New article: Ariel Olson, Kicked While They’re Down: Deficiency Judgments and the Great Recession, 67 Emory L. Rev. 1273 (2018). Abstract below:
In the District of Columbia and forty-two states, if a borrower defaults on her mortgage payments, the lender may be able to take more than just her home. If the foreclosed property sells for less than the total amount of outstanding debt, the lender can file a claim for the outstanding balance to obtain a deficiency judgment.
When the economy is in crisis and housing prices are depressed, deficiency judgments can reach hundreds of thousands of dollars. Lenders can wait to collect these judgments until interest has accrued, further increasing the hardship on the defaulting borrower. For most borrowers who default because they can no longer afford their loans, a deficiency judgment is unmanageable—their only option is to file for bankruptcy.
State legislatures enacted various forms of anti-deficiency laws after the foreclosure crisis of the Great Depression, with the goal of protecting borrowers from losing their homes and being forced to file for bankruptcy by deficiency judgments. However, fewer than ten states currently have laws that achieve this goal for all residential borrowers who default due to financial hardship.
Although some scholars argue that prohibiting deficiency judgments will lead to increased strategic default by borrowers who still have the financial resources to make their monthly payments, several recent studies discount this hypothesis. The ability of lenders to predict and protect themselves from losses related to borrower default, as well as the increase in predatory lending practices leading unsuspecting borrowers to take out unsustainable loans, necessitate a legislative response. This Comment argues that states have a valid interest in protecting their citizens from financial ruin—and in encouraging recovery over punishment—and should enact legislation prohibiting deficiency judgments for residential borrowers.
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