By: Kevin A. Darby, Esq.
Given the current real estate market conditions in Nevada, combined with the collapse of the state’s economy and unemployment epidemic, more and more homeowners are unable or unwilling to continue to make their monthly mortgage payments. Instead, homeowners are looking to “get out” of their mortgages, usually through either a short-sale or allowing their property to go back to the bank through a foreclosure. In doing so, homeowners should be aware of potential liabilities that may survive a short-sale or foreclosure under Nevada law.
Notably, homeowners need to understand their liability exposure for any difference in the amount they owe their mortgage holder(s) and the short-sale price or value of the property on the date of a foreclosure. Under Nevada law, a foreclosing mortgage holder (on any mortgage loan made before July 1, 2009) has the right to seek and obtain a “deficiency judgment.” Specifically, Nevada Revised Statute 40.455(1) provides:
Upon application of the judgment creditor or the beneficiary of the deed of trust within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080 , respectively, and after the required hearing, the court shall award a deficiency judgment to the judgment creditor or the beneficiary of the deed of trust if it appears from the sheriff’s return or the recital of consideration in the trustee’s deed that there is a deficiency of the proceeds of the sale and a balance remaining due to the judgment creditor or the beneficiary of the deed of trust, respectively.
So, under NRS 40.455(1), a foreclosing mortgage has the right to seek a judgment from a borrower in amount equal to the difference between the balance of the loan and the fair market value of the property on the date of the foreclosure. The foreclosing lender has 6-months after the date of a foreclosure sale to bring a lawsuit seeking a judgment for the deficiency.
In this regard, it must be understood that NRS 40.455(1), and in particularly the 6-month limit to bring a claim (or statute of limitations), only applies to a mortgage holder who has completed a foreclosure. The limits of NRS 40.455 do not apply to non-foreclosing lender (such as a second mortgage holder wiped out in a foreclosure) or in the short sale context. Instead, generally speaking, non-foreclosing secured lenders are bound by the breach of contract statute of limitations, which is 6-years under Nevada law. See: NRS11.190(1)(b).
Applying these rules to a common modern day scenarios may help to understand how these rules apply in real life. A common factual scenario has a homeowner with a first and second mortgage, but is upside down on the first. The house is currently worth $100,000, but subject to a first mortgage of $125,000 and a second mortgage of $25,000. If the homeowner allowed this property to go through a foreclosure, the first mortgage holder would have 6-months from the date of the foreclosure to bring a lawsuit seeking a $25,000.00 deficiency judgment. On the other hand, because the second mortgage did not foreclose, it has 6-years to file a lawsuit to recover its debt. Because the second mortgage did not foreclose, it will be bringing a “breach of contract” claim, not a “deficiency judgment” claim and will subject to NRS 11.190 and not NRS 40.455.
Likewise, in a short sale context, any liability not expressly released by the mortgage holders through the short sale can be collected through litigation for up to 6-years after the short sale. So, using the same facts as above, but substituting a short-sale for the foreclosure, the first mortgage would have 6-years to seek to the $25,000 deficiency balance, as would the second mortgage. Of course, the primary benefit of a short-sale is to obtain a release or settlement of any such deficiency liability. The concept is that a borrower/homeowner is brining a ready, willing and able buyer at current fair market value to the bank and in return the bank forgives deficiency liability. I order to maximize the benefits of a short sale it is imperative to have a seasoned real estate agent to spearhead successful liability release negotiations with lenders.
Finally, it should be noted that the impact of deficiency liability is just one factor a homeowner must consider when contemplating a plan to “get out” of their mortgage. There are other important factors beyond the scope of this piece, which should be considered, including tax consequences and credit recovery. In order to make the best decision, it is first important to know all the facts, laws, rights, duties and risks. The best way to accomplish this is to surround yourself with a team of quality legal professionals, including attorneys, real estate agents and accounts to assess the particular risk and rewards of any particular situation.