Robo-Signing and Foreclosure Deficiency Judgments in Maryland

Robo-signing of affidavits and other legal documents used in Maryland foreclosures has led to the predictable scenario where long after the foreclosure was approved, junk debt buyers are now seeking foreclosure deficiency judgments on what was the difference between the amount of the mortgage and the price fetched at the foreclosure sale.

Most participants in our legal system agree that robo-signing (including consensual forgery, perjury, and falsely stating one has personal knowledge of events) is an assault on the integrity of the courts. But as is well known, when faced with admittedly fraudulent documents, most courts simply looked the other way, and allowed the foreclosures to go through.

A recent article in the New York Times by Gretchen Morgenson illustrates the long shadow that robo-signing in foreclosures has created, and shows why robo-signing’s negative effects on people’s legal rights will continue for years to come. By way of example, although the state of Maryland disciplined two lawyers for admittedly submitting false affidavits in thousands of foreclosures, not a single one of those foreclosures was overturned.  See  here and here. Now the deficiency amounts from cases like these are being sold for pennies on the dollar to junk debt buyers, who are reopening the foreclosure cases and seeking tens or even hundreds of thousands of dollars from former homeowners who thought their cases were finally over.  The good news in Maryland (unlike in other states) is that a law was passed which shortened the statute of limitations from twelve to three years on seeking foreclosure deficiency judgments.

Deficiency judgments are based on the debts leftover after foreclosures: they are the difference between what is owed on the mortgage and what the foreclosed house is sold for.  As Morgenson says:

Robo-signer redux, as it might be called, has come about because of an aggressive pursuit of former borrowers by debt collectors hired by Fannie Mae, the mortgage finance giant. What Fannie is trying to recoup from these borrowers is the difference between what the borrowers owed on the mortgages when they were foreclosed and the amount Fannie received when it resold the properties.

These monetary amounts — and they can be significant — are known as deficiency judgments. It is legal in most states for lenders to pursue them. (California is one notable exception.) The time limit for debt collectors to go after former borrowers varies from state to state; Florida allows deficiencies to be pursued for 20 years, and borrowers must pay a compounded annual interest rate of 4.5 percent.

The problem is that if the foreclosures are flawed, then one would think that any action for a deficiency judgments is also flawed. Time will tell what the courts do with this dilemma, but if history is any guide, don’t bet on the homeowners.

Fannie Mae defends its deficiency judgment collection program on the grounds that it is only seeking to collect against consumers who can pay, but refuse to do so. However, in Morgenson’s article, no details were provided to indicate how Fannie Mae identified these consumers and determined their ability to pay.