In the Wake of Foreclosure, a Debt That Won’t Die

Molly Messick / StateImpact Idaho

Ben and Lori Jensen of Meridian say they were stunned to receive a lawsuit from their bank months after they lost their home to foreclosure.

Month in and month out, Idaho’s foreclosure rate remains one of the highest in the nation.  For many, losing a home is the definition of hitting bottom.  But some former homeowners are finding themselves in an even tighter spot than they thought possible.  They’ve lost their homes and wrecked their credit ratings.  Now lenders are pursuing them for the debt that remains.

The day Ben Jensen found out that he and his wife, Lori, were being sued for more than $140,000 is fixed in his mind, like the slow-motion moments before a car crash.  It was a weekday afternoon, and he’d just come home from work.  “My wife and I were standing in the kitchen talking,” he remembers.  “There was a knock at the door, she went to get it.  And as she was walking back she had a really perplexed look on her face.”

In The Wake Of Foreclosure, A Debt That Won’t Die

She was holding a hand-delivered envelope.  Ben says they both knew something serious was happening.  “We start going through the paperwork.  It’s all in legalese.  There’s no simple explanation on the front saying, ‘Bank of America is suing you.’  We’re going through the documents, we’re seeing the lawsuit, and my heart is just sinking.”

Ben and Lori had already been through a hard couple of years.  They lost their home to foreclosure in a long process that began when the engineering firm where Ben works cut his hours.  By the time Ben and Lori had moved themselves and their two young children from their old home in Star to a rental in Meridian, they thought they had seen the worst of it.  Then they learned the bank was suing them for the money it lost on their loan.  It’s called a deficiency judgment.  Lawyers who represent Idaho homeowners say more of them are being filed.  One of those attorneys is Brian Webb, of Angstman Johnson.  “My practice definitely has seen an increase from 2010 to 2011,” he says.

Ben and Lori Jensen called Webb within hours of learning they were on the hook for tens of thousands of dollars that they simply didn’t have.  “I only handled five or six in 2010,” Webb says. “Versus 2011, it’s been between 15 and 25 deficiency cases that I have actually handled.”

The National Consumer Law Center, a nonprofit consumer advocacy group, confirms that deficiency judgments appear to be going up across the country, but how that plays out depends on state law.  Geoff Walsh, a staff attorney with the organization, says approximately 40 states, including Idaho, allow lenders to sue former homeowners for the amount of the mortgage that remains after a foreclosure.  Idaho is more protective of homeowners than some of those states.  It requires lenders to act within 90 days of the foreclosure sale.  Elsewhere, the statute of limitations can be much longer.  “In many other states around the country, homeowners find themselves subject to deficiency actions one, two, three, four or five years after they’ve been foreclosed,” Walsh says.

That means former homeowners can think they’ve moved on, only to find that the debt is still there.  “They’ve definitely been under the impression that they walked away from a situation, or it’s over,” says Walsh, “and then this deficiency claim in court just comes back and hits them.”

Idaho’s law may be more restrictive than some, but that doesn’t mean all Idaho homeowners who have been through foreclosure can heave a sigh of relief after the 90-day window has passed.  According to the state attorney general’s office, that short statute of limitations only applies to the first mortgage.  If a homeowner has a second mortgage that receives no repayment in the foreclosure process, that lender has five years to try to collect.

Terri Pickens, a private practice attorney in Boise, says it’s a small wonder that with such a complex and state-specific set of statutes, people don’t have any clue what they could face.  “Most people don’t know,” she says.  “And that’s a problem.”

What’s more, Pickens says there is an additional unnerving trend that former homeowners should consider.  Lenders are selling deficiency claims.  “I do know some private investors who are coming in and purchasing up bank loan packages and have been paying literally pennies on the dollar, ” she says.  “Just sitting on the paper, waiting for the right time to collect on it.”

The National Consumer Law Center’s Geoff Walsh and others agree it’s an emerging investment strategy.  Pickens says she’s watched it happen in her own work with clients.  Suddenly, a loan changes hands.  Often the new owner is a recently-formed limited liability company.  Clearly, collection is the aim.

Pickens and others say there are things homeowners can do to avoid all of this.  Their number one suggestion is to negotiate a short sale.  In the course of that sale, homeowners work out agreements with lenders, giving them a clear sense of where they’ll stand once the sale is done.  It’s advice Ben Jensen wishes he had received. “I wish that somebody had come to us in the months before all of this happened and said, ‘Look, you really, really should look at a short sale or taking any other option other than foreclosure,'” he says.

Ben says that when he and his wife, Lori, were served with a deficiency judgment, there was no way they could pay.  They had $5,000 to their name.  One hundred and forty thousand was an impossible amount.  “I kept running the number through in my head,” Ben remembers.  “That’s almost the entire mortgage amount that we signed up for with the house, and I felt like if we had to pay that amount there was absolutely no way we had any kind of a financial future.  We were going to be bankrupt.”

In the Jensens’ case, attorney Brian Webb was able to work out a settlement.  The couple turned over their savings and agreed to pay $75 each month for three years.  They say it doesn’t make sense to them that the bank went through so much effort to recover a total of about $8,000, prolonging the nightmare of their foreclosure.  But at least they know that it will be behind them.

StateImpact Idaho contacted Bank of America for comment, but received no response by the given deadline.