Family in Foreclosure

Homeowners who are facing a foreclosure of their home are understandably concerned about the impact this will have on them and whether they will owe money to the mortgage company (hereafter “bank”) after the foreclosure.

This is part four of a series on Minnesota foreclosures, explaining deficiency judgments that result from a foreclosure in Minnesota.

  1. Minnesota Foreclosure Law Overview
  2. Foreclosure by Advertisement
  3. Foreclosure by Action
  4. Deficiency Judgments
  5. Foreclosure of a 2nd Mortgage

The first consequence of a foreclosure is on a homeowner’s credit report as reported by the credit bureaus. It goes without saying that this is bad. However, most homeowners already know this. What homeowners care about most is whether the bank (mortgage company) will be able to pursue the homeowner for amounts still owed on the mortgage after the foreclosure sale.

A “deficiency judgment” is a bank’s legal right to pursue the homeowner for the amount owed by a homeowner after a foreclosure. But bank’s don’t always have this right.

When You Would Owe for the Deficiency

A bank’s right to obtain a deficiency judgment only exists if

  1. the bank foreclosed on the homeowner in a “foreclosure by action,”
  2. the home was foreclosed by the bank owning the first mortgage and there is a second mortgage (the second mortgage is generally eliminated, but the homeowner will still owe the bank for the amount remaining owed on the second mortgage), or
  3. for agricultural property, the bank may can obtain a deficiency judgment in the amount of the difference between the fair market value of the property and the amount remaining unpaid on the mortgage by initiating a lawsuit within 90 days following the foreclosure sale.

So if a homeowner’s property does not fulfill one of the above three conditions, the bank has no right to any more money from the homeowner. For example, by doing a foreclosure by advertisement, the bank gives up its right to get more money from the homeowner.

This is explained in legal terms in this excerpt from Minnesota Foreclosure and Repossession, written by Daniel C. Beck, Mark W. Vyvyan, and Cass S. Weil, National Business Institute, 2001:

A bank may not obtain a deficiency judgment against a homeowner in a foreclosure by advertisement. The amount the bank receives from a foreclosure sale is full satisfaction of the mortgage debt except as provided in Minn. Stat. § 582.30, Minn. Stat. § 581.09 (foreclosure by action) and Minn. Stat. § 580.225 (foreclosure by advertisement).

If the redemption is six months under Minn. Stat. § 580.23 or five weeks under Minn. Stat. § 582.032 and the mortgage is foreclosed by advertisement, no deficiency judgment is available against the homeowner. See Minn. Stat. § 582 subdiv. 2.

If Minn. Stat. § 580.23 provides for a six month redemption period, a bank cannot foreclose by advertisement and preserve its right to a deficiency by electing a twelve month redemption period. See American Nat’l Bank v. Blaeser, 326 N.W.2d 163 (Minn. 1982).

If Minn. Stat. § 580.23 provides for a six month redeption period and the mortgage is foreclosed by action rather than by advertisement, a deficiency judgment is available against the homeowner. See. Norwest Bank Hastings, Nat’l Ass’n v. Franzmeier, 355 N.W.2d 431 (Minn. Ct. App. 1984).

Why Banks Give Up a Right to Deficiency

Why would a bank give up its right to a deficiency judgment against a homeowner? Because the bank is concerned it would cost more money doing a foreclosure by action than it is worth:

  1. A person who can’t pay their mortgage probably has little money, so the bank may figure it won’t get much money from the homeowner if the bank decided to sue the homeowner.
  2. A Foreclosure by Action is more expensive for the bank than a Foreclosure by Advertisement because the Foreclosure by Action involves additional delays and substantial legal fees.

Thus, banks are often willing to cut their losses and move on by letting homeowners avoid a deficiency judgment.

Additional Minnesota Foreclosure Resources

Learn more about Minnesota Foreclosures:

  1. Minnesota Foreclosures 101 – Foreclosure Basics
  2. Minnesota Foreclosures: Foreclosure by Advertisement
  3. Minnesota Foreclosures: Foreclosure by Action
  4. Minnesota Foreclosure Deficiency Judgment
  5. Minnesota Foreclosure of a 2nd Mortgage

If you are facing a foreclosure in Minnesota, you are welcome to contact our law firm to schedule a meeting with a Minnesota real estate attorney to understand your legal rights, risks, and options.