When a real estate mortgage is foreclosed the underlying property is typically sold at a sheriff’s sale by the mortgage lender. The lender hopes to sell the property for a high enough price to cover the loan balance owed by the borrower. Sometimes, however, the loan balance exceeds the value of the property (especially in a declining real estate market), and bids at the sheriff’s sale often fall short of the loan balance and in many cases the bids fall short of the true value of the property. In such cases the lender ends up buying the property at the sheriff’s sale at a price that is substantially less than its true fair market value. The lender takes title to the property and then resells it on the open real estate market, usually for an amount much closer to its actual fair market value.
In order to protect the borrower in this situation, Pennsylvania law provides that when a lender acquires the property in a judicial sale, it must file a petition within 6 months after the sale to fix the “true” fair market value of the property. The borrower then receives a credit against the loan balance for the true value and can only be held responsible for the “deficiency” between this amount and the (presumably higher) loan balance. If the lender does not file a petition to fix the fair market value of the property within 6 months the borrower is relieved of any deficiency liability.
The process of fixing the fair market value of the property involves a court hearing where a judge makes a determination of the fair market value of the property based upon expert appraisal testimony. The lender will try to present testimony that the value of the property is as low as possible, which would maximize the deficiency liability of the borrower. Accordingly, it behooves the borrower to present expert appraisal testimony showing that the fair market value of the property is as high as possible. This minimizes the borrower’s potential deficiency liability.
The Deficiency Judgment Act is remedial legislation designed to protect borrowers from unscrupulous bank practices. However, in order to take advantage of those protections, borrowers must be vigilant to insure that they make a strong case for the true fair market value of their property with credible expert appraisal testimony.
– Kevin Palmer