Beware of deficiency judgements!

The threat of a deficiency judgment is the last arrow
lenders have in their quiver.
It used to be that when a property was foreclosed or sold as a short sale that three hideous financial events took place: 

First, the borrower�s credit was demolished.  Second, the
lender�s loss on the property was considered
�imputed� income for tax purposes.
This meant that the Internal Revenue Service (IRS) could go after borrowers who had not fully repaid their mortgage,seeking to tax �income,� which did not exist in the form of cash or any kind of material asset. In other
words, if you owed the lender $300,000 and paid back
$225,000 then under the  imputed income rule the IRS
would seek taxes on the $75,000 that was unpaid.
Third, in many states, lenders could go after defaulted
borrowers with a �deficiency  judgment,� a court
suit to collect losses not covered by mortgage
insurance.

In practice mortgage borrowers today are in much better
shape. Here�s why:  It can take as long as seven
years to again qualifying for a new mortgage once a
home has been lost to foreclosure.
However, in some cases borrowers may once again qualify for mortgage in as little as two years. Many homes that would�ve been foreclosed several years ago have been saved through the government's HARP and HAMP programs.  Under the
Mortgage Forgiveness Debt Relief Act of 2007, the IRS
is no longer allowed  to regard most unpaid mortgage
debt as taxable income. This legislation was supposed
to end December 31, 2012, but was extended to January
1, 2014.
 Deficiency Judgments

But what about deficiency judgments? Writing in The
Washington Post, Kimbriell Kelly said deficiency
judgments are allowed in  40 states and the District of
Columbia. The catch?  �A recent government audit
found the recovery rate at one-fifth of 1%,� wrote
Kelly. �But for those hit with the judgments, it can
seem like double-dipping on their pain.�  The report
mentioned by Kelly shows that in 2011 Fannie Mae and
Freddie Mac �pursued 35,231  deficiency accounts,
with a combined value of about $2.1 billion. Of this
amount, vendors recouped approximately $4.7 million �
about 0.22%.�` The real percentage is much lower, of
course, because relatively-few foreclosures or short
sales result in collection efforts.  Indeed, deficiency
judgment collections seem so low that they hardly seem
worth lender efforts or much borrower worry. However,
that�s not quite the case.  Those who have been
foreclosed rarely have the assets or income in the
short run to pay off massive claims, but lenders can
have a number of years to file a deficiency judgment.
That means as savings increase and income grows a
borrower could be hit with a claim once they're back on
their feet.  A judgment once obtained may be
collectible for as long as 20 years according to the
Wall  Street Journal.  For many distressed borrowers
the foreclosure crisis is not over, it's simply on
hold.

The Tax Man is Comming.