Legally Speaking

Understanding deficiency judgments and subordinate residential mortgages

In recent years, our country has experienced a “foreclosure crisis.”

Fortunately, North Dakota foreclosure rates were much lower than national averages and remain low today. To avoid financial ruin homebuyers should take steps to understand what may occur if they default on a home loan. If you are a homeowner or considering purchasing a home, a general overview of deficiency judgments and subordinate mortgages in North Dakota can be helpful in protecting your home.

When a lender takes a first position mortgage on residential real property as security, it gives up the right to initially proceed against the homebuyer for the debt owed under the promissory note upon default. In exchange, the law affords the lender the protection of an interest in the property. Thus, upon default by the homebuyer, the lender may only pursue a foreclosure and is not entitled to seek a money judgment for the outstanding debt owed by the homebuyer.

Typically, when a lender forecloses on residential real estate occupied as a homestead it is not entitled to a deficiency judgment under section 32-19-03 of the North Dakota Century Code (commonly referred to as the “anti-deficiency judgment statute”). Deficiency judgments are for the amount still owed to the lender, if any, when the secured real estate is sold at a foreclosure sale for less than the homebuyer’s outstanding debt. These judgments are one of the least favored creatures of the law and our legislature adopted the anti-deficiency judgment statute to protect homebuyers. Because deficiency judgments are strongly disfavored under the law, a lender cannot force a prospective homebuyer to waive their rights afforded by the North Dakota anti-deficiency laws at the time a mortgage is executed.

Most homebuyers presume that if they default on their home loan, the worst-case scenario is loss of the home and damage to their credit rating. If, however, another lender has a subordinate mortgage (a mortgage not in first position) on the home, it may waive its right to foreclose and sue the homebuyer for the remaining debt owed under section 32-19-07 of the North Dakota Century Code.

Homeowners and potential homebuyers should proceed with caution in allowing subordinate mortgages against their homes. A homebuyer may lose his or her home to foreclosure by the lender with a first position mortgage and get sued by subordinate mortgage holders. This result for already distressed homebuyers can be dire.

It is important to understand how deficiency judgments and subordinate mortgages operate if you are considering a home purchase or borrowing against your home equity. If you have any questions regarding the financial consequences of these transactions consult your attorney beforehand.

This article was written and prepared by Kasey McNary, an attorney with the Serkland Law Firm in Fargo, North Dakota. For more information, call 232-8957, email at kmcnary@serklandlaw.com or visit www.serklandlaw.com.

BY: RACHEL FLEISSNER MD