You fell behind on your mortgage payments. The bank foreclosed on your home and bought it at foreclosure.
Now, the bank has filed a lawsuit against you, claiming you still owe money. What are your options?
The bank’s claim is called a lawsuit for a deficiency judgment. The bank is saying that the price it bid at foreclosure was not enough to fully repay your loan.
There are two important rules that apply to this situation. Sometimes lenders, and even judges, get them confused. But, they are very different. Let us look at each of them.
Rule No. 1 – if the bank bids on the property at foreclosure, it does not have to bid the full value of the property.
When a bank forecloses on property, it is common for the bank to purchase the property itself at foreclosure. The bank makes what is known as a “credit bid.”
Here is an example. The homeowner owes the bank $100,000 on the mortgage. The house has appraised recently for $100,000. At foreclosure, the highest bid comes from the bank, and it is for $85,000.
The bank does not actually pay itself $85,000. Instead, it gives the homeowner an $85,000 credit on the amount of the loan. Then the bank claims that $15,000 is still owed by the homeowner.
Note: In Mississippi, there is no requirement that the bank bid an amount that equals the value of the property. The courts will not set aside a foreclosure for an inadequate bid unless it is so low that it “shocks the conscience of the court.”
Foreclosures have been upheld when the bid price was as low as 40% of the value of the property. So, a bid of 85% of the value of the home is adequate.
Rule No. 2: The bank has to give you credit for the full value of the property, regardless of how much the bank bid.
Continuing with our example, the bank then sues the homeowner for a $15,000 deficiency judgment. This is where the second rule comes into play.
Although the law does not require the bank to make a credit bid for the full value of the home at foreclosure, the bank is still required to give the homeowner credit for the full value of the home at the time of foreclosure.
So, in our example, the homeowner would defend the lawsuit by insisting that the bank apply the full value of the home ($100,000) to the amount of the loan ($100,000). If successful, the homeowner would owe nothing.
Also, note that the same rules apply to foreclosures on commercial buildings.
If you are facing a lawsuit by bank for a deficiency judgment, do not immediately assume that you still owe the money. Call the Panter Law Firm at 601-607-3156 for a consultation.