There is a little known fact that USDA can (and will) seek deficiency against a borrower even is USDA proceeds non-judicially (foreclosed) against the debtor in Washington State. The rules for FHA, FANNIE, FREDDIE, and VA do not apply to USDA mortgages.
SOME IMPORTANT CONSIDERATIONS WHEN LOOKING AT “USDA” LOANS FOR YOUR BUYER
Information Courtesy Ed McFerran, McFerran Law, (253) 284-3838 or www.mbs-shortsales.com
This may appear to be a strange topic coming from me. I am not a mortgage broker. Why would I care about USDA loans? Why should YOU CARE about USDA loans?
In the world of short sales, I can tell you that USDA shorts sales are not huge in number. Part of this lies in the fact that few USDA loans were closed before the Recession. Most are relatively recent and the default rate is not high, at present.
However, I have done my share of USDA short sales and they are very different from every other short sale that you will ever do.
So why should you read this section?
YOU NEED TO KNOW ABOUT THE SPECIAL RULES FOR USDA MORTGAGES BEFORE YOU EVER SUGGEST A BUYER SEEK FINANCING THROUGH THE USDA PROGRAM!!!!!
Part of this article is occasioned by many questions on our Legal-Line and part by numerous clients who have experienced, first-hand, the special rules that USDA uses to collect monies from defaulting borrowers. The story of an actual client (names changed, of course) follows.
Sam was the owner of a rural residential property located in a State of Washington county. The county is not important. He had purchased his home using USDA financing and subsequently suffered a variety of financial set-backs, ultimately leading to defaulting on the USDA backed mortgage loan.
The lender utilized a non-judicial foreclosure procedure and, as a result, Sam felt pretty comfortable that he was relieved of any further obligation for any deficiency. Sam had met with a local attorney who assured him that Washington State Law was clear and that USDA could not come after him for any deficiency or short fall.
Well after his consultation with that attorney and after the foreclosure occurred, Sam came to our office and met with me. He had discovered that he was no longer receiving his Social Security Payments from the Federal Government.
It took me very little time to determine what happened. After a bit of investigation; I found out that, as a result of his foreclosure, he had a deficiency due the USDA OF $73,642.13. They had sent him some mail, but he didn’t pay any attention as he felt comfortable with the previous attorney’s confidence that they couldn’t come after him.
I had to inform him that, unfortunately, he got bad advice. The attorney had been so sure and confident he said. How could he have been so wrong?
The fact is there is a case out there in the Federal Court system that ruled that the laws in Washington State regarding non-judicial foreclosure apply only procedurally, but do not apply substantively to USDA mortgages in Washington State. In short, USDA can seek a deficiency against a borrower even if USDA proceeds non-judicially against the debtor in Washington State. This is huge as it says in all cases that USDA is treated very differently than FHAS, VA, FANNIE and FREDDIE and every other lender in Washington State. I hope I got your attention.
I am happy to provide you all copies of the applicable cases. Just shoot a short email to my para-legal Susy Heatherly at Susy@mcferranlaw.com and she will forward the cases to you.
PRACTICE POINTER:
So it is as simple as that. I can tell you in no uncertain terms that the rules for FHA, FANNIE, FREDDIE and VA do not apply to USDA mortgage loans and they can (and do and will) seek to collect every stinking dollar of deficiency from the borrower upon default, foreclosure and short sales. That includes any Federal Tax refund that they may have available will be collected by USDA. That also includes any other benefits available to the debtor including Social Security payments.
Our attorneys in all of our five (5) offices are well aware of the myriad of rules associated with USDA and can help you and your clients through the maze. I think that anyone that takes out a USDA loan today needs to know that there is a big difference in the outcome to them in default versus what would happen in FHA or VA or FANNIE or FREDDIE deals.
I will bet 99% of new home buyers have no clue. We can help through the process of getting them to allow the release in short sales and we do that quite often.
Information Courtesy Ed McFerran, McFerran Law, (253) 284-3838 or www.mbs-shortsales.com