Both lenders are stepping up their collection efforts against second mortgage borrowers
August 24, 2011
Nash Law Firm, PLLC
By: Stephen J. Nash
Since the start of the real estate meltdown, lenders holding second mortgages have been slow to pursue borrowers. In most cases, lawsuits are being commenced years after the short sale. That trend may be changing. Wells Fargo and TCF appear to be adopting a much more aggressive plan.
Wells Fargo like other national lenders has tended to move very slowly. You rarely saw them initiate a lawsuit on the promissory note relating to a second mortgage until long after the short sale or foreclosure. Quite often, we found success in negotiating a settlement with Wells during the short sale or within six months after the short sale.
Recently, it has become apparent that there has been a change in their approach. Their offers to settle usually are something like, "If the borrower pays us half of the amount owed and then signs a promissory note for the balance, we will settle with them." Heck, if they had the cash to pay of half of the debt, they wouldn't have needed a short sale!
In the past, we would close on the short sale without a full settlement and then wait until the file was sent to a new department within Wells and we would start the negotiation process all over. In most cases, we were then able to negotiate a settlement that the borrower could afford. Unfortunately, we are now running into a brick wall. They simply won't negotiate.
In many cases, they are suing the borrower before the short sale or foreclosure is completed or shortly thereafter. This often forces the borrower to file bankruptcy which stops the short sale in its tracks. Even if the borrower doesn't file bankruptcy, the negotiator for Wells will tell you that they no longer have any authority to negotiate since it has been sent to litigation. When you contact the law firm, they tell you they were hired to litigate, not to negotiate. They may offer to talk to whoever hired them but inevitably they will come back and say that they are not in the position to do anything.
Is this a passing trend or a hint of things to come? Are the other national lenders going to follow suit? What are they going to do once they get a judgment? Only time will answer these questions.
TCF is a regional lender and is relatively new to the short sale process. They tend to have second mortgages with people who had good credit with homes in middle and upper middle class neighborhoods. They were not involved in the subprime market and their clients were able to withstand the economic problems for a longer period of time. On the other hand, once their clients run out of money or have to sell their home, TCF is in a vulnerable position since its debt will only be paid off if there is enough money to pay off the first mortgage and their mortgage. While the first mortgage is looking a taking a partial loss, they are looking at taking a significant loss.
It is common in the files that we have been involved in that TCF will sue on the promissory note as soon as there is a default. They will obtain a judgment and begin aggressive collection activities. Instead of just sitting on the judgment, we have seen them try to find and attach bank accounts and garnish wages. We have also been involved in cases where they have contacted the listing real estate agent to find out information about the property and the borrowers. In one case they even attempted to depose the real estate agent. They have also spoken to neighbors and undertaken other investigative procedures.
It seems unlikely that national lenders are going to become this aggressive in the near future, it would not be suprising if other regional and local lenders follow TCF's lead.
Given the fact that most borrowers who are in trouble today are middle class and upper middle class individuals who have always had good income, it is not surprising that lenders are more aggressively pursuing deficiencies against borrowers. The fact that the deficiencies are also increasing both as a percentage and in total dollars as the values continue to fall only makes the lenders that much more desperate to recover the deficiencies.
In some cases, this new aggressivenes will simply push the borrowers into bankruptcy. In other cases, borrowers are going to have to realize that they are going to have to pay to avoid having their bank accounts liquidated and their wages garnished.
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 2011 Nash Law Firm