Who is Liable for The Mortgage Deficiency? Heirs or the Estate?

Posted By on December 3, 2009

A client contacted me the other day with a very interesting situation. His father was a citizen of Canada and maintained a winter home in South Florida. His father had named him on the deed to the property so that it would pass to him upon his father’s death. And while this kind gesture might have proved beneficial to my client in any other economy, it is now a source of aggravation.

My client’s father had taken out a mortgage to finance the Florida property, and the dip in the housing market has resulted in the property’s being worth less than the amount that is due on its mortgage (this is referred to as a “deficiency”). My client’s father is now dead, and the bank is looking to collect on the mortgage. While my client is not named on the mortgage itself, and thus is not a party to it, he is the legal owner of the property and so is confused as to what he should do. If he continues to make the mortgage payments, he will essentially be paying two or three times the worth of the property. If he does nothing, the bank will likely foreclose on the property and may secure a “deficiency judgment” against him for the difference between the foreclosure sale price and the amount that is due on the mortgage.

So, what is my client to do? Ultimately, my client can only be made to pay his father’s obligations concerning the Florida property to the extent that there is money left in his father’s estate. If there is no money in the estate with which to satisfy his father’s mortgage debt, my client cannot be forced to do so from his own funds. However, if he lets the property fall to foreclosure, the bank will likely name him as a defendant in the deficiency suit, which will compromise his credit. If, on the other hand, he arranges a “short sale” and negotiates a “waiver” of the deficiency with the bank, he can avoid such a predicament. In a short sale, the property owner undertakes to sell the property on his own and turns over all of the proceeds of the sale to the bank that issued its mortgage. As with foreclosure sales, it is unlikely, in this economy, that the property will be sold for an amount that exceeds the value of its mortgage. However, in proposing a short sale, a property owner is in a better position to bargain with the bank and can usually obtain from it a promise that it will not look to the owner to satisfy the deficiency. The recent influx of foreclosures (and layoffs of bank employees) has left them overburdened and thus more willing to offer concessions to property owners who assume the responsibility/ expenses of selling their property, without forcing the bank to initiate the time-consuming and expensive foreclosure process.

Whether my client chooses to negotiate a waiver of deficiency with the bank and sell the mortgaged property on his own, or whether he instead chooses to do nothing and allow the property to be foreclosed upon, my client will need me (or another lawyer) to ensure that he is adequately protected from being held personally liable for his father’s. In the former situation, my client’s actions (and those of his lawyer) will be proactive and, thus, likely more effective. In the latter situation, my client will have to clear his name after it has already been marred. It seems unfair that my client should be made to bear the expenses of legal representation regarding a mortgage into which he never entered, especially given that his father had tried to do a nice thing for him by deeding the property to him. Unfortunately, under these circumstances, my client has no other option.

If you would like more information about this topic, you may either post a comment to this blog, contact me, Larry Tolchinsky, by email, or call me at (954) 458-8655 and I will be happy to answer your questions. I offer a free initial consultation.

Comments

One Response to “Who is Liable for The Mortgage Deficiency? Heirs or the Estate?”

  1. Bill B says:

    Hello,

    I have a somewhat similar situation. My mom died in 2008, my dad in 2010. He left behind a house with a mortgage, the house is “under water.”

    I have been talking to the mortgage bank, SunTrust, about renegotiating the mortgage. We could not arrive at a deal. The bank has started foreclosure proceedings. In the last week, I have received the summons, and a motion for summary judgment.

    I was not named in the mortgage or on the deed. I signed nothing. I have nothing to do with the property (I live in NJ). What are my options?

    Thanks.

Leave a Reply

Please note: Comment moderation is currently enabled so there will be a delay between when you post your comment and when it shows up. Patience is a virtue; there is no need to re-submit your comment.

css.php