Deficiency Judgment Defense

A deficiency judgment is likely the greatest risk associated with foreclosure, deed-in-lieu or short sale. A deficiency judgment is a personal money judgment against one or more persons for the difference between the amount of the debt and the value of the property. A deficiency judgment can:

  • last up to 20-years unless paid or otherwise resolved
  • be a lien on all non-homestead real estate and other assets if recorded with the State of Florida
  • serve as the basis for wage or bank account garnishment; or attachment and sale of assets

If you have been served with a foreclosure suit, and no final judgment has been rendered, see foreclosure defense. Defending a foreclosure suit is likely the best way to avoid a deficiency through gaining legal leverage to get the lender to agree, as part of the foreclosure suit resolution, to refrain from pursuing a deficiency.

Defending a Deficiency Action – Ben’s Strategy

Ben’s strategy for defending a motion for deficiency judgment is not a one-size-fits-all operation.  Each case is different.  However, several key overarching principles apply to many deficiency cases. 

  1. The borrowers should not have to bear the deficiency burden alone.  The large lenders, with their teams of financial analysts, were in a better position than borrowers to know that real estate prices were well beyond sustainable levels – the large lenders assumed a huge amount of deficiency risk [assumption of deficiency risk]
  2. Lenders should not be able to pursue or recover that portion of an alleged deficiency that they previously recovered from other sources – sources like mortgage insurance or loss-sharing agreements [offsets]
  3. The lenders’ own conduct, in deviating from historically-sound lending standards, is what created the bubble in the first place – thus contributing to their own alleged losses [contributory negligence for the deficiency].

Where entry of a deficiency judgment is discretionary, the court should consider such factors in determining whether or not a deficiency is warranted.

Assumption of Deficiency Risk

At a minimum, the deficiency burden should be shared between the two parties – borrower and lender.  There is a negligence law principle that states: “between two innocent parties, the party in the best position to assess the risk should bear the loss”.  The large lenders, with their teams of financial analysts, were in a better position to know that real estate prices were well beyond sustainable levels.  Possessing this knowledge, they assumed the risk that they would not be able to recover the loan balances when home prices returned to normal levels.  They also assumed the risk that a market full of upside-down properties would result in massive default rates.  The large lenders have entire departments dedicated to financial analytics and risk management – professionals whose sole job is to evaluate real estate market trends.  These departments are critical to internal risk management and compliance and reporting to the FDIC or OTS.  These departments certainly reported the eye-popping changes in key metrics as the bubble began to form in 2001-2002.  One such measure is the relationship between personal income and home prices.  Historically, this relationship was less than 1:3, respectively.  In other words, where average income is $40,000 per year, average home prices are a little less than $120,000. However, at market peak in the Tampa Bay Market Statistical Area (“TBMSA”) – which includes Tampa, Clearwater and St. Petersburg, Florida – the relationship topped 1:6 – meaning home prices more than doubled their historical relationship to personal incomes.  A relationship of 1:4 was virtually unheard of, let alone 1:5 and 1:6.  While borrowers did in fact sign promissory notes obligating them to repay a certain amount of money, borrowers did so in reliance on the Lenders’ appraisers and were largely unaware that real estate prices were well beyond sustainable levels.  However, where the large lenders had superior knowledge of the risks, and continued to make loans in amounts larger than what the lenders knew the properties would support over time, they assumed the deficiency risks – suffering the exact consequences they knew would occur when lending standards and home prices returned to normal.  Basic analysis clearly shows that property prices were well beyond sustainable levels.

Lending executives were willing to assume such risks, on behalf of the corporations they managed, in exchange for huge bonuses that resulted from the increased profitability of securitization operations which were fueled by lending operations which in turn were fueled by tweaking the lending standards to feed the lending operations. It was a thing of beauty – while it lasted.


Another deficiency defense concept is the legal principle that “equity prevents duplicative or multiple recoveries for the same alleged damages”.  In other words, equity prevents the lender from double-dipping.  Examples of this may be the lender’s receipt of bailout funds, proceeds from credit-default swaps, mortgage insurance, FDIC loss-sharing recoveries, or other offsets.  Determining if such alternative or collateral sources of recovery exist is a matter of conducting pre-hearing discovery.

Contributory Negligence for the Deficiency

The large lenders’ own conduct, in knowingly and intentionally deviating from historically sound lending standards and adopting wholly new and untested lending standards, is the root cause of the real estate bubble and the bulk of the lenders’ alleged deficiency losses or damages.  The large lenders:

  1. having discovered that it was more profitable to make loans and sell or securitize loans – instead of holding the loans, and
  2. knowing that a large portion of the loans were going to be sold to Freddie Mac, Fannie Mae or securitized and sold to investors, and
  3. knowing that the bulk of default risk and bubble risk was transferred to Freddie Mac, Fannie Mae or outside investors, willingly and knowingly abandoned lending fundamentals and chose to adopt whatever lending standards would keep the process going.

The result – stated income loans [what lenders themselves called liar loans], “no doc” loans, 100% financing and negative amortization loans.  Additionally, many of the large lenders also vertically integrated to make money off of the loan-making process itself.  This was not a knowing plunge into the unknown but a calculated operation to generate large profits while pushing the inherent risk off onto others.  Banking executive bonuses are driven by profits, would you do it for millions of dollars – maybe just massage the lending standards a little?

Just like the statistical relationship between interest rates and home prices, there is a clear and unignorable statistical relationship between relaxed lending standards and home prices.  By relaxing lending standards in the 2001-2007 period, the large lenders intentionally manipulated real estate market conditions to serve their own purposes, and by doing so contributed to large portion of their alleged damages.  More specifically, where the large lenders:

    1. knowingly chose to relax the lending standards,
    2. knowingly created incentives for their lending officers and mortgage brokers to push these new standards,
    3. ignored or intentionally looked the other way when the lending officers completed loan applications on behalf of the borrowers, telling borrowers how much income they needed to “state” on their “stated income loan applications”,
    4. ignored or looked the other way when borrowers “misstated” their income,
    5. and failed to put adequate safeguards in place to ensure that these new lending standards were not abused by lending officers and borrowers alike.

The conduct of the large lenders is analogous to a bus driver who knowingly takes a shortcut through a treacherous canyon in save two hours of time and crashes the bus.  The driver and the passengers suffer injuries.  The driver sues the passengers for causing his injuries because they were talking and distracting the driver on the treacherous path chosen by the driver.

If real estate was worth what the lenders’ appraisers said it was worth, in say 2006, would there be a deficiency?  Would we have seen the historically unprecedented default rates?   Stated another way, but for the bulk of the large lenders’ deviating from sound lending standards in the 2001 – 2006 period – putting themselves and the entire economy at risk – would the growth rate of real estate prices outpace the borrower income growth rate by hundreds of percentage points?

As a former financial analyst on behalf of a lender, and as a former consultant to a number of large lenders, Ben is well-positioned to make these arguments.  Although every case is different, Ben Hillard believes that many of these concepts, supported by statistical analysis and expert testimony, should sway judges, in their discretionary and equitable role, towards refusing to enter deficiency judgments.

The law concerning the entry of a deficiency judgment is almost completely discretionary.  In other words, the judge has discretion or power to enter, or refuse to enter, a deficiency judgment, so long as his or her decision is supported by legal or equitable principles.  While entering a deficiency judgment is, or has historically been the norm, deficiency judgment law was developed long before the prevalence of lender bailouts, mortgage insurance, negative amortization loans, “no doc” loans and various other bubble-inspiring maladies.  

The litigation goal in defending a motion for deficiency is to eliminate or reduce the deficiency amount, or to simply gain the legal leverage to attempt to achieve a favorable settlement.  The lenders know that it costs money to engage in collection efforts.  The lenders do not want to “spend good money chasing bad”.  The lenders also know that collecting money from defendants who sought advice early and engaged in proper planning could be very challenging indeed.  Therefore, leverage and preparedness are critical to achieving a favorable resolution.

As mentioned earlier, one initial hurdle in the deficiency judgment battle is receiving notice that lender or collection agency is seeking a deficiency.  Concerning notice, most people Castle Law Group sees are in one of three situations:

  • They received notice that the lender/plaintiff is seeking a deficiency;
  • They defended the foreclosure suit and the lender/plaintiff is aware of their present address – they should be entitled to notice of a motion for deficiency; or
  • They didn’t defend the foreclosure suit, were defaulted and may not receive, or be entitled to receive, notice that the lender/plaintiff is seeking a deficiency.

If you received notice that the lender/ plaintiff is seeking a deficiency judgment, contact a good lawyer in this practice area immediately.  There is a large amount of discovery to be done prior to the deficiency hearing.  I cannot stress this enough: DO NOT WAIT – contact a good lawyer immediately.

If you defended the foreclosure suit and did not use a lawyer, make sure that the clerk of court and opposing counsel has a current address for you.  The best way to do this is to file a notice of address with the clerk of court and send a copy to Plaintiff’s attorney.  If you defended or attempted to defend the foreclosure suit yourself, you should still speak with an attorney.  Each person’s situation is different.  If you used a lawyer to defend that suit and were unable to get an agreement with the lender concerning the lender refraining from pursuing a deficiency, make sure that your lawyer has your current address.

If you didn’t defend the foreclosure suit, Ben recommends seeing a good lawyer immediately. You will also want to make sure that the clerk of court and opposing counsel has a current address for you, and that the lender has not sought, and/or is not presently seeking a deficiency.  The first step is awareness.  Each person’s situation is different.  Consult a good lawyer in this practice area.

Understanding Your Situation

The bank or lender may seek a deficiency judgment if it has not otherwise agreed to refrain from pursuing a deficiency judgment or forgiven the amount of the alleged debt that exceeds the value of the property. A deficiency may be sought following a short sale, a deed-in-lieu or after a foreclosure sale has occurred following the entry of a final judgment of foreclosure. If a deficiency is sought following a deed-in-lieu or short sale, the lender must establish both the amount of the alleged debt and the value of the collateral property. If a deficiency judgment is sought following a foreclosure sale, the amount of the debt is already established by the final judgment of foreclosure. In such case, the only arguments to be made at a deficiency hearing concern whether the lender is entitled, equitably, to the entry of a deficiency judgment; and the value of the property as of the foreclosure sale date.


If however, a lender or collection company is contacting you, suing you or setting a deficiency hearing and you believe the lender has already let you off the hook from a deficiency via short sale approval letter, deed-in-lieu agreement or stipulation in a foreclosure suit, you must take immediate action. This could be a simple mistake on the lender’s part, or it could be intentional. Worse yet, you were the one mistaken as to the nature of an agreement that you believed let you off the hook. If you don’t act immediately, you could lose your opportunity to raise “settlement” as a defense.

Lenders often sell “opportunities” to pursue deficiencies to collection companies who then seek deficiencies against borrowers.

Many borrowers are surprised to learn that the language contained in their short sale approval letter or deed-in-lieu agreement merely released the mortgage from the property, but did not release the borrower of the underlying debt.

How Do You Know if the Lender or collection company seeks a Deficiency Judgment?

If the bank or lender is seeking a deficiency judgment following a foreclosure sale, it will seek a deficiency judgment at a formal hearing. However, if you failed to respond to the foreclosure lawsuit and were defaulted, you are not entitled to notice of the deficiency hearing. In such a case, the lender could proceed with a deficiency hearing without notifying you. It is imperative, if you ignored the foreclosure lawsuit, to file something in the court file to let the court and lender know that you want notice if the lender seeks a deficiency. The law concerning notice of a deficiency hearing is not well developed and does not appear to require new notice be sent to a defaulted defendant borrower.

Ben Hillard esquire, former mortgage banker turned lawyer, defends deficiency judgment actions by pointing out equitable reasons why a deficiency should not be entered. For example, the lender should not be able to seek multiple recoveries for the same alleged damages. An example of this may be mortgage insurance, TARP or bailout money, recoveries from credit default swaps or other sources. Although more appropriate in defending the foreclosure action itself, the real reason a deficiency exists in the first place is due to the lender’s role in creating the real estate bubble. The statistics don’t lie, the lenders knew that a bubble existed and continued to lend into it, assuming the risk that a large portion of the loans they were making would not be repaid. Each case or situation is different – seek knowledgeable counsel.

The law provides that entering a deficiency is within the judges discretion; if you are facing a deficiency judgment hearing, seek counsel immediately.

Warnings / Cautions:

If you have been sued, don’t cease paying attention to the lawsuit simply because the property was sold in a short sale or given back the bank in association with a deed-in-lieu. Loss of the collateral property is one thing, a money judgment for a deficiency could follow you for 20-years.


Frequently Asked Questions


What is the effect of a deficiency judgment? Will it affect my credit score?

Yes, it will negatively affect your credit score because it lasts up to 20-years or until resolved.

What is a final judgment of deficiency?

A final judgment of deficiency is the equivalent of a money judgment and can last up to 20-years. It can serve as the basis for garnishment of wages, bank accounts, non-retirement investment accounts, etc. It could also serve as the basis for attachment and sale of vehicles or other assets. In a word, its very bad news.

How to negotiate a deficiency judgment?

First, consult a knowledgeable and talented attorney. I am trying to say this with a straight face.

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