A Question For The Bankers

I read something in today's St. Petersburg Times about deficiency judgements that got me thinking.

First, let me explain what a deficiency judgement is. A deficiency is the difference between the selling price of a piece of real estate and it's mortgage amount at the time of the sale.

So, if you had a mortgage for $100,000 and sold the house for $75,000, the deficiency would be $25,000. If the bank wanted to, they could go to court and get a deficiency judgement for the $25,000 shortfall. They could then garner your wages, attach things of value that you own and do all manner of other things to collect the money from you.

Deficiency judgements are becoming more common in Florida and other states as lenders try to recoup as much as possible from short sales and foreclosures. It's perfectly legal and I have no real problem with financial institutions pursuing the money.

Recently, however, I've heard of deficiency judgements turning into investment instruments. I didn't actually think anybody would stoop to such a thing, but apparently I was wrong and the St. Petersburg Times mentioned it in an article in Monday's newspaper about deficiency judgements and foreclosures. I guess trying to make a profit from other people's misfortune is par for the course these days.

The paper reported that there is a growing resale market for deficiency judgements. The debt is being packaged and sold to investors in much the same way that mortgages once were. The paper reports that a collection agency bought some $18-million worth of deficiency claims from one lender for a mere $130,000. The buyers are hoping that they can collect on enough of these debts to turn a profit over time, and the bank seems to be willing to settle quickly for cents-on-the-dollar.

Here's the question that comes to my mind about this kind of procedure: If the bank is willing to accept pennies-on-the-dollar when selling the deficiency to the investor, why not do it much earlier in the process and offer to sell the deficiency to the original debtor for a few cents on the dollar? That way the debtor could clear his financial problems, the bank would have all the money they would have gotten from selling to some third party, and everybody could live happily ever after.

Of course, I'm not a financial genius so my grocery store arithmetic approach to solving complex financial and legal matters probably doesn't hold here. But I wish some banker could take the time to explain why it wouldn't. Seems to me like it's kind of a win-win for all parties -- except maybe the investors.

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