Estate Finance Notes
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.