Vanessa Corey sold this house but still owed some of the mortgage balance. Now the bank is coming after the $65,000 difference.By Les Christie, staff writerFebruary 3, 2010: 3:21 PM ET

NEW YORK (CNNMoney.com) — As terrible as it is to lose your house to foreclosure, at least it’s a relief to put your biggest financial headache behind you, right?

Wrong.

Vanessa Corey

Former homeowners may still be on the hook if there’s a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these “deficiency judgments” are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.

“My understanding was that the deficiency was negotiated away,” she said. “Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it.”

Many homeowners are now in the same boat. And not just those who took out bigger loans than they could afford or who did so called “liar loans” where they didn’t have to verify their income.

Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances — like unemployment or a job transfer — can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.

“After the banks foreclose, it’s very common now to have large deficiencies with houses not worth the balances owed,” said Don Lampe, a North Carolina real estate attorney.

Lenders mostly declined comment. Although Corey’s lender, BB&T did indicate it was pursuing more deficiency judgments.

“They follow the rise and fall of foreclosures,” said the spokeswoman, who would not discuss Corey’s account.

Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there’s a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.

“Once they have a judgment, they can pursue you anywhere,” said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. “They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail.”

In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

Some states, such as California, are “non-recourse” and don’t allow deficiency judgments. But, even there, if the original loan was refinanced, some or all of it may be subject to claims.

Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.

But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.

“People shouldn’t have a false sense of security that a deficiency judgment may not be later sought,” Zaretsky said.

He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.

“The parties who bought those notes wouldn’t have paid money for them unless they had the intention of acting,” Zaretsky said.

What can be scary is that the judgments don’t have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

It doesn’t have to be a large amount of debt for a lender or collection agency to come after borrowers. Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.

It wasn’t until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.

“I told them, ‘Hey, you guys released the title,’” he said. “As far as I know, I’m off the hook.”

He wasn’t. Releasing title does not necessarily end the debt. It’s complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.

Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.

Zaretsky had one client who was so relieved to have arranged a short sale that he signed every paper his real estate agent shoved at him, even a confession that clearly stated he still owed the debt.

“He had no idea what he was doing,” said Zaretsky. “All the lender had to do was go to court to convert the confession into a deficiency judgment.”

Lenders are also very inconsistent. One of Zaretsky’s short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.

Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

“Banks are pulling credit reports to see if it’s a strategic default,” he said. “If you’re behind on all your other payments, you’re okay. But if you’re not, they’ll come after you.”

If borrowers have any doubts about their risks, they should seek legal advice. Or, at least, call non-profit organizations such as NeighborWorks for advice. According to Doug Robinson, a NeighborWorks spokesman, its counselors always try to negotiate away deficiencies when they facilitate short sales or deeds-in-lieu.

“We don’t favor any short-sale contracts that leave any deficiency that can be pursued,” he said.

Robinson himself knows what can happen. He paid off a deficiency after his own New Jersey house went through foreclosure 11 years ago. 

MERS: The Mortgage Database That’s Clouding Millions of Titles

By ABIGAIL FIELD Posted 10:00 AM 12/06/10 Company News, Columns, Economy, Real Estate

On Dec. 2, the House Judiciary Committee held a hearing on the mortgage mess. Perhaps the most disturbing testimony was the written submission from Christopher Petersen, associate dean for academic affairs and law professor at the University of Utah. Petersen detailed how the banks, Fannie Mae, Freddie Mac and Ginnie Mae destroyed America’s land-record system, a method of tracking property sales that’s existed since colonial times. Instead, they put in place a system called “MERS” (for Mortgage Electronic Registration Systems) that’s legally shaky, makes tracking mortgage-note ownership extremely hard and may be clouding the title of millions of properties.

But the MERS situation could be even worse than Petersen described to Congress: Millions of documents, including millions of foreclosure documents, may have been signed in MERS’s name by people without the power to do so. A lack of authority would call into question the validity of all those documents. While the ramifications are uncertain, the bottom line is, as Petersen told me: “This issue injects yet another level of uncertainty into the already murky swamp of foreclosure nonsense.”

At a minimum, the deposition of William Hultman, MERS corporate secretary and treasurer, and related documents that expose the issue reveal yet another example of the mortgage and foreclosure industry’s carelessness with the rule of law.

A Shortcut System for Tracking Mortgages

MERS has one purpose: to hold and track mortgages. It’s basically an incorporated database financed and maintained by its members, who represent most of the mortgage industry. The MERS database simplifies securitization and makes it much cheaper by bypassing the requirement that every change in ownership of a mortgage be recorded in the county where the mortgaged property is located.

Instead, the mortgage is recorded once, in the name of MERS, and all the other transfers are tracked on the MERS system only, or even not tracked at all. Entering data into the MERS database is optional for members: MERS Chief Executive R.K. Arnold told Congress recently that “Members tend to register only loans they plan to sell.”

The loss of county recording fees can be significant. One irate Massachusetts register of deeds estimates that bypassing his county might have cost the state hundreds of thousands of dollars. MERS itself boasts of saving the “industry up to $200 million annually by creating an electronic clearinghouse for mortgage ownership rights and information.”

20,000 “Certifying Officers”

MERS has no employees, so how does it do this? Basically, it doesn’t. MERS’s members upload and manage their own data, and whenever a MERS member wants MERS to do something for it, the member just tells a MERS “certifying officer” — of which there are some 20,000 — to do what the member wants it to do.

These certifying officers, who usually have a traditional corporate title like vice president or assistant secretary but specific and limited powers, don’t report to anyone at MERS, much less get paid by it. Indeed, their only link to the company is a corporate resolution signed by MERS Secretary Hultman appointing them as officers of MERS.

As Arnold explained to Congress: “From inception, the concept of certifying officers has always been fundamental to the operations of MERS.” Given the centrality of the concept, it’s surprising how badly MERS seems to have pulled it off.

An Outdated Resolution?

The validity of Hultman appointing certifying officers comes under attack from a few different directions. First, the April 9, 1998, corporate resolution that Hultman points to as giving him the power to approve certifying officers appears to say that only member employees can be certifying officers. Indeed, MERS CEO Arnold told Congress two weeks ago that “MERS relies on specially designated employees of its members, called certifying officers.”

Regardless of that apparent limitation, however, Hultman has made many attorneys at firms doing foreclosures for MERS banks, and possibly other non-MERS member employees, certifying officers.

Second, the resolution that empowers Hultman to approve certifying officers was originally adopted by an earlier corporate incarnation of MERS, and it may not have been ratified by the current one. Unless the current MERS ratified the authorizing resolution or replaced it with another, whatever power Hultman had ended no later than Jan. 1, 1999, when the current MERS came into being. An awful lot of certifying officers have been appointed since then, so it’s possible the ratification did occur.

Murky Corporate Bylaws

Nonetheless, when Hultman was deposed, he said he didn’t know if the current MERS ratified his appointing power. Of course, as corporate secretary he’s perhaps in the best position of anyone at MERS to know. Although Hultman turned over a number of documents relating to the April 9, 1998, resolution both before and after his deposition last April, to date Hultman has not turned over evidence that the current MERS has ratified his power, according to Mark Malone, the former New Jersey assistant U.S. attorney and former New Jersey deputy attorney general who took Hultman’s deposition. (After a number of years in private practice, mostly helping corporations with internal investigations, Malone now volunteers for New Jersey Legal Services’ antipredatory lending project.)

A third problem with Hultman’s power to appoint certifying officers is rooted in MERS’s bylaws, which give only the board of directors the power to choose officers, regardless of title. Boards can’t pass resolutions that violate their companies’ bylaws, so even if April 9, 1998, resolution giving Hultman the power to choose certifying officers was ratified by MERS, it might be invalid anyway.

The bylaws may explain why Hultman’s appointing documents each claim to be a “true copy of a Resolution duly adopted by the Board of Directors” rather than a more straightforward “by the power vested in me, I Hultman appoint…” During his deposition, Hultman conceded that despite the “true copy” language, what he’s signing is the original. The board never separately passed the resolution.

So What Are the Consequences?

Malone was blunt: “What Hultman says in the resolutions he signs is false. He’s not saying by the power delegated to me by the board. He’s saying the board met and adopted a resolution, and what he’s signing is a ‘true copy’ of that resolution. Which is just false — there’s no original resolution that it’s a true copy of.” Which, of course, raises the question: Why write the resolution the way he does, if his “power” to appoint the certifying officers complied with the bylaws?

Given that MERS had some 66 million mortgages in its system at one point, and currently has some 31 million mortgages, the number of wrongly executed documents is hard to fathom. How many foreclosures were achieved using documents these “officers” had no right to sign? How many pending foreclosures are based on fraudulent documents? The only answer is: Many.

Still, despite the scale of the issue, it may turn out to be a relatively minor problem in overall scheme of foreclosure document problems. That’s because the doctrine of apparent authority might protect all the completed foreclosures. The idea behind this doctrine is essentially that the court was entitled to rely on the unchallenged representation that the person signing really was a MERS officer. After all, MERS isn’t denying the signer’s authority.

Nonetheless, pending foreclosures might be jeopardized as homeowners challenge the MERS-signed documents, as some are already trying to do. At this point, I’m starting to look for documents the banks and their allies actually get right.

See full article from DailyFinance: http://srph.it/f7Z6MO

(Reuters) – The U.S. Justice Department said on Wednesday it was probing reports the nation’s top mortgage lenders improperly evicted struggling borrowers from their homes as part of the devastating wave of foreclosures unleashed by the financial crisis.

Amid mounting political outrage over the U.S. mortgage mess, key members of U.S. congressional banking committees joined calls for probes into the foreclosure activities of banks accused of tossing homeowners out without proper review.