What is a Deficiency Judgment?
Most homes in Nevada have loans against them for an amount greater than the actual market value of the home. If a homeowner owes $200,000 and the property is sold at foreclosure for $100,000, there is a $100,000 deficiency owed by the borrower. Nevada laws generally provide that the lender can sue the borrower or guarantor for this deficiency after the foreclosure and obtain a judgment against the borrower or guarantor for the same. This is known as a deficiency judgment. As of October 1, 2009, however, lenders who are a financial institution may not seek a deficiency judgment in some circumstances.
What is a “Financial Institution”?
A “financial institution” is defined in the new law in broad terms as applying to any entity required to be licensed or registered under state or federal law to loan money. The definition specifically excludes credit unions from this definition, meaning that they are still free to seek deficiency judgments. This law applies prospectively, meaning that it only applies to loans written and secured by real property after October 1, 2009. Further, it only applies where: 1) the real property is a single-family dwelling and the debtor owns the real property; 2) the debtor used the loan to purchase the property; 3) the debtor occupied the property continuously after obtaining the loan; and 4) the debtor did not refinance the property after obtaining the loan from the judgment creditor.
Lenders are no longer able to sue the homeowner if the foreclosure sale does not yield enough money to cover the debt. This is a significant development in Nevada law. While its full effects are not known, this law will surely result in changes in how and whether financial institutions lend money for homes in Nevada. Further, one may anticipate that credit unions may eventually have a market advantage over other financial institutions, as their risk will be less because of their ability to seek and obtain deficiency judgments. Since the law does not have a sunset clause, this is not a temporary advantage, although in the current market, it is doubtfully much of an advantage at all. To combat this advantage, other financial institutions are sure to find other ways to level the playing field, such as requiring personal guarantees from all borrowers.