What Happens If My House Is Foreclosed On For Less Than I Owe?

Ran through this scenario for a client caller today.    FORECLOSUREdetroitMI

And, foreclosures are up again nationally.

Home worth $320,000, mortgage balance $420,000, and, payment going up.  And house payment scheduled to go up again,  yearly.

This mortgage started, as so many troubled mortgages did, in the boom years before the bubble burst in 2008-2009.

A ten year, interest only  mortgage in 2003 termed out in 2013, with, of course, the full balance still owing.

A modification was agreed to starting at 2.5% interest, amortized over 40 years.

But the interest rate goes up every  year, so the monthly payment went from $1,400 to $1,640.

Which they cannot afford.

What can we do about this house that is $100,000 underwater that we can no longer afford?

Unfortunately, you cannot make a mortgage company do ANYTHING for the first mortgage on your residence.

You cannot even make them foreclose.

In Michigan, the mortgage company can collect if there is a deficiency between the foreclosure sale price and what is owed on the mortgage.

Most foreclosures here are by publication, 4 consecutive weekly notices in the Legal News, of the sheriff’s sale.

The mortgage company can bid up the the mortgage balance without coughing up any actual dough.

If they bid the balance, and that is the high bid, after the (usually) 6 month redemption period expires, the mortgage company gets a sheriff’s deed putting the house in their name, and the mortgage is gone, no debt left.

If they bid LESS than what is owed, and that is the high bid, they get the house and you still owe the difference.

Now, I have seen Bank of American bid $300,000 on a $900,000 first mortgage, leaving a $600,000 deficiency, and NOT chase the homeowners for the difference.

But they could sue, get a judgment, and enforce it like any other in Michigan, garnish wages, state tax refunds, take vehicles and/or put a judgment lien on other real estate.

IF the bank agrees, you can do a short sale, which means they release their mortgage lien for an amount short of that necessary to pay off the mortgage.

They can have you sign a note to pay the difference, or, forgive some or all of that difference.

However, there may be debt forgiveness income to you if they do forgive some debt:The IRS publication says the deficiency act expired December, 2014.  This means that unless Congress acts to extend, which I found in a pending bill sponsored by our own Senator Stabenow, that 1099 forms will result in income to clients who have deficiencies waived by the lender.

check with your tax adviser. NOT ME.

Or, the mortgage company could accept a deed in lieu of foreclosure.

You sign a deed giving them the house, and they cancel the mortgage.

This can be set up as an even exchange, which is the only way you should do it, usually.

Or, the mortgage company may only accept the deed with the property noted as being worth something less than the mortgage balance.  There may be debt forgiveness income in this situation.

There is always bankruptcy, if you can get a chapter 7 discharge, that is one way to get rid of a mortgage foreclosure deficiency.

If you are facing this situation, consult competent counsel.

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