may “redeem” the property prior to foreclosure by tendering the full balance
47
See id. at 39. Some states require the court to set a minimum bid amount for the sale based on the
appraised value of the real estate. See id. Other states require judicial review of the sale before ratification. See
id. at 12, 42–44.
48
Cf. Barnes, supra note 27, at 255–57, 269, 271 n.167; Harris & Meir, supra note 15, at 124 n.21
(describing a similar approach under California law).
49
See Grant S. Nelson, The Impact of Mortgagor Bankruptcy on the Real Estate Mortgagee: Current
Problems and Some Suggested Solutions, 50 MO. L. REV. 217, 248 (1985).
50
Id.
51
Id.
52
Id.
53
Id.
54
Id.
55
Id. Nelson notes that although it is probably in the borrower’s interest to allow third parties to see the
property—especially if the borrower has made improvements since moving in—one can imagine why she might
be less than inviting to these potential purchasers. See id. The borrower may assume that third parties who visit
her property are agents of her lender, there to evict or harass her for money she does not have, and may be too
fearful or angry to come to the door to learn otherwise.
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1282 EMORY LAW JOURNAL [Vol. 67:1273
due.
56
This right is known as the borrower’s equity of redemption, and its
existence is sacrosanct in American mortgage law.
57
The borrower’s equity of
redemption terminates upon foreclosure.
58
A few states provide for a corollary
redemption right that begins at the time of foreclosure: the statutory right of
redemption (SRR). Unlike the equity of redemption, which is exercised by
tendering the full mortgage debt owed to the lender, the SRR has a potentially
lower price tag. A borrower may redeem the property under an SRR by tendering
the foreclosure sale price.
59
The statutory period ranges from thirty days up to a
full year following the sale.
60
SRRs are thought to not only benefit borrowers during the foreclosure
process, but also to provide post-foreclosure protection from deficiency
judgments, for a few reasons. The borrower may have more time to find alternate
housing before she is forced to vacate the property. She may even redeem the
property at a discount, if the foreclosure sale price was much lower than the total
debt balance. Conversely, the threat of borrower
61
redemption is thought to
encourage competitive bidding by parties attending the sale, who wish to avoid
losing the property during the post-foreclosure statutory period.
62
Some states
that offer statutory periods of redemption also use this right as a replacement for
an effective anti-deficiency law.
63
SRRs rarely accomplish their intended goals. Borrowers who default on their
mortgage payments are rarely illiquid for a short time. To illustrate: Benavides,
his wife, and their two daughters were still living in a cramped two-bedroom
56
See RESTATEMENT (THIRD) OF PROP.: MORTGS. §§ 3:1, 6:4 (AM. LAW INST. 1997).
57
See GRANT S. NELSON ET AL., REAL ESTATE TRANSFER, FINANCE, AND DEVELOPMENT: CASES AND
MATERIALS 126–29 (9th ed. 2015); see also RESTATEMENT (THIRD) OF PROP.: MORTGS. §§ 3:1, 6:4 (AM. LAW
INST. 1997).
58
See RESTATEMENT (THIRD) OF PROP.: MORTGS. §§ 3:1, 6:4 (AM. LAW INST. 1997); see also NELSON
ET AL., supra note 57, at 128–29.
59
See NELSON ET AL., supra note 29, at 9.
60
See, e.g., KAN. STAT. ANN. § 60-2414(a) (West Supp. 2016) (providing for a twelve-month statutory
redemption period); cf. S.C. CODE ANN. § 15-39-720 (2005) (providing that the sale “shall remain open” to other
bidders, including the lender, for thirty days after the day of the judicial sale).
61
The borrower is not the only party who may exercise a statutory right of redemption. See S.C. CODE
ANN. § 15-39-720. Other creditors may also redeem the property during the statutory period, depending on the
state. Some states provide for an exclusive period of borrower redemption, before allowing other creditors to
redeem. See, e.g., IOWA CODE ANN. § 628.3 (West 1999) (limiting redemption during the first six months
following foreclosure to the borrower exclusively).
62
See Nelson, supra note 49, at 248.
63
See, e.g., IOWA CODE ANN. § 654.26 (West 1995); MINN. STAT. ANN. § 582.32 (West 2010); see also
Mixon, supra note 27, at 23 n.67; infra notes 123–27 and accompanying text.
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apartment when the process server called more than three years after
foreclosure.
64
He could not pay the deficiency judgment of $115,000, let alone
the foreclosure sale price of $279,700.
65
Extending the redemption period by a
month—or even a year—after foreclosure is not a realistic time frame for a
borrower to recover her finances and redeem her home. Instead, SRRs put
downward pressure on the foreclosure sale price by creating title uncertainty
among potential third-party purchasers and by discouraging competitive
bidding.
66
C. Evolution of State Mortgage Law
Anti-deficiency laws emerged during the Great Depression in response to
the widespread financial ruin plaguing borrowers.
67
Between 1928 and 1932,
real estate lost over 50% of its value.
68
By 1933, the unemployment rate rose to
25%,
69
and the foreclosure rate almost quadrupled.
70
Not only were borrowers
unable to make their mortgage payments, but their homes were also selling for
nominal amounts at foreclosure sales, and lenders were suing for staggering
amounts in deficiency actions. Often, this was a direct result of lender behavior:
the lender would buy the property at foreclosure for well below market value
before it obtained a deficiency judgment for the remaining debt balance.
71
Then,
the lender would turn around and sell the property on the open market for a
higher price, thus realizing a windfall, or “double recovery.”
72
However,
depressed housing prices also meant that the foreclosure sale was likely to
produce a significant deficiency, even absent lender misconduct.
To protect borrowers from the devastation of both losing their homes and
being forced into bankruptcy by deficiency judgments, state legislatures
responded with a variety of different anti-deficiency laws.
73
The laws took
64
See Kelly, supra note 1.
65
See id.
66
See Nelson, supra note 49, at 248. SRRs may also lead to property deterioration if the borrower neglects
upkeep or vacates the property before the end of the redemption period, another deterrent to potential bidders.
67
Cf. David C. Wheelock, Changing the Rules: State Mortgage Foreclosure Moratoria During the Great
Depression, 90 FED. RES. BANK ST. LOUIS REV. 569, 574 (2008).
68
Tom Nicholas & Anna Scherbina, Real Estate Prices During the Roaring Twenties and the Great
Depression, 41 REAL EST. ECON. 278, 280 (2013).
69
See Wheelock, supra note 67, at 570.
70
See Andra C. Ghent, Securitization and Mortgage Renegotiation: Evidence from the Great Depression,
24 REV. FIN. STUD. 1814, 1816 (2011). This rate refers to non-farm properties only. Id.
71
See Solomon, supra note 19, at 170–71.
72
See id.
73
The different forms of anti-deficiency laws that developed are discussed in more detail, infra Part II.
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different forms—some prohibited deficiency judgments outright, while others
simply limited the amount a lender could recover—but the policy objectives
were consistent: after the trauma of foreclosure, the borrower should not be hit
with a crippling deficiency judgment.
74
Lenders challenged the anti-deficiency laws as a violation of the U.S.
Constitution, claiming the laws were an impermissible impairment of contracts
by the states.
75
The Supreme Court disagreed,
76
more than once.
77
It
distinguished between a contractual obligation and a contractual remedy, finding
the latter outside the ambit of protection prescribed by Article I.
78
More
importantly, the Court concluded that states have the authority under their police
powers to modify “existing contract rights” as necessary to protect their
citizens.
79
This power may be used to “protect the lives, health, morals, comfort,
and general welfare of the people, and is paramount to any rights under
contracts.”
80
D. The Great Recession
The Great Recession has illuminated the need for re-evaluation of state
foreclosure laws. Although the arguments in favor of banning deficiency
judgments may be more persuasive during a widespread foreclosure crisis, the
need to protect borrowers from foreclosure and unnecessary financial ruin does
not disappear as the economy recovers.
81
Unfortunately, very few states seized
the opportunity to revisit their laws related to residential mortgage foreclosure.
The changed nature of residential mortgage lending since the Great Depression
makes it even more important to protect borrowers from the unnecessary
hardship of a deficiency judgment. Today there are more ways for lenders to
induce borrowers into taking out unsustainable loans that inevitably lead to
74
See ALEXANDER ET AL., supra note 25, § 9:1.
75
See Mixon, supra note 27, at 58–59; see also U.S. CONST. art. I, § 10, cl. 1.
76
See Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934).
77
See Gelfert v. Nat’l City Bank of N.Y., 313 U.S. 221 (1941); Honeyman v. Jacobs, 306 U.S. 539 (1939).
78
See Blaisdell, 290 U.S. at 429 n.8 (citation omitted).
79
See id. at 437.
80
See id. (quoting Manigault v. Springs, 199 U.S. 473, 480 (1905)). The court later held that this
reasoning was valid even absent a declared state of emergency. Gelfert, 313 U.S. at 235.
81
Determining whether the economy has recovered is outside the scope of this Comment, but reports
show that the nationwide foreclosure rate has dropped since its peak in 2012. See CORELOGIC, NATIONAL
FORECLOSURE REPORT NOVEMBER 2016 4 (2017) (“The foreclosure rate, currently at 0.8 percent, is back to June
2007 levels.”).
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severe negative equity and foreclosure.
82
These conditions developed in the
mortgage industry over the course of the last century, contributing to both
individual borrower hardship and the widespread financial collapse of the Great
Recession.
Deregulation of the mortgage market occurred during the second half of the
twentieth century, allowing the residential mortgage market to evolve from a
conservative industry to one that tolerated (and often encouraged) riskier
lending.
83
Deregulation helped alleviate the “immediate pressures” faced by the
banking industry in the 1970s and 1980s.
84
But it also led to the adoption of less
prudent underwriting standards, the proliferation of riskier types of mortgage
loans, and a practice of targeting borrowers who did not have the ability to repay
the debt they incurred.
85
Because lenders could securitize mortgages after
origination, the risk of default was shifted to investors on the secondary market,
and the traditional incentives for risk-averse lending were abated.
86
This,
combined with government initiatives in the 1990s and early 2000s advocating
for increased homeownership, led more individuals to seek out home mortgage
loans.
87
The increased demand for home mortgage loans was met with an increased
supply in the form of predatory and subprime loan products.
88
Lenders induced
borrowers who could not qualify for prime loans to instead take out adjustable-
rate mortgages (ARMs) with low initial rates that increased substantially after a
few years.
89
Borrowers were assured that they could refinance when the rates
reset—at that point, the lenders returned and refinanced the loans with more fees
82
Negative equity—when the value of the mortgaged property is less than the total debt balance—is
dangerous for borrowers because it often leads to a deficiency after foreclosure. If the borrower owes $200,000
on the loan, and the home has a market value of $160,000, the borrower is said to have $40,000 in negative
equity. The foreclosure sale price is likely to be even lower than the estimated market value, putting the borrower
in a recourse state at risk for a substantial deficiency judgment.
83
See, e.g., KATHLEEN C. ENGEL & PATRICIA A. MCCOY, THE SUBPRIME VIRUS: RECKLESS CREDIT,
REGULATORY FAILURE, AND NEXT STEPS 16 (2011); Joseph William Singer, Foreclosure and the Failures of
Formality, or Subprime Mortgage Conundrums and How to Fix Them, 46 CONN. L. REV. 497, 507 (2013). To
be fair, deregulation occurred in part due to Congress’s response to the “faltering” banking industry and the
drought of real estate sales in the 1970s and early 1980s. See ENGEL & MCCOY, supra, at 16.
84
See ENGEL & MCCOY, supra note 83, at 16.
85
See id.
86
See id. at 18.
87
See id. at 20–21. The initiative began under President Clinton, and was then championed by President
Bush when he took office in 2001 as the new “Ownership Society.” See id.
88
See id. at 22–25.
89
See id. at 23.
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that tacked onto the principal, raising the monthly payments.
90
In the subprime
market, lenders would use a “bait and switch” technique to describe favorable
loan terms to borrowers without making an actual offer;
91
when borrowers
arrived at closing, closing agents would hurry them through a large stack of
documents and dismiss concerns if they questioned any of the changed terms.
92
When major investment banks began buying subprime lenders in the early to
mid 2000s, they claimed to put an end to the abusive practice the lenders had
previously used.
93
One of those investment banks, Lehman Brothers, was the lender who
originated Benavides’s loan.
94
Lehman Brothers had already filed for
bankruptcy by the time Benavides was hit with the $115,000 deficiency.
95
Benavides had no idea why he was being sued three years after the foreclosure;
after getting no information from an attorney in the suit and the process server,
he finally called a local bank.
96
The bank told him there was nothing to be done.
97
Freddie Mac was the insurer for Benavides’s loan, and—although it and Fannie
Mae both claim to only pursue deficiencies when they suspect the borrower of
strategic default
98
—it assigned Benavides’s mortgage to Dyck-O’Neal for
collection instead.
99
Another change in the mortgage industry is the ability of lenders to sell loans
once they are in various stages of delinquency, or to sell bundles of deficiencies
after obtaining the judgments.
100
Lenders sell the distressed assets for “pennies
90
See id. After housing prices fell sharply, borrowers were unable to refinance their loans, and were left
paying fixed interest rates as high as 18%. See id.
91
Federal disclosure laws only prohibited lenders from changing the terms if they had made a “binding
offer.” Id. at 24.
92
See id.
93
Id. at 26. The former CEO of Lehman Brothers, Richard Fuld, testified before the House Committee
on Government Oversight and Reform that when they bought the subprime lenders, “[they] changed
management, [they] changed underwriting standards to make them much more restrictive, to improve the quality
of the loans that we did in fact originate so that those loans that we did then put into securitized form would be
solid investments for investors.” Id.
94
See Kelly, supra note 1.
95
Id.
96
Id.
97
Id.
98
Deficiency Collections Overview, FANNIE MAE (July 8, 2015), https://www.fanniemae.com/content/
fact_sheet/deficiency-collections-overview.pdf; see also Kelly, supra note 1.
99
See Kelly, supra note 1.
100
See Gary Blankenship, Foreclosure Deficiencies Less than Expected, but Still Raise Questions, FLA.
B. NEWS (Jan. 15, 2015), https://www.floridabar.org/news/tfb-news/?durl=/DIVCOM%2FJN%2Fjnnews01%2
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on the dollar” because investors understand that most of the deficiencies are
uncollectable.
101
One attorney representing sixty borrowers in Florida stated that
none of his clients had the financial resources to pay the deficiencies Dyck-
O’Neal sought to collect from them, which averaged around $100,000 each.
102
Some of these borrowers had moved out of state since their foreclosure, but
Dyck-O’Neal sued them in Florida to collect unsecured debt; the borrowers’
attorney asserted that this practice violated the Fair Debt Practices Act.
103
Even if recent federal legislation and increased news coverage have reduced
the instances of abusive lending and post-foreclosure practices, borrowers
remain in need of protection. In the absence of lender misconduct, some
borrowers will inevitably default on their mortgage payments due to
unavoidable and unforeseeable financial constraints from job loss, unexpected
medical bills, or death of an income-providing family member. While states may
not be able to prevent these borrowers from losing their homes to foreclosure
under such circumstances, they can protect them from the additional and
unnecessary hardship of a deficiency judgment—a hardship regardless of
whether it is pursued immediately following foreclosure, or just shy of twenty
years later. The next Part highlights the dearth of borrower protections in many
states.
II. S
TATE LAWS
This Part first breaks state anti-deficiency judgment laws into three broad
categories: (1) states with no anti-deficiency laws, (2) states that ban deficiency
judgments outright for certain groups of borrowers, and (3) states with modified
forms of anti-deficiency laws. Then, it reviews the most common forms of
modified anti-deficiency laws.
Next, it discusses the laws in New Hampshire,
Maryland, Georgia, and Iowa to highlight the inadequacy of residential
borrower protection in those (and other similarly legislated) jurisdictions.
Finally, for comparison, it discusses the anti-deficiency laws in North
Dakota and Oregon, both of which provide an example of a statutory scheme
that adequately protects residential borrowers.
Ensf%2Fcb53c80c8fabd49d85256b5900678f6c%2F665edb7b7c924db985257dc400481e98%21OpenDocume
nt; see also Barnes, supra note 27, at 263–64 n.121 (citing Silver-Greenberg, supra note 12).
101
Blankenship, supra note 100.
102
Id.
103
Id.
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A. The Three Broad Categories
In the District of Columbia and Alabama, Delaware, Indiana, Kentucky,
Missouri, New Hampshire, Rhode Island, Virginia, West Virginia and
Wyoming, lenders can seek deficiency judgments with no limitations.
104
In this
Comment, “no limitations” means that the legislation is either silent as to
statutory limitations on deficiency judgments, or merely reiterates that lenders
can seek a deficiency if the sale of the property does not cover the full balance
of the debt. In Illinois, lenders can pursue deficiency judgments if they request
it in the complaint, subject to judicial discretion.
105
Arizona, California, Montana, Nevada, North Carolina, North Dakota, and
Oregon prohibit deficiency judgments following foreclosure of either a specific
type of mortgage, or specific type of secured property.
106
These are either
purchase money mortgages, or mortgages secured by residential property. A
purchase money mortgage is generally defined as a loan made to fund the unpaid
purchase price of real property.
107
Purchase money mortgages are distinguished
from mortgage loans a borrower acquires after purchasing her home, which may
104
See ALA. CODE § 35-10-1 (2014); DEL. CODE ANN. tit. 10, § 5065 (West 2006); D.C. CODE ANN. § 42-
816 (West 2013); IND. CODE ANN. § 32-29-1-2 (West 2013) (allowing a deficiency judgment without limitation
if the mortgage contains an express “covenant for the payment of the sum intended to be secured by the
mortgage”); KY. REV. STAT. ANN. § 426.005 (West 2006); MO. ANN. STAT. § 443.420 (West 2000); N.H. REV.
STAT. ANN. § 479:25 (Supp. 2017); 34 R.I. GEN. LAWS ANN. § 34-27-1 (West 2006); VA. CODE ANN. §§ 55-59,
-61 (West 2010); W. VA. CODE ANN. § 38-1-7 (West Supp. 2017); WYO. STAT. ANN. §§ 1-18-113, 34-4-113(c)
(West 2007); see also DUNAWAY, supra note 37, at app. 19A (2016) (describing Delaware law as having no
“specific statutory provision” for deficiency judgments but that the “court controls this through confirmation of
sale”); Grant S. Nelson, Deficiency Judgments After Real Estate Foreclosures in Missouri: Some Modest
Proposals, 47 MO. L. REV. 151, 157 (1982) (discussing Missouri Law).
105
See 735 ILL. COMP. STAT. ANN. 5/15-1511 (West 2011). Although one source suggests that deficiency
judgments are rarely granted in Illinois because they are subject to judicial discretion, another scholar proposes
that this pattern has changed in recent years. Compare State Anti-deficiency Laws & Non-recourse Laws,
BILLS.COM (Feb. 18, 2015), https://www.bills.com/anti-deficiency (stating that deficiency judgments are rarely
granted due to judicial discretion), with Barnes, supra note 27, at 249–50 (citing Honorable Mathias W. Delort,
Assoc. Judge, Cook Cty. Circuit Court, Keynote Address at the University of Northern Illinois Law Review
Symposium: The Mortgage Foreclosure Crisis (Apr. 20, 2012)) (noting that “[t]here is evidence to suggest that
Illinois judges are moving away from this practice”).
106
See, e.g., ARIZ. REV. STAT. ANN. §§ 33-725(B), -727(A), -729(A) (2014); CAL. CIV. PROC. CODE
§§ 580b, 726(b) (West 2015 & Supp. 2018); MONT. CODE ANN. §§ 71-1-222(2), -232 (West 2009); NEV. REV.
STAT. ANN. § 40.459(3) (West Supp. 2017); N.C. GEN. STAT. ANN. § 45-21.38 (West 2013); N.D. CENT. CODE
ANN. § 32-19-03 (West 2008); OR. REV. STAT. ANN. § 88.103 (West Supp. 2017). Some of these states also
have laws similar to the modified anti-deficiency laws discussed infra Section II.B.
107
See Purchase-Money Mortgage, BANKRATE, https://www.bankrate.com/glossary/p/purchase-money-
mortgage (last visited Mar. 21, 2018). Purchase money mortgages can be financed by a third-party lender, such
as a bank, or by the individual who sells the property. This Comment focuses on third-party loans.
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include a smaller second mortgage, or a refinanced first mortgage, or a home
equity line of credit.
The remaining thirty-three states fall into the third broad category: they have
a form of anti-deficiency legislation in place. These states limit lender access to
deficiency judgments more than the states in category one, but offer far less
protection to residential borrowers than the states in category two that ban
deficiency judgments. These anti-deficiency variations were enacted at the same
time as the outright bans, but reflect the choice of the state legislatures to only
address a narrow part of the problem.
B. Anti-Deficiency Variations
Although no two states share the exact same catalogue of anti-deficiency
laws, most fall into one of the following categories: (1) laws prohibiting
deficiency judgments after nonjudicial foreclosure, (2) fair value laws, (3) time
limitations to file a deficiency, (4) one action rules,
and (5) laws that prohibit
deficiency judgments if the lender chooses a shortened SRR.
Alaska, Hawaii, Oklahoma and Washington all prohibit deficiency
judgments if the lender chooses nonjudicial foreclosure.
108
The rationale behind
this type of anti-deficiency law is that the judicial foreclosure process benefits
borrowers by providing them a longer time frame, a judicial hearing to protect
them from improper or fraudulent foreclosure, and a higher foreclosure sale
price.
109
In contrast, the states that prohibit lenders from seeking a deficiency
judgment after nonjudicial foreclosure reason that lenders will rarely choose the
judicial process because of the added cost; but if they do, borrowers will be
protected from deficiency judgments because the sale price will be higher.
110
Although the added cost and inconvenience of judicial foreclosure may cause
fewer lenders to seek deficiency judgments in these states, this type of statute
offers no protections to the borrowers from whom they do seek to recover. The
foreclosure sale price will likely still reflect the lack of competitive bidding at
the auction, and the borrower will still be left without a home and with the
crushing financial burden of a deficiency judgment.
108
See ALASKA STAT. ANN. § 34.20.100 (West 2007); HAW. REV. STAT. ANN. § 667-38 (West Supp.
2017); WASH. REV. CODE ANN. § 61.24.100(1) (West 2004). Oklahoma prohibits deficiency judgments after
nonjudicial foreclosure if the property qualifies as a homestead and the borrower notifies the lender of this at
least ten days prior to the sale. See OKLA. STAT. ANN. tit. 46, § 43(A)(2)(c) (West 2014).
109
See supra Section I.A.
110
See supra Section I.A.
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Fair value laws limit the maximum amount that a lender can recover in a
deficiency judgment.
111
They vary by state, but the most common approach is to
limit the deficiency to the difference between the fair market value of the
property and the total balance owed on the debt—even if the property sells at
foreclosure for less than fair market value.
112
As of this writing, there are
eighteen states that impose some type of fair value limit on the amount that a
lender can recover in a deficiency judgment.
113
Although these statutes may
lessen the hardship to the borrower imposed by a deficiency judgment, they will
have no effect in a depressed market, in which the value of the borrower’s home
is still significantly less than the amount she owes. And even when these statutes
do succeed in lessening the amount of the deficiency, they fail to achieve the
goal of the states’ respective legislatures: to protect borrowers from losing their
homes and then being forced into bankruptcy by a deficiency judgment.
114
Currently, fourteen states limit the time in which a lender can file a
deficiency judgment after foreclosure and sale of the property.
115
The limits
range from ninety days to six years.
116
Although these laws restrict the time that
the lender has to file a claim for a deficiency, they do not similarly restrict the
time the lender has to collect a deficiency judgment, if one is awarded. For
example, although Maryland shortened its statute of limitations for filing a
deficiency action from twelve to three years, it did not change the statutory
111
See Mixon, supra note 27, at 33–34.
112
See, e.g., ARK. CODE ANN. § 18-50-112(b)(2) (West 2004).
113
See id.; COLO. REV. STAT. ANN. § 38-38-106(6) (West Supp. 2017); CONN. GEN. STAT. ANN. § 49-14(a)
(West 2006); FLA. STAT. ANN. §§ 45.031(8), 702.06 (West Supp. 2017); GA. CODE ANN. § 44-14-161(a) (West
2003); IDAHO CODE ANN. §§ 6-101(1), -108, 45-1512 (West 2006); KAN. STAT. ANN. §§ 60-2415(b), -2417(b)
(West 2008); NEB. REV. STAT. ANN. § 76-1013 (West 2009); N.J. STAT. ANN. § 2A:50-1 to -2 (West 2014); N.Y.
REAL PROP. ACTS. LAW § 1371(1)–(2) (McKinney 2009); OHIO REV. CODE ANN. § 2329.20 (West Supp. 2017);
OKLA. STAT. ANN. tit. 12, § 686 (West 2015); S.C. CODE ANN. §§ 29-3-660, -740 (2007); S.D. CODIFIED LAWS
§§ 21-47-16, -48-14 (2004); TENN. CODE ANN. § 35-5-118(a)–(c) (West 2017); TEX. PROP. CODE ANN.
§§ 51.003–004 (West 2014); UTAH CODE ANN. § 57-1-32 (West 2016); WIS. STAT. ANN. §§ 846.04(1), .10(1),
.165(2) (West 2007 & Supp. 2017).
114
See ALEXANDER ET AL., supra note 25, § 9:1.
115
See ARK. CODE ANN. § 18-50-112(a)(1); CONN. GEN. STAT. ANN. § 49-14(a); GA. CODE ANN. § 44-14-
161(a); IDAHO CODE ANN. §§ 6-101(1), 45-1512; MD. CODE ANN., REAL PROP. § 7-105.13(d) (West Supp.
2017); MD. CODE ANN., MD. RULES § 14-216(b) (West 2015); MASS. GEN. LAWS ANN. ch. 244, § 17A (West
2004); MISS. CODE ANN. §§ 11-5-111, 15-1-23 (West 2008 & 2013); NEB. REV. STAT. ANN. § 76-1013; N.J.
STAT. ANN. § 2A:50-2; N.M. STAT. ANN. § 48-10-17(A) (West Supp. 2016); N.Y. REAL PROP. ACTS. LAW
§ 1371(2); OHIO REV. CODE ANN. § 2329.08 (West 2004); OKLA. STAT. ANN. tit. 12, § 686; TENN. CODE ANN.
§ 35-5-118(d); TEX. PROP. CODE ANN. §§ 51.003(a), .004(b); UTAH CODE ANN. § 57-1-32.
116
See, e.g., N.J. STAT. ANN. § 2A:50-2 (proscribing a ninety-day or three-month statute of limitations);
N.M. STAT. ANN. § 48-10-17(A), (E) (proscribing a six-year statute of limitations).
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period for judgment collection; the collection period is still twelve years, and
lenders may extend it for another twelve years before the first period expires.
117
The one-action-rules category encompasses three different, but related, types
of anti-deficiency laws: (1) election-of-remedies rules, (2) security-first rules,
and (3) one-action rules. Election-of-remedies rules require the lender to choose
between foreclosure of the mortgaged property or an action on the note.
118
Security-first rules require the lender to exhaust the secured property before
pursuing the borrower’s unsecured assets.
119
They do not prohibit a deficiency
judgment; they merely require the lender to foreclose and sell the property before
filing a claim on the note for a deficiency.
120
One-action rules require the lender
to assert all claims against the borrower in one action; these laws aim to protect
the borrower from multiple actions that could have been settled at one time.
121
They do not, however, prohibit deficiency judgments by themselves. There is
disagreement over the exact number of states with laws in one of these
categories, but there is a general consensus that at least the following six states
qualify: California, Idaho, Nevada, New Jersey, Oregon, and Utah.
122
Finally, twenty-seven states grant borrowers an SRR after foreclosure.
123
The primary rationale for these grants is that SRRs result in much higher
117
See infra note 155 and accompanying text.
118
See, e.g., OR. REV. STAT. ANN. § 88.103 (West Supp. 2017); Banteir v. Harrison, 485 P.2d 1073, 1075
(Or. 1971) (“If the purchase money mortgagee elects to foreclose the mortgage, he is barred from bringing an
action on the mortgage debt, or he may obtain a judgment on the mortgage debt, in which case he loses his
mortgage lien.” (citation omitted)). But see Magnolia Lumber Corp. v. Lithia Lumber Co., 404 P.2d 190, 193–
94 (Or. 1965) (holding that the lender may foreclose on the mortgaged real estate and bring an action on the note
if the mortgage was secured by both real and personal property at origination).
119
See PATRICK E. MEARS ET AL., STRATEGIES FOR SECURED CREDITORS 136 (2d ed. 2012).
120
See id.
121
See id.
122
See CAL. CIV. PROC. CODE § 726(a) (West 2015); IDAHO CODE ANN. § 6-101(1) (West 2006); NEV.
REV. STAT. ANN. § 40.430(1) (West Supp. 2017); N.J. STAT. ANN. § 2A:50-2 (West 2014); OR. REV. STAT. ANN.
§ 86.752(4) (West. Supp. 2017); UTAH CODE ANN. § 78B-6-901(1) (West 2009). Montana has a foreclosure
statute that was modeled after California’s, and the Montana Supreme Court has stated that the state has “adopted
the construction given to the statute by the Supreme Court of California.” David J. Dietrich, The Montana
Judicial and Non-judicial Foreclosure Sale: Analysis and Suggestions for Reform, 49 MONT. L. REV. 285, 297–
98 (1988). Minnesota, New York, and Washington have also been cited as states with one action or security first
rules. See MEARS ET AL., supra note 119, at 136.
123
ALA. CODE § 6-5-248(a)–(b) (Supp. 2017); ALASKA STAT. ANN. §§ 09.35.250, .45.190 (West 2007);
ARIZ. REV. STAT. ANN. §§ 12-1283(A), -1566(C) (2016); ARK. CODE ANN. § 18-49-106(a) (West 2004); CAL.
CIV. CODE § 2931 (West 2012); CAL. CIV. PROC. CODE §§ 729.010(a), .030 (West 2015); 735 ILL. COMP. STAT.
ANN. § 5/15-1603 (West 2011); IOWA CODE ANN. § 628.3 (West 1999); KAN. STAT. ANN. § 60-2414(a) (West
Supp. 2016); KY. REV. STAT. ANN. §§ 426.220(1), .530(1) (West Supp. 2017); MASS. GEN. LAWS ANN. ch. 244,
§ 35 (West 2004); MICH. COMP. LAWS ANN. § 600.3140(1) (West Supp. 2017); MINN. STAT. ANN. §§ 580.23,
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foreclosure sale prices,
124
allowing the lenders to recover the full debt owed from
the property alone. Because SRRs more often cause less competitive foreclosure
sale bidding,
125
they fail to offer borrowers any meaningful protection from
deficiency judgments. Some states allow borrowers to waive or limit their SRRs
in exchange for the lender’s agreement to waive its right to a deficiency
judgment.
126
Although these statutes could potentially offer borrowers adequate
protection from deficiency judgments, they require the borrower to have
knowledge and comprehension of state laws beyond that of the average
borrower. These statutes are also ripe for lender abuse: if the lender does not
formally cancel the mortgage debt after the borrower agrees to waive her SRR,
the lender can still pursue a deficiency judgment after foreclosure.
127
C. No Limit: New Hampshire & Maryland
In New Hampshire, lenders exclusively use nonjudicial foreclosure.
128
After
the lender confirms that the mortgage document contains a power of sale
provision, the lender must determine whether there are other lienholders or
interested parties entitled to notice of foreclosure.
129
Residential borrowers are
entitled to receive notice at least forty-five days prior to the foreclosure sale.
130
.25, 582.32(5)(d) (West 2010 & Supp. 2018); MO. ANN. STAT. § 443.290, .410, .420 (West 2000); MONT. CODE
ANN. §§ 25-13-710, -801(1)(a), -802 (West 2009); NEB. REV. STAT. ANN. § 25-1530(1) (West 2009); N.J. STAT.
ANN. § 2A:50-4 (West 2014); N.M. STAT. ANN. §§ 39-5-18(A), -21, 48-10-16(A)–(B) (West 2010 & Supp.
2016); N.Y. REAL PROP. ACTS. §§ 1352, 1353(3) (McKinney 2009 & Supp. 2018); N.D. CENT. CODE ANN. § 32-
19-18 (West 2008); OR. REV. STAT. ANN. §§ 18.964(1), .966, .975, 88.106 (West Supp. 2017); S.C. CODE ANN.
§§ 15-39-720, -760 (2005); S.D. CODIFIED LAWS §§ 21-47-23, -52-4 to -52-5, -52-7, -52-11, -52-14, -52-23
(2004); TENN. CODE ANN. §§ 66-8-101 to -103 (West 2002); UTAH CODE ANN. § 78B-6-906(1) (West 2009);
UTAH R. CIV. P. 69C (West 2016); VT. STAT. ANN. tit. 12, § 4941(c)–(d) (West Supp. 2017); WASH. REV. CODE
ANN. §§ 6.21.080, .23.010, .23.020 (West 2009 & Supp. 2018); WYO. STAT. ANN. § 1-18-103(a) (West Supp.
2017).
124
See supra Section I.B.
125
See supra note 66 and accompanying text.
126
IOWA CODE ANN. § 654.26 (West 1995); MINN. STAT. ANN. § 582.32.
127
See, e.g., IOWA CODE ANN. §§ 654.20, 654.26; MINN. STAT. ANN. § 582.32. This problem arises with
short sales and agreements for a deed-in-lieu of foreclosure as well.
128
Judicial foreclosure is technically available through an equitable proceeding, but this rarely occurs. See
N.H. REV. STAT. ANN. § 479:25 (Supp. 2017); see also COMM’N TO STUDY N.H. MORTG. FORECLOSURE LAW,
NEW FED. REGULATIONS, & FAIR FORECLOSURE PRACTICES, FINAL REPORT ON SB 306, CHAPTER 198, LAWS OF
2014 5–6 (2014) [hereinafter FINAL REPORT]. Comparing the merits of judicial versus nonjudicial foreclosure is
outside the scope of this Comment; however, the Final Report notes that judicial foreclosure is “the gateway to
mediation” and it “slows the process down enough to allow both parties to explore the benefits of loss
mitigation.” Id. at 7.
129
N.H. REV. STAT. ANN. § 479:25.
130
Id.
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If the borrower fails to petition the superior court in her county prior to the sale,
she is forever barred from asserting any claim regarding the validity of the
foreclosure.
131
New Hampshire has no fair value law, SRR, or statute of limitations on
deficiency judgments.
132
A lender in the state can pursue a borrower for a
deficiency judgment up to twenty years after the foreclosure and sale of the
home.
133
One case, Cadle Co. v. Dejadon, is particularly illustrative.
134
In Cadle,
the borrower executed a mortgage for $222,900 to a local bank in September
1989.
135
After the borrower defaulted, the mortgaged property was foreclosed in
October 1993 and sold to a third party in November 1993 for $97,000.
136
The
plaintiff sought a deficiency judgment for $248,937.86 in September 2004.
137
The superior court granted the borrower’s motion to dismiss for expiration of
the statute of limitations.
138
The New Hampshire Supreme Court reversed,
holding that the twenty-year statute of limitations for mortgages applied to the
action to recover the deficiency.
139
The court explained that a cause of action
may be maintained on the mortgage unless it has been discharged by “payment
in fact of the debt, or a release by the [lender].”
140
A promissory note that has
not been repaid “remains actionable until the running of the statute of limitations
on the mortgage.”
141
131
Id. The borrower can also file for bankruptcy prior to the sale to stay the foreclosure. See FINAL REPORT,
supra note 128 at 6.
132
See N.H. REV. STAT. ANN. § 479:25.
133
See N.H. REV. STAT. ANN § 508:2 (2010); Cadle Co. v. Dejadon, 904 A.2d 605 (N.H. 2006) (holding
that New Hampshire’s twenty-year statute of limitations applies to notes secured by mortgages).
134
See Cadle, 904 A.2d at 605.
135
Id. at 606.
136
Id. at 607.
137
Id.
138
Id. at 606–07.
139
Id. at 609.
140
Id. at 608 (quoting Ladd v. Wiggin, 35 N.H. 421, 426 (1857)).
141
Id. Defendants in a later case argued that Cadle should be overturned because it conflicted with an
older case, Cross v. Gannet, 39 N.H. 140 (1859). Premier Capital, LLC v. Skaltsis, 934 A.2d 496, 498–99 (N.H.
2007) (citing Cross, 39 N.H. at 140). The New Hampshire Supreme Court distinguished Cross: the twenty-year
limitations period for mortgages only applies to an action on the note if the note and the mortgage were executed
at the same time, by the same individual. Id. at 499–500. Thus, under a limited number of circumstances a
borrower may only be liable for a deficiency for three years following the foreclosure sale of her home. See id.
However, it would be nearly impossible for these circumstances to arise within the narrowly defined group of
borrowers (and narrowly defined mortgages) this Comment submits should be protected from deficiency
judgments.
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In 2014, the New Hampshire legislature enacted S.B. 306, which established
a commission tasked with studying New Hampshire foreclosure law, new
federal regulations issued by the Consumer Financial Protection Bureau, and
“fair foreclosure practices” more generally.
142
A group of housing counselors
proposed that the commission support shortening the statute of limitations for
deficiency judgments on promissory notes secured by residential mortgages
from twenty to six years.
143
They argued that the twenty-year statute of
limitations overly burdened borrowers:
It is truly unfortunate that after foreclosure, consumers face up to 20
years of uncertainty, never quite knowing when or if the Mortgagee
will file a suit for deficiency or cancel the debt triggering mortgage
debt forgiveness (IRS Form 1099-C). After losing a home, many folks
work diligently, often for years, to overcome their financial hardship,
gain adequate income, repair their credit, and begin saving for
retirement. If a Mortgagee is permitted 20 years after foreclosure to
determine what action they will take with regard to the note and
mortgage, the consumer’s options become limited.
144
Although a majority of the commission voted in favor of this proposal, no
legislative action to that effect has been taken as of this writing.
145
Maryland—where Benavides found himself subject to a $115,000
deficiency judgment over three years after the lender foreclosed upon and sold
his home
146
—similarly does not protect borrowers from lengthy deficiency
collections. Between 2008 and 2012, 400 families in Maryland were sued for
deficiency judgments.
147
At least 144 of those families filed for bankruptcy as a
result.
148
This was a marked change from pre-recession statistics: in 2006, only
nineteen deficiency actions were filed in the state.
149
The total recovery amount
142
See 2014 N.H. Laws 256.
143
See FINAL REPORT, supra note 128, at 19.
144
Id. at 18.
145
See id. at 19 (voting in favor of a proposal to amend section 508:6 to add a six-year statute of limitations
to deficiency actions); see also N.H. REV. STAT. ANN. § 508:6 (2010).
146
See Kelly, supra note 1. Note that the party that attempted to collect the deficiency judgment was not
the original lender, but the assignee, Dyck-O’Neal, Inc. See id.
147
See What Is a Deficiency Judgment?, MD. CONSUMER RTS. COALITION, http://www.
marylandconsumers.org/issues/housing/deficiency_judgement (last visited Mar. 23, 2018).
148
Id.
149
See HB 274: Frequently Asked Questions, MD. CONSUMER RTS. COALITION, http://www.
marylandconsumers.org/penn_station/folders/issues/housing/deficiency_judgement/_2_defciencyjudgmentsfaq
final2.pdf (last visited Mar. 23, 2018).
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sought was $432,115.
150
In contrast, in 2012, 120 deficiency actions were filed,
and the amount sought was $13.6 million.
151
As of November 2016, Maryland’s
foreclosure inventory was equal to 1% of all homes in the state, the sixteenth
highest percentage in the country.
152
Until July 1, 2014, Maryland allowed lenders to wait up to twelve years
before filing a deficiency action, one of the longest statutory periods in the
nation.
153
With the enactment of section 7-105.13, the period was shortened to
three years.
154
However, the 2014 law only changes the amount of time the
lender has to file the deficiency claim; it does not change the amount of time the
lender has to collect the judgment, which remains twelve years unless the lender
renews for another twelve years before the end of the period.
155
Maryland allows
lenders to garnish wages to collect a deficiency judgment.
156
If the borrower
manages to recover enough to buy a new home before the lender attempts to
collect the judgment, a lien will attach to her new property and prohibit her from
selling it until the judgment is satisfied.
157
D. Confirmation Requirements & Statutory Redemption: Georgia & Iowa
Georgia allows lenders to foreclose through nonjudicial power of sale,
traditional judicial foreclosure, and through an equitable proceeding.
158
The
nonjudicial power of sale form is used most often.
159
Power of sale foreclosure
in Georgia allows the lender to terminate the borrower’s interest in her home
through an auction “on the courthouse steps.”
160
The lender must run an
advertisement for the sale in a local newspaper for four weeks leading up to the
scheduled date.
161
If the lender follows the minimum statutory requirements for
150
Id.
151
Id.
152
CORELOGIC, supra note 81, at 7. Georgia’s foreclosure inventory was 0.5%, Iowa’s was 0.6%, New
Hampshire’s was 0.4%, North Dakota’s was 0.4%, and Oregon’s was 0.7%. Id. at 8–9.
153
See HB 274: Frequently Asked Questions, supra note 149.
154
MD. CODE ANN., REAL PROP. § 7-105.13 (West Supp. 2017).
155
MD. CODE ANN., MD. RULES § 2-625, 14-216(b) (West 2015 & Supp. 2017).
156
Id. § 3-646 (West 2015).
157
Id. § 3-621.
158
See GA. CODE ANN. § 44-14-49, -180, -187 (West 2003). See generally ALEXANDER ET AL., supra note
25, §§ 1:3, 7:1, 8:1.
159
See ALEXANDER ET AL., supra note 25, § 8:1.
160
See id.
161
See GA. CODE ANN. § 9-13-140(a) (West 2003).
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advertising the sale, the advertisement cannot be defective as a matter of law.
162
In most cases, the lender purchases the property at the sale after little to no
competitive bidding.
163
Although defects in the advertisement may prevent confirmation of the sale,
this result will only occur if there is evidence that bidding was chilled because
of the defects.
164
The lender must have the sale confirmed to pursue a deficiency
judgment following a power of sale foreclosure.
165
To obtain the confirmation,
the lender must report the sale within thirty days to the superior court of the
county in which the property is located.
166
The lender must prove that the
property sold for its true market value.
167
Although Georgia’s confirmation requirement may appear to offer sufficient
protection to borrowers from deficiency judgments, it has several shortcomings.
First, there is confusion over the nature of the statutory requirements
168
: the text
states that the court shall not confirm the sale unless the lender provides evidence
that “the property so sold brought its true market value.”
169
But it also states that
the court shall “pass upon the legality of the notice, advertisement, and regularity
of the sale.”
170
In some cases, courts have concluded that the only issue to be
determined at a confirmation hearing is the value of the property on the date of
the sale.
171
However, more recent cases have held that both tests must be met for
the court to confirm the sale.
172
162
See Diplomat Constr., Inc. v. State Bank of Tex., 726 S.E.2d 140, 146 (Ga. Ct. App. 2012) (“The
minimum legal requirements of a foreclosure advertisement are prescribed in OCGA § 9–13–140(a), and only a
failure to properly include those items will render the advertisement defective as a matter of law.” (quoting Se.
Timberlands v. Sec. Nat’l Bank, 469 S.E.2d 454, 456 (Ga. Ct. App. 1996))).
163
See ALEXANDER ET AL., supra note 25, § 8:1.
164
See Diplomat Constr., 726 S.E.2d at 146.
165
See GA. CODE ANN. § 44-14-161 (West 2003).
166
See id.
167
See id.
168
See ALEXANDER ET AL., supra note 25, § 9:3.
169
See GA. CODE. ANN. § 44-14-161(b).
170
Id. § 44-14-161(c).
171
See ALEXANDER ET AL., supra note 25, § 9:3; see also Hamilton Mortg. Corp. v. Bowles, 237 S.E.2d
198, 200 (Ga. Ct. App. 1977) (citing Aaron v. Life Ins. of Ga., 226 S.E.2d 96, 97 (Ga. Ct. App. 1976)) (noting
that the “sole issue in the confirmation procedure is the evaluation of the real estate as of the date of the sale”).
172
See ALEXANDER ET AL., supra note 25, § 9:3 (first citing Martin v. Fed. Land Bank of Columbia, 325
S.E.2d 787, 788 (Ga Ct. App. 1984); then citing Peters v. CertusBank Nat’l Ass’n, 763 S.E.2d 498 (Ga. Ct. App.
2014)) (noting two cases that determined the court must confirm both the value of the property and the legality
of the procedures).
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In addition to confusion over the nature of the confirmation requirements,
the statute also does not set out any “particular method for appraising property”
that must be followed to determine true market value at the time of the sale.
173
This means that a court may still affirm the sale despite the property selling for
less than the borrower paid two years earlier if there is evidence of a “depressed
or declining real estate market.”
174
While the confirmation requirement may
prohibit the lender from obtaining a windfall, or double recovery,
175
it does not
protect the borrower from “being forced into bankruptcy by [a] deficiency
judgment[].”
176
Even if the housing market remained relatively stable since the
borrower purchased her home, any number of factors could result in the court
confirming a sale price far below the outstanding debt balance: (1) the lender
overvalued the property at the time the loan was made,
177
(2) other foreclosures
in the same neighborhood reduced overall property values,
178
or (3) the principal
balance increased after origination when the lender later modified the loan, to
name a few.
179
If a lender uses judicial foreclosure, it is not required to apply for
confirmation prior to seeking a deficiency judgment.
180
Confirmation is also not
required if the lender chooses to obtain a judgment on the underlying promissory
note before foreclosing on the mortgaged real estate—even if the lender
forecloses nonjudicially.
181
A leading treatise explains that because the
confirmation requirement is a statute “in derogation of the common law,” it will
be strictly construed—i.e., its protections will not be “expanded beyond its
narrow application.”
182
This loophole, then, undermines the original goal of the
173
See id. (citing Powder Springs Holdings, LLC v. RL BB ACQ II-GA PSH, LLC, 754 S.E.2d 655 (Ga.
Ct. App. 2014)).
174
See id. (citing Peterson v. First Nat’l Bank of Atlanta, 412 S.E.2d 579 (Ga. Ct. App. 1991)).
175
See id. § 9:1.
176
See id. (noting the circumstances surrounding the enactment of the statute during the Great Depression,
the purpose of which was to provide “relief to debtors from the economic depression of the times” (quoting First
Nat’l Bank & Tr. Co. v. Kunes, 199 S.E.2d 776, 778 (Ga. 1973))).
177
See RAO & WALSH, supra note 11, at 38.
178
See Michael G. Bradley et al., Strategic Mortgage Default: The Effect of Neighborhood Factors, 43
REAL EST. ECON. 271, 277 (2015).
179
U.S. DEP’T OF HOUS. & URBAN DEV., OFFICE OF POLICY DEV. & RESEARCH, REPORT TO CONGRESS ON
THE ROOT CAUSES OF THE FORECLOSURE CRISIS xii (2010). The report found that many modified subprime loans
re-defaulted because the modifications failed to lower monthly payments, “virtually none involved a reduction
in principal,” and instead “typically increased a borrower’s principal debt.” Id.
180
See ALEXANDER ET AL., supra note 25, § 7:1.
181
See id. § 9:4 (first citing Ga. R.R. Bank & Tr. Co. v. Griffith, 335 S.E.2d 417 (Ga. Ct. App. 1985); then
citing First Fed. Sav. & Loan Ass’n of Rochester v. Fisher, 422 F. Supp. 1 (N.D. Ga. 1976)).
182
See id.
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Depression-era statute: to protect borrowers from losing their homes and being
forced into bankruptcy by crippling deficiency judgments.
183
The borrower’s
only way to avoid this outcome is an action to set aside foreclosure; the borrower
must show not only that the sales price was grossly inadequate, but also that the
lender’s actions amounted to fraud or chilled bidding.
184
Iowa does not prohibit deficiency judgments for residential borrowers.
185
However, Iowa grants borrowers an SRR after both judicial and nonjudicial
foreclosure. Following nonjudicial foreclosure, the borrower has one year to
occupy and redeem the property.
186
The price of redemption is the amount “paid
by the holder of the certificate.”
187
Following judicial foreclosure, the borrower
has up to ten years to redeem the property.
188
Iowa also provides several options
to lenders and borrowers to expedite foreclosure, forego deficiency actions, and
waive redemption rights.
189
Under section 654.18, the borrower exchanges her statutory right of
redemption for a deficiency judgment waiver from the lender.
190
The statute
requires the borrower to convey all her interest in the mortgaged property to the
lender.
191
The lender, in return, waives all its rights to a deficiency or any other
claim arising from the mortgage.
192
The borrower waives her right to a
surplus.
193
The lender is also given immediate possessory rights to the property,
to “maintain and protect” it.
194
The statute provides that the lender must give
183
See id.
184
See id. § 8:10.
185
See IOWA CODE ANN. § 654.6 (West Supp. 2017).
186
See id. § 628.3 (West 1999).
187
See id. § 628.11 (West 1999). This also includes costs and interest.
188
The statute does not specify a limitations period. See id. § 654.5 (West Supp. 2017). Case law has
established that the property may be redeemed within ten years. See Ritz v. Rea, 135 N.W. 645, 648 (Iowa 1912);
Mahaffy v. Faris, 122 N.W. 934, 936 (Iowa 1909); Crawford v. Taylor, 42 Iowa 260, 263–64 (1875); Gower v.
Winchester, 33 Iowa 303, 305–06 (1871).
189
See IOWA CODE ANN. §§ 654.18, .20, .26 (West 1995 & Supp. 2017).
190
See id. § 654.18.
191
See id. § 654.18(1)(a).
192
See id. § 654.18(1)(b). This statute is the functional equivalent of a deed-in-lieu of foreclosure,
discussed supra Section I.A.
193
See IOWA CODE ANN. § 654.18(1)(f). Just as the lender is entitled to a deficiency if the property sells
for less than the outstanding debt balance, the borrower is normally entitled to the surplus—i.e., if the property
sells for more than the outstanding debt balance, the surplus is distributed as follows: first, to any junior
lienholders, and any amount remaining goes to the borrower. Even when the economy is healthy, however,
surpluses are rare. See generally Section I.A (discussing why foreclosure sale prices are usually lower than fair
market value).
194
IOWA CODE ANN. § 654.18(1)(c).
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notice to any junior lienholders that they have thirty days in which to exercise
their redemption rights.
195
Finally, the lender must give the borrower a form
titled “DISCLOSURE AND NOTICE OF CANCELLATION,” which formally
extinguishes the mortgage debt.
196
Although this statute may appear to offer borrowers an effective way to
avoid deficiency judgments, it has several drawbacks. Borrowers must be careful
to follow the statutory requirements precisely, or they may end up waiving both
their SRR and protection from a deficiency judgment. In one case, after the
borrower defaulted, the lender agreed to accept a deed-in-lieu of foreclosure
197
in partial satisfaction of the debt.
198
Although the deed-in-lieu of foreclosure
resembled the procedural result of section 654.18, the borrower was unable to
take advantage of the post-default protection that statute affords “because [the
lender was] not seeking foreclosure.”
199
The court held that the lender could
pursue a deficiency judgment for the remaining debt.
200
The statute has other drawbacks as well. Even if the borrower fully
comprehends the statutory requirements, she may be unable to take advantage
of them because of a lack of alternate housing options. If the lender is unwilling
to waive its right to a deficiency judgment in exchange for the borrower’s
statutory waiver, the redemption period may discourage bidding and lower the
ultimate foreclosure sale price.
201
E. Prohibitions: Oregon & North Dakota
Oregon uses both deeds of trust and mortgages.
202
Mortgages must be
foreclosed with judicial procedures, and lenders may not obtain a deficiency
195
Id. § 654.18(1)(e)(1). The redemption price under these circumstances would be the outstanding
balance on the senior mortgage. Id. § 628.29 (West 1999).
196
Id. § 654.18(1)(f).
197
A deed-in-lieu of foreclosure is a procedure by which the borrower agrees to convey the mortgaged
real estate to the lender in exchange for the lender’s agreement to extinguish the mortgage debt. What Is a Deed-
in-Lieu of Foreclosure?, CONSUMER FIN. PROTECTION BUREAU, https://www.consumerfinance.gov/ask-
cfpb/what-is-a-deed-in-lieu-of-foreclosure-en-291/ (last updated Sept. 25, 2017). It is thought to benefit both
parties in that the lender avoids the time and expense of foreclosure proceedings, and the borrower avoids a
deficiency judgment if the lender eventually sells the property for less than the loan amount. See id.
198
See Nash Finch Co. v. Corey Dev., Ltd., 669 N.W.2d 546, 547 (Iowa 2003).
199
See id. at 549–50.
200
See id. at 550.
201
See supra Section I.B.
202
See DUNAWAY, supra note 37, at app. 19A.
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judgment after the foreclosure of a purchase money mortgage.
203
The judicial
foreclosure prohibition requires that the lender engage in an election of remedies
if the borrower defaults: it must choose between foreclosure of the mortgage or
a judgment on the promissory note.
204
However, the lender is not prohibited from
pursuing “all statutory remedies, concurrently or successively.”
205
The lender is
not required to choose the remedy prior to judgment, and thus, can plead in the
alternative.
206
Oregon also prohibits lenders from obtaining deficiency judgments after
judicial and non-judicial foreclosure of “residential trust deeds,”
207
and
bankruptcy courts have held that the election-of-remedies doctrine also
applies.
208
Lenders cannot circumvent the state’s deficiency judgment
prohibitions by suing on the promissory note and then foreclosing on the
residential trust deed.
209
One judge stated that the reason for the judicially
created doctrine is that “the mortgagee or trust deed beneficiary should be
prevented from doing indirectly what the anti-deficiency statutes prohibit,
directly.”
210
The major problem with Oregon’s anti-deficiency statutes is that they do not
protect a borrower who refinances the mortgage or trust deed secured by her
home. This is problematic whether the borrower was induced to refinance the
loan at predatory terms, or refinanced to take advantage of lower interest rates;
under either circumstance, the borrower unknowingly gives up her statutory
protection from a deficiency judgment. This problem arises in other states that
disqualify refinanced loans from purchase money mortgage status and
deficiency judgment protection.
203
OR. REV. STAT. ANN. § 88.103 (West Supp. 2017). However, this prohibition does not apply if the note
and mortgage were given to purchase both real estate and personal property. See Magnolia Lumber Corp. v.
Lithia Lumber Co., 404 P.2d 190, 193–94 (Or. 1965). In that case, the lender can pursue a deficiency judgment
for uncollected payment of the personal property. Id.
204
See, e.g., Banteir v. Harrison, 485 P.2d 1073, 1075 (Or. 1971) (“If the purchase money mortgagee
elects to foreclose the mortgage, he is barred from bringing an action on the mortgage debt, or he may obtain a
judgment on the mortgage debt, in which case he loses his mortgage lien.” (citation omitted)).
205
See Family Bank of Commerce v. Nelson, 697 P.2d 216, 218 (Or. Ct. App. 1985).
206
Cf. id.
207
OR. REV. STAT. ANN. §§ 88.103, 86.797 (West Supp. 2017).
208
See, e.g., In re Daraee, 279 B.R. 853, 858 (Bankr. D. Or. 2002); In re Knight, No. 690-63779-Rll, 1992
Bankr. LEXIS 2573, at *12–13 (Bankr. D. Or. June 26, 1992).
209
See In re Daraee, 279 B.R. at 857–58.
210
Id. at 858 (citing In re Knight, 1992 Bankr. LEXIS 2573).
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North Dakota’s statutory scheme, however, avoids this issue by prohibiting
deficiency judgments following the foreclosure of all one-to-four-family
residences situated on fewer than forty acres of land, where the borrower
occupies one of the residences as a homestead.
211
Some common criticisms of
borrower-friendly legislation are that it leads to increased instances of
foreclosure and default and higher interest rates.
212
However, the following
tables illustrate that neither foreclosure rates nor default rates—those reflected
by the “serious delinquency rate,” at least—are higher in North Dakota when
compared to the other five jurisdictions reviewed.
213
211
N.D. CENT. CODE ANN. § 32-19-03 (West 2008). While this statute unfortunately leaves agricultural
land open to deficiencies, the judgment is limited to the fair value of the property. See id. See generally Jon W.
Backes, Comment, Mortgages—North Dakota’s Anti-deficiency Statute Defined, 65 N.D. L. REV. 127 (1989)
(discussing the calculation of fair values of agricultural property). Further discussion of agricultural mortgage
lending is beyond the scope of this Comment.
212
See supra notes 19–21.
213
See CORELOGIC, supra note 81, at 8–9; CORELOGIC, NATIONAL FORECLOSURE REPORT: JUNE 2015 8–
9 (2015) [hereinafter CORELOGIC, 2015 REPORT]; CORELOGIC, NATIONAL FORECLOSURE REPORT: MARCH 2014
7–8 (2014) [hereinafter CORELOGIC, 2014 REPORT]; CORELOGIC, NATIONAL FORECLOSURE REPORT: AUGUST
2013 7–8 (2013) [hereinafter CORELOGIC, 2013 REPORT]; CORELOGIC, NATIONAL FORECLOSURE REPORT:
SEPTEMBER 2012 (2012) [hereinafter CORELOGIC, 2012 REPORT].
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State
2016
Foreclosures | Delinquency
Rate
2015
Foreclosures | Delinquency
Rate
North Dakota 260 1% 313 0.9%
Oregon 7,102 1.8% 5,657 3.2%
Maryland 5,916 3.5% 9,119 5.0%
New Hampshire 1,452 1.7% 1,651 2.5%
Georgia 19,552 2.7% 26,909 3.4%
Iowa 2,846 1.8% 4,210 2.2%
State
2014
Foreclosures | Delinquency
Rate
2013
Foreclosures |
Delinquenc
y
Rate
2012
214
North Dakota 414 1.1% 463 1.2% 583
Oregon 3,635 4.2% 3,206 4.7% 9,629
Maryland 6,633 6.7% 4,474 7.3% 3,400
New Hampshire 2,002 3.2% 2,099 3.5% 2,786
Georgia 33,232 4.8% 39,82
7
5.3% 54,778
Iowa 4,900 3.1% 4,374 3.3% 3,380
The data for completed foreclosures may be somewhat misleading, however,
as it does not account for the smaller population and potentially smaller number
of outstanding loans in North Dakota relative to the other states.
215
However, the
serious delinquency rate is calculated as a percentage of outstanding mortgage
loans within each state.
216
Comparison across this statistic, then, reveals that
North Dakota does not have higher instances of default as a result of its statutory
prohibition on deficiency judgments after foreclosure of qualifying residential
214
The 2012 report did not include the serious delinquency rate statistic. See CORELOGIC, 2012 REPORT,
supra note 213.
215
As of February 2017, North Dakota’s population was 659,858, while Oregon’s population was
3,761,925, New Hampshire’s population was 1,313,939, Maryland’s population was 5,696,423, Georgia’s
population was 9,468,815, and Iowa’s population was 3,016,267. See generally Georgia Foreclosure &
Foreclosed Homes, REALTYTRAC, http://www.realtytrac.com/mapsearch/foreclosures (last visited Mar. 24,
2018).
216
See CORELOGIC, supra note 81, at 11.
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properties. This also suggests that there are not more instances of strategic
default in North Dakota than there are in Maryland, New Hampshire, Georgia,
and Iowa—states that allow lenders to pursue deficiency judgments after
foreclosing on residential mortgage loans. The delinquency rate in Oregon,
although higher than the rate in New Hampshire and Iowa in all years but 2016,
is still significantly below that of Maryland and Georgia in all five years
surveyed.
III. R
ESIDENTIAL BORROWERS NEED PROTECTION FROM DEFICIENCY
JUDGMENTS
This Part identifies the main arguments supporting the widespread
prohibition of deficiency judgments following foreclosure of residential
mortgage loans. It also responds to the major arguments proposed by critics of
anti-deficiency laws.
A. The Original Goal of Depression-Era Statutes Remains Important
During the Great Depression, state legislatures enacted laws prohibiting
deficiency judgments after residential foreclosure because they determined that
protecting their citizens from financial collapse was a crucial policy objective.
217
After lenders challenged the laws as improperly impairing contract obligations,
the Supreme Court held that the states had reasonably exercised their police
powers to protect the welfare of their citizens.
218
Protecting borrowers from the
unnecessary hardship of deficiency judgments remains important even as the
economy recovers.
Contrary to one scholar’s assertion, foreclosure is far from a “weak
sanction.”
219
For many Americans, a home is more than just an asset, investment,
or shelter. Owning a home is a critical part of their identity.
220
Losing that home,
then, signals much more than just financial hardship: it is “a failure to maintain
or achieve the American Dream.”
221
Numerous studies have found a direct
correlation between foreclosure rates and depression, suicide, and deteriorating
217
See ALEXANDER ET AL., supra note 25, § 9:1; Harris & Meir, supra note 27, at 16–17.
218
See, e.g., Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934).
219
See Tess Wilkinson-Ryan, Breaching the Mortgage Contract: The Behavioral Economics of Strategic
Default, 64 VAND. L. REV. 1547, 1552 (2011).
220
See Jason N. Houle, Mental Health in the Foreclosure Crisis, 118 SOC. SCI. & MED. 1, 2 (2014).
221
Id. (citing Kimberly Libman et al., Housing and Health: A Social Ecological Perspective on the US
Foreclosure Crisis, 29 HOUSING THEORY & SOC’Y 1 (2012)).
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1304 EMORY LAW JOURNAL [Vol. 67:1273
physical health.
222
One foreclosure defense attorney anecdotally observed
depression and suicide as a result of foreclosure firsthand.
223
After foreclosure,
a borrower’s credit score may be so damaged that no landlord will approve her
application for a lease, forcing her and her family into homelessness.
224
The financial recovery of a borrower after foreclosure is not just important
to that individual, it is important to her local community as well.
225
Individuals
who are forced into bankruptcy by deficiency judgments may end up having
more than just their mortgage debt extinguished.
226
Creditors from the
borrower’s local community may end up having their debts discharged as well—
debts the borrowers could have paid, but for the imposition of the deficiency.
227
The National Consumer Law Center notes that the recipients of deficiency
judgment payments are often “distant holders of securitized loan obligations,”
which provide no stimulus to distressed local communities.
228
Borrowers who
end up filing for bankruptcy may require public support, further draining state
resources, local resources, or both.
229
B. Borrowers Do Not Walk Away Willingly
Prohibiting deficiency judgments after foreclosure of a borrower’s primary
residence will not lead to increased strategic default because borrowers invest
far more than just their financial resources in the mortgaged real estate. The real
estate is not just collateral for a loan; it is their home—for some, their children’s
home—and walking away from that home is a last resort.
230
One scholar,
Professor Brent White, notes that many borrowers with underwater mortgages
during the peak of the financial crisis stayed in their homes despite the
222
See Katherine A. Fowler et al., Increase in Suicides Associated with Home Eviction and Foreclosure
During the US Housing Crisis: Findings from 16 National Violent Death Reporting System States, 2005–2010,
105 AM. J. PUB. HEALTH 311, 314 & fig.2 (2015); Jason N. Houle & Michael T. Light, The Home Foreclosure
Crisis and Rising Suicide Rates, 2005 to 2010, 104 AM. J. PUB. HEALTH 1073, 1077 & fig.2 (2014); William C.
Kerr et al., Economic Recession, Alcohol, and Suicide Rates: Comparative Effects of Poverty, Foreclosure, and
Job Loss, 52 AM. J. PREVENTIVE MED. 469, 472 & tbl.2–3 (2017) (finding that foreclosure rates increased
suicides among borrowers aged 45–64).
223
See Judith Fox, The Foreclosure Echo: How Abandoned Foreclosures Are Re-entering the Market
Through Debt Buyers, 26 LOY. CONSUMER L. REV. 25, 34 (2013).
224
See RAO & WALSH, supra note 11, at 37.
225
See Harris & Meir, supra note 27, at 18–19.
226
See id.
227
See RAO & WALSH, supra note 11, at 38.
228
See id.
229
See Harris & Meir, supra note 27, at 18–19.
230
See id. at 17.
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significant savings they would have realized if they had simply stopped
paying.
231
Economists typically consider this behavior irrational.
232
Some scholars argue that prohibiting deficiency judgments after foreclosure
of residential mortgages will lead to significant increases in instances of strategic
default precisely because they consider it a rational decision for a borrower to
abandon her home and stop payment once her negative equity drops below a
certain threshold.
233
But this analysis overstates the weight of financial
calculations in the decision-making process of the average borrower.
234
While
several well-documented cognitive biases may contribute to this “irrational”
decision making,
235
emotions most likely play the largest role.
236
Not only are
individuals incredibly emotionally invested in and attached to their homes, they
are equally averse to the idea of defaulting on their mortgage payments.
237
Most
borrowers consider mortgage default to be “immoral,” and feelings of guilt or
shame keep them from walking away until long after financial calculations
would consider the decision rational.
238
Finally, for many borrowers, fear may
be the most powerful factor.
239
Foreclosure is considered the worst-case
scenario: “financial suicide to be avoided at all costs.”
240
Several recent studies present further evidence discounting the argument that
strategic default will increase if the threat of deficiency judgments for residential
borrowers is removed. Although some older studies proposed that non-recourse
231
See Brent T. White, Underwater and Not Walking Away: Shame, Fear, and the Social Management of
the Housing Crisis, 45 WAKE FOREST L. REV. 971, 983–85 (2010).
232
See id. at 986.
233
See supra note 21 and accompanying text.
234
See White, supra note 231, at 987–88.
235
For example, White explains that biases such as status quo bias (the tendency to “keep one’s head in
the sand”), myopia (the tendency to “overvalue up-front cost and undervalue long-term gain”), and selective
perception (which results in their failure “to see evidence . . . that would suggest a steep fall in their home’s
value”) all contribute to borrowers’ decisions to remain in their homes long after economic analysis suggests
that it is in their best interests to walk away. See id.
236
See id.
237
See id. at 990–91 (discussing the need for more research focusing on the emotional hurdles to strategic
defaults).
238
See id. at 991. Older or disabled borrowers may be unable to leave their homes because of mobility
issues as well.
239
See id. at 995 (“People not only fear losing their homes, but also fear having ruined credit for life and
not being able to find a decent place to live, to buy a car, to get a credit card, to get insurance, to ever buy a
house, or even to get a job. Foreclosure is seen as the end of life as one knows it—financial suicide to be avoided
at all costs.”).
240
Id.
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1306 EMORY LAW JOURNAL [Vol. 67:1273
states had higher instances of strategic default,
241
more recent studies have
refined the early statistical models and reached a different result.
242
For example,
a recent study found that the average borrower does not default until her equity
drops to -74%, when previous models predicted that default would occur at -
20%.
243
The study finds that even in two non-recourse states, Arizona and
California, most borrowers have a high threshold for negative equity before they
are pushed to walk away.
244
The authors conclude that “nonfinancial costs and
behavioral factors must” contribute to the default decision,
245
confirming
White’s argument,
246
among others.
247
In fact, a study that focused specifically on the effect of a 2009 Nevada
statute which prohibited deficiency judgments after foreclosure of residential
mortgages explicitly cautioned that using deficiency judgments to deter strategic
default was ill-advised, given the absence of increased strategic default in the
wake of the statutory change.
248
The authors identify three main findings of the
study: (1) lenders reduced approval rates and loan sizes after the law change, but
did not increase interest rates significantly; (2) applications for one- to four-
241
See, e.g., Andra C. Ghent & Marianna Kudlyak, Recourse and Residential Mortgage Default: Evidence
from US States, 24 REV. FIN. STUD. 3139, 3140 (2011) (finding higher instances of strategic default for properties
valued between $500,000 and $750,000 at the time of origination in non-recourse states than in recourse states).
242
See supra note 22 and accompanying text.
243
See Bhutta et al., supra note 22, at 2434 (citing James B. Kau et al., Default Probabilities for
Mortgages, 35 J. URB. ECON. 278 (1994)).
244
Id. at 2436.
245
Id. at 2463.
246
See generally White, supra note 231, at 972.
247
See, e.g., Harris & Meir, supra note 27, at 17 (“The deal is predicated on the assumption that borrowers
will be very reluctant to give up their primary residence, which means uprooting their family from familiar
surroundings, incurring significant moving costs, and in all likelihood having to change neighbourhoods. These
factors make lenders confident that the non-recourse feature will be exploited only in cases of severe financial
distress. If this assumption is fulfilled, the expected number of non-recourse foreclosures will be small and, as a
result, the cost premium of non-recourse loans will be minimal. Published research tends to confirm both the
assumption and the result.”); Mixon, supra note 27, at 7 (noting that most borrowers are unaware of many of the
consequences of default); cf. Singer, supra note 83, at 507–09 (explaining that the foreclosure process was the
product of “banks develop[ing] a business model that exploited vulnerable people by leading them to take out
loans they could not afford,” and that “[n]one of this would have been possible unless both homeowners and
investors had been misled into believing these investments were safer than anyone had a right to believe”).
248
See Li & Oswald, supra note 22, at 3. Delinquency rates are also not higher in non-recourse states, as
some critics suggest. See Fernando Lopez Vicente, The Effect of Foreclosure Regulation: Evidence for the US
Mortgage Market at State Level 27 (Banco De España, Working Paper No. 1306, 2013). Vicente found that the
states with the lowest delinquency rates were North Dakota, South Dakota, and Montana. Id. North Dakota and
Montana are both non-recourse states. Id.
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family purchase money loans did not increase significantly; and (3) default
behavior did not change in any “statistically significant way.”
249
C. Borrowers Are Still Vulnerable to Predatory Practices
Although the federal government attempted to curb some of the predatory
lending that dominated the early 2000s—and which led to increased foreclosure,
negative equity, and larger and more numerous deficiency judgments—with
legislation aimed at increasing lender disclosure and improving underwriting
standards,
250
it did not eliminate the need for increased state statutory protection.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank) only affects lender behavior during mortgage origination; it does not
protect borrowers from foreclosure or from being forced into bankruptcy by
deficiency judgments.
Dodd-Frank does not eliminate the lenders’ incentives to sell loans that are
most attractive to potential secondary-market buyers but less sustainable for
borrowers making the monthly payments.
251
And although it prohibits some
abusive lender practices such as charging duplicate fees for credit life insurance
or capping prepayment penalties, it only encourages lenders not to engage in
others.
252
If a lender wants a loan to meet the requirements of a “qualifying
mortgage,” it cannot make a loan involving negative amortization,
253
interest
only payments, excessive fees or points, or prepayment charges.
254
The only
benefit to the lender of securing the designation of a qualifying mortgage is
gaining the rebuttable presumption that it complied with the requirements
ensuring the borrower’s ability to repay the loan.
255
It is highly unlikely that borrowers will be able to successfully litigate claims
that their lenders violated any of these laws.
256
The standard of proof is high,
249
See Li & Oswald, supra note 22, at 3.
250
15 U.S.C. § 1639b (2012).
251
See Stark et al., supra note 10, at 100.
252
See id. at 100–01; see also 15 U.S.C. § 1639c.
253
Negative amortization means the principal increases over the life of the loan. What Is Negative
Amortization?, CONSUMER FIN. PROTECTION BUREAU, https://www.consumerfinance.gov/ask-cfpb/what-is-
negative-amortization-en-103/ (last updated Sept. 25, 2017).
254
See Stark et al., supra note 10, at 102 n.30.
255
See id. at 102.
256
See Robin P. Myers, Consumer Damages and Remedies for Truth in Lending Act and Regulation Z
Violations, FED. RES. BANK PHILA. (2006), https://www.philadelphiafed.org/bank-resources/publications/
compliance-corner/2006/fourth-quarter/q4cc1_06 [https://web.archive.org/web/20170515230523/https://www.
philadelphiafed.org/bank-resources/publications/compliance-corner/2006/fourth-quarter/q4cc1_06].
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1308 EMORY LAW JOURNAL [Vol. 67:1273
and requires the borrower to show that the disclosure statement was inaccurate,
that it caused her not to find a lower-priced loan, and that she would have
obtained a lower-priced loan if the disclosure statement was accurate.
257
In
addition to the challenging evidentiary burden, borrowers who are victims of
lending behavior that violates these statutes are unlikely to have the resources to
pursue such litigation. A borrower who just lost her home to foreclosure—and
depending on her state, was sued for a deficiency—because she could not sustain
her predatory and expensive loan does not have the financial resources or the
energy to sue her lender.
A recent study also determined that even with the new mandatory disclosure
requirements, borrowers still do not understand how to identify less expensive
loans, nor can they consistently identify inherently risky terms.
258
On the other
hand, lenders are equipped with software, data, and years of lending experience
that can help them determine just how likely a borrower is to default on a loan.
259
If the risk is too high, the lender can decline, or take steps to reduce exposure to
loss in the event of default. Ron Harris and Asher Meir describe non-recourse
loans as providing “‘financial distress’ insurance” and highlight the benefits of
shifting the risk of default to the parties who make or insure the loans:
The advantages of such “financial distress” insurance are evident. Risk
is transferred to financial institutions such as banks and insurance
companies, which are typically far less risk-averse than individual
homeowners; furthermore, their ability to foresee, manage and hedge
the risk are greater due to greater financial sophistication and large
economies of scale in risk management.
260
The harm to lenders from uncollected deficiencies is minor. A former chief
economist for Freddie Mac stated that while it might be “worthwhile to hire
some lawyers and some people to try to [collect deficiency judgments,] . . . it’s
not going to make or break the companies.”
261
257
Id.
258
See Stark et al., supra note 10, at 117. Borrowers were only able to identify lower priced loans at a
“chance” rate (44% of the time). Id.
259
See supra notes 27, 83.
260
See Harris & Meir, supra note 27, at 17.
261
See Kelly, supra note 1 (quoting Robert Van Order, a chief economist for Freddie Mac from 1987 to
2002).
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D. Modified Anti-Deficiency Laws Do Not Protect Borrowers.
The modified forms of anti-deficiency laws used in many states do not
adequately protect borrowers from losing their homes to foreclosure and being
forced into bankruptcy by deficiency judgments. They may reduce the overall
number of borrowers who have an experience similar to Benavides’s, but they
do not eliminate this outcome entirely. SRRs may appear to benefit the borrower,
but they are just as likely to lower foreclosure sale prices than encourage
competitive bidding.
262
Allowing borrowers to avoid a deficiency judgment by
waiving this statutory right is only effective if the borrower both understands the
strict statutory requirements she must follow to ensure this protection, and if the
lender agrees.
263
Prohibiting deficiency judgments following nonjudicial foreclosure may
reduce the overall incidence of deficiency actions filed, but it does nothing to
help the borrowers’ lenders decide to pursue. The judicial foreclosure process is
no more likely than the nonjudicial power of sale foreclosure to encourage
competitive bidding and bring a fair price for the property.
264
While fair value
laws may partially alleviate the negative effect a forced sale has on the
property’s sale price, these laws often have difficult burdens of proof, and do
not offer any relief when a depressed market reduces home values far below the
outstanding debt amount.
265
Statutes that shorten the time in which a lender may file a deficiency claim
may end up barring some lenders from recovering, but they still do not prevent
lenders from obtaining the judgment and then waiting years to collect.
266
Interest
can increase the judgment by thousands or even tens of thousands of dollars after
only a few years.
267
Even when collection efforts would be impractical for
lenders, the debt can survive through sales of distressed asset bundles to
investors or debt collectors.
268
262
See supra notes 123–126 and accompanying text.
263
See supra notes 126–127 and accompanying text.
264
See supra notes 108–109 and accompanying text.
265
See supra notes 113–114 and accompanying text.
266
See supra notes 115–117 and accompanying text.
267
John P. Dickson, Will You Owe After Foreclosure? Deficiency Judgment Basics, DICKSON L. GROUP
(July 20, 2015), http://dicksonlawgroup.com/will-you-owe-after-foreclosure-deficiency-judgment/ (noting that
under Illinois law a deficiency judgment accumulates interest at a rate of 9% per year).
268
See supra notes 100–103 and accompanying text.
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1310 EMORY LAW JOURNAL [Vol. 67:1273
Security-first statutes and one-action rules also fail to protect borrowers from
deficiency judgments. While security-first statutes ensure that lenders do not sue
on the promissory note before foreclosing on the mortgaged property, they do
not ultimately offer any protection to borrowers from chilled bidding at the
foreclosure sale, or from declining home values due to a depressed housing
market.
269
And while one-action rules prevent the borrower from a multiplicity
of actions, they do nothing to prohibit or even abate the harshness of a deficiency
judgment.
270
CONCLUSION
This Comment argues that states need to adopt legislation prohibiting
deficiency judgments for residential borrowers. The original anti-deficiency
laws of the Great Depression were enacted to protect borrowers from the
unnecessary hardship of losing their homes and subsequently being forced into
bankruptcy by deficiency judgments. Opponents argue that the threat of
deficiency judgments is needed to deter borrowers from strategically defaulting;
they assert that this will lead to an increase in the cost of loans. But recent
empirical studies reveal that neither of these hypotheses are true in states that
have prohibited deficiency judgments. Borrowers are incredibly attached to their
homes, and will avoid defaulting on their mortgage payments as long as
possible—even when it would be in their interest to walk away.
Currently, too few states have laws in place that prohibit lenders from
seeking a deficiency judgment after foreclosing on a borrower’s home. Although
some of the modified anti-deficiency laws in use may reduce the amount and the
frequency of deficiency judgments, they fail to achieve their intended purpose.
States determined that it was critical to protect borrowers from the trauma of
foreclosure and enormous deficiency judgments during the Great Depression.
The Supreme Court held that these laws were constitutional, and that states had
a valid interest in protecting the welfare of their citizens—even if contract
remedies were impaired.
Although the economy has recovered in part from the worst of the 2008
financial crisis, deficiency judgments remain a problem. Borrowers are still
vulnerable to predatory lending practices that induce them into taking out
expensive loans that lenders know they cannot afford long-term. And the
secondary market, while increasing lending capital, allows lenders to externalize
269
See supra notes 102–103 and accompanying text.
270
See supra notes 102–103 and accompanying text.
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the risks of default. But lenders, mortgage insurers, and secondary-market
investors are much better positioned to bear the loss from a deficiency after the
foreclosure of a borrower’s home. Public policy and statistical analysis,
therefore, favor the widespread adoption of effective anti-deficiency laws.
A
RIEL OLSON
∗
∗
Managing Editor, Emory Law Journal; Emory University School of Law, J.D., 2018; Virginia
Commonwealth University, B.A., 2012. I am exceptionally grateful to my comment advisor and mentor,
Professor Frank S. Alexander, for sparking my love of property law and real estate finance; for his patience,
encouragement, and consistent guidance throughout this project; and especially for his resolute and unequivocal
high standards, which ultimately pushed me to produce a comment worth publishing. I would like to thank the
editors of the Emory Law Journal, especially Janiel Myers and Matthew Demartini, who edited and prepared
my Comment for publication. I would also like to thank my father, Jonathan Olson, and my mother, Kathy
Sukenis, for reading my first draft and kindly reassuring me that it “wasn’t that bad.” I want to thank my brother,
Baxter Olson, for listening to me talk about deficiency judgments during his winter break, and for believing in
me, nevertheless. Finally, I would be remiss to neglect my dearest friends, who listened, advised, motivated, and
reassured me throughout the entire process, and to whom I am indebted and exceedingly grateful.
