Banks have been taking homeowners to court long after they lose their properties in foreclosure, extending the nightmare of mortgages gone bad.

What’s happening is lenders are pursuing former mortgage holders for old debts, like the “deficiency balance.”

A deficiency balance, also known as the “underwater amount,” is the difference between the amount of the mortgage and the actual property value. Sometimes, the difference can total hundreds of thousands of dollars, and the homeowner is still on the hook to pay the deficiency balance even after losing the property.

“Deficiency judgments are absolutely devastating to the foreclosed home buyer both as a matter of immediate financial impact and income tax consequence,” John Mixon, a recently retired professor at the University of Houston Law Center who has studied deficiency judgments for the past 30 years, told The Washington Post.

Banks are permitted to go after deficiency judgments in 40 states, as well as the District of Columbia. In New Jersey, lenders have up to 56 years to collect debts and in Massachusetts 60 years. In Pennsylvania, there is no time limit at all.

Part of the nightmare for foreclosed homeowners is that the lenders often wait several years until the homeowner has recovered financially before they go after the debt. By this time, significant interest has been added to the original debt amount.

In addition to banks going after these costly judgments, Fannie Mae and Freddie Mac, the two quasi-governmental lending agencies, are seeking them in order to recoup money lost in the crisis. They claim that they only go after what is known as “strategic defaulters,” people who stopped paying their mortgage loan, but continued to pay other bills.

-Noel Brinkerhoff, David Wallechinsky

To Learn More:

Lenders Seek Court Actions against Homeowners Years after Foreclosure (by Kimbriell Kelly, Washington Post)

Bank of America has Worst Big Bank Home Loan Customer Service Complaint Record (by Matt Bewig, AllGov)

Foreclosed Homeowners Still Pursued by Texas Company for Second Mortgages (by Ken Broder, AllGov California)