Real
Estate Finance Notes
Antideficiency legislation
What
is the purpose of this? The mortgagee
has two remedies that are alternatives.
You can sue on the mortgage to foreclosure on the mortgage and have the property
sold, or you can sue on the promissory note that is the personal liability of
the mortgagor, or you can do both. What
does it mean to sue on the note? What is
a deficiency? If you only sue on the
note, you just get a personal judgment.
You execute against all of the assets of the mortgagor including the mortgaged
property. If the mortgagor is solvent,
then suing on the note will get around the deficiency judgment legislation. The legislation is designed to make sure that
the lender evaluates the property so that it’s sufficient collateral for the
loan and you don’t need a deficiency.
Also, foreclosures can have a “domino effect”. If you have an economic downturn where people
are out of work and property values are tending lower, deficiency judgments
just aggravate that problem.
There
are several types of antideficiency legislation. Some are procedural. You may have to bring the deficiency judgment
within a certain amount of time. You may
need to give a certain kind of prescribed notice. There is also the “one action rule”, which is
a statute that says that there is one and only one action to realize on an
action to recover debt secured by a property.
If you sue on the note, you waive
the security and thus don’t have the option to proceed against the
collateral. If you proceed against the
collateral first, then, assuming there aren’t other statutes involved, you have
the right after that to seek a deficiency judgment. But the basic idea is that we’re going to
have just one lawsuit.
Then
there are substantive rules. The main
substantive rule is that in some states and under certain circumstances, you
can’t get a deficiency judgment. There
is also fair value legislation. The legislature
decides that you’ll get the property appraised and determine the fair market
value. The deficiency judgment will be
the difference between the debt and fair market value. The property must sell for some fraction of
the appraised value. “Low ball” bids are
prevented.