Apr

How to avoid a judgment in a foreclosure in Iowa

I speak daily to homeowners who are in default on their mortgages in Des Moines who are considering a Short Sale as an alternative to foreclosure. Without fail they all want to know, “Will the Bank come after me for the money that they lose or forgive?” The answer to this question is a resounding…”Depends”.

A basic understanding of the Iowa law surrounding foreclosures is needed here. Now, remember, I am not an attorney, seek competent legal advice before proceeding in any course or action related to this subject matter.

The section of the Iowa code in question is Section 654 on Foreclosure of Real Estate Mortgages.
Section 654.6 States:
Deficiency–general execution.
If the mortgaged property does not sell for sufficient to satisfy the execution, a general execution may be issued against the mortgagor, unless the parties have stipulated otherwise.

This would seem to state the banks do indeed have the right to chase the homeowner for any loss that they would occur….but wait!!!….not so, fast. The key to this section is the last highlighted part. In over 90% of foreclosures in Des Moines, the banks who are foreclosing have stipulated otherwise.
Where have they made this gracious stipulation that they will not pursue any deficiency judgment or “chase you”? Why pray tell have they gotten so magnanimous? Let us go to Section 654.20

654.20 Foreclosure without redemption–nonagricultural land.
If the mortgaged property is not used for an agricultural purpose as defined in section 535.13, the plaintiff in an action to foreclose a real estate mortgage may include in the petition an election for foreclosure without redemption. The election is effective only if the first page of the petition contains the following notice in capital letters of the same type or print size as the rest of the petition:
NOTICE
THE PLAINTIFF (Usually the Bank) HAS ELECTED FORECLOSURE WITHOUT REDEMPTION. THIS MEANS THAT THE SALE OF THE MORTGAGED PROPERTY WILL OCCUR PROMPTLY AFTER ENTRY OF JUDGMENT UNLESS YOU FILE WITH THE COURT A WRITTEN DEMAND TO DELAY THE SALE. IF YOU FILE A WRITTEN DEMAND, THE SALE WILL BE DELAYED UNTIL TWELVE MONTHS (or SIX MONTHS if the petition includes a waiver of deficiency judgment) FROM ENTRY OF JUDGMENT IF THE MORTGAGED PROPERTY IS YOUR RESIDENCE AND IS A ONE-FAMILY OR TWO-FAMILY DWELLING OR UNTIL TWO MONTHS FROM ENTRY OF JUDGMENT IF THE MORTGAGED PROPERTY IS NOT YOUR RESIDENCE OR IS YOUR RESIDENCE BUT NOT A ONE-FAMILY OR TWO-FAMILY DWELLING. YOU WILL HAVE NO RIGHT OF REDEMPTION AFTER THE SALE. THE PURCHASER AT THE SALE WILL BE ENTITLED TO IMMEDIATE POSSESSION OF THE MORTGAGED PROPERTY. YOU MAY PURCHASE AT THE SALE.
If the plaintiff has not included in the petition a waiver of deficiency judgment, then the notice shall include the following:
IF YOU DO NOT FILE A WRITTEN DEMAND TO DELAY THE SALE AND IF THE MORTGAGED PROPERTY IS YOUR RESIDENCE AND IS A ONE- FAMILY OR TWO-FAMILY DWELLING, THEN A DEFICIENCY JUDGMENT WILL NOT BE ENTERED AGAINST YOU. IF YOU DO FILE A WRITTEN DEMAND TO DELAY THE SALE, THEN A DEFICIENCY JUDGMENT MAY BE ENTERED AGAINST YOU IF THE PROCEEDS FROM THE SALE OF THE MORTGAGED PROPERTY ARE INSUFFICIENT TO SATISFY THE AMOUNT OF THE MORTGAGE DEBT AND COSTS.
IF THE MORTGAGED PROPERTY IS NOT YOUR RESIDENCE OR IS NOT A ONE-FAMILY OR TWO-FAMILY DWELLING, THEN A DEFICIENCY JUDGMENT MAY BE ENTERED AGAINST YOU WHETHER OR NOT YOU FILE A WRITTEN DEMAND TO DELAY THE SALE.

That is a mouthful, so let try and put this in layman’s terms. In essence for the sake of this article, we are talking about someone’s primary, single family home. Banks will almost always choose foreclosure without redemption, because the redemption process takes a long time. Long time = delay in asset recovery + additional loss of income and capital.
The Bank is making you a deal: We won’t chase you if you give up your ‘rights’ to your redemption period.
(Sidebar: Redemption rights were consumer protection rights that were put in place to give people time to come up with the money after their home was foreclosed on so they could buy it back. This period was anywhere from 6 to 12 months)
It is important to note the highlighted area above. If you exercise your right to file a delay of sale and postpone the foreclosure, the bank can say, “Deal’s off!”. Now, in order to do this they would have to amend their petition and remove the language that already states they won’t chase you. This is unlikely to happen, but it could.

To recap you will know that the bank cannot come after you if

The have obtained a default judgment in the foreclosure AND the judgment is “In Rem” (against the house or the land) and NOT “In personam” (against you personally)
In the foreclosure decree the bank has elected Foreclosure WITHOUT redemption and stipulated that they will not pursue a deficiency judgment.

**If you want to know if you have a judgement against you and what type check out IOWA Courts Online and search your name. You may need to pay a monthly fee to get the information on they type of judgment**
If you have second mortgages or liens, that is a different story. They can chase you for a deficiency judgment and often do. (Read this article about Fannie Mae’s recent bulletin on cracking down on strategic defaults) We always try, when negotiating with subordinate lien holders, to get a full settlement with no deficiency. This is one of the most important reasons to do a short sale. Without some face time with the lien holders, you are going to be obligated for the full debt with no ability to negotiate terms of surrender. If you do a short sale, you can state your case, provide evidence, and an amicable settlement.

(FYI…if you are going through a Bankruptcy, it will most likely wipe out any ability the bank has to come after your, depending on the type of BK. Consult a competent attorney)
Matthew Smith is the owner of S & G Real Estate Investments, Inc. in Des Moines, IA.
S & G has purchased over 400 homes in the last 6 years and has coordinated over 100 successful short sales in and around Des Moines. Find out more at http://www.shortsaledesmoines.com or http://www.twitter.com/shortsaleDM

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