Roughly one-quarter of all mortgage defaults are considered to be strategic defaults, where borrowers deliberately stop making payments on their debt and walk away from their investments. Mark Berman
Yet, in an era where the number of residential foreclosure sales alone are expected to top 4.8 million between 2009 and 2011, how are debt investors preventing value from simply evaporating from their portfolios?
For former Liquid Realty co-founder Mark Berman and partners Josh Rand and Jeff Kosterich, the answer is to target individual strategic defaulters through court-ordered deficiency judgments, which allow for the collection of the shortfall between the sale price achieved from the foreclosure and the principal amount of the mortgage. 
There is a tremendous opportunity here given the number of foreclosures expected in the next few years, yet few if any see this as a business where they can try to fully maximise their asset. It’s about getting more juice from the lemon, as it were, rather than accepting charge-offs.
Having launched the Deficiency Judgment Recovery Network in late 2009, the trio – all of whom trained as lawyers – said there was largely an untapped opportunity for private equity real estate funds, hedge funds and other secondary buyers of whole loan portfolios to attempt to “completely monetise” their investment.
“There is a tremendous opportunity here given the number of foreclosures expected in the next few years, yet few if any see this as a business where they can try to fully maximise their asset. It’s about getting more juice from the lemon, as it were, rather than accepting charge-offs,” said Berman, who founded the multi-family office platform MB Family Advisors after leaving Liquid in 2005, managing the distressed credit fund of funds, MB Dislocation Opportunity Fund.
In one recent case, DJRN collected more than $550,000 from one New York state real estate broker, who had acquired five properties between 2005 and 2006, but walked away from the deals when the rental income failed to cover debt payments. Because the broker had a business and other assets, DJRN was able to secure a deficiency judgment on the $800,000 shortfall between the foreclosure sale price and the principal mortgage amount.
However it’s not just about residential assets in the US, the firm is also targeting commercial strategic defaulters (it recently collected $970,000 following a deficiency judgment against a Brooklyn, New York, commercial investor who defaulted on his mortgage leaving a shortfall of $1.7 million).
“There is an assumption that commercial mortgages are non-recourse across the board but that’s not necessarily so,” explained Kosterich. In trying to identify potential strategic defaulters amid portfolios that can often comprise thousands of mortgages, Kosterich admitted DJRN had to often work quickly. Each US state often had different time periods in which deficiency judgments had to be sought, ranging from 90 days to several years.
“If the holders of the mortgage do not take action then the asset will eventually go away,” added Berman. “Part of our job is to educate mortgage holders so they can target, even after foreclosure, those defaulters with the apparent means to cover a shortfall.”
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: 
