VA Loans: Don’t Rely on Minnesota Law to Protect the Borrower

Minnesota’s anti-deficiency protections are not recognized by VA.

January 10, 2012

Nash Law Firm, PLLC
By:  Stephen J. Nash
nash@nash-law.com

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In a normal situation, when a lender forecloses their mortgage by advertisement, the lender ends up with the property but the borrower is released from liability on the promissory note.  However, the Veteran’s Administration has always taken the position that state law does not apply to them.  As a result, they take the position that the underlying debt does not go away even if the mortgage was foreclosed by advertisement.

Of course, someone could challenge this position in court but there are not many sane people around that really want to get involved in a lawsuit with the VA.  The cost of such a lawsuit would be extremely expensive.

As a practical matter, the VA also holds another extremely powerful hammer – the ability to withhold VA benefits.  When the economy is good, many veterans don’t take advantage of these benefits, but when faced with a long termed, difficult economy, those veteran benefits become much more valuable and necessary. 

In the early 90’s, when faced with another recession, the VA took the position that state law did not protect veterans; however, they were reasonable to deal with when applying for a hardship exception (i.e., reducing the debt).  The real question today is whether they will be quite so reasonable to deal with since this economic downturn has been much more severe than that faced in the early 90’s.  When the VA reduces the amount owed, the taxpayers will pick-up the tab.  In the early 90’s, that was not really an issue.  Today this issue is being talked about and debated every day.

The bottom line is you cannot assume that dealing with a VA loan, that the normal rules and expectations apply.

NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2012 Nash Law Firm