Legal Definitions - fair-value law

A fair-value law is a type of statute designed to protect borrowers when their property is sold through a foreclosure process. If the property's sale price at foreclosure is significantly lower than its actual market value, this law allows a court to reduce the amount of any remaining debt (known as a "deficiency") that the borrower might owe. Instead of calculating the deficiency based solely on the low foreclosure sale price, the court considers the property's higher fair market value, thereby giving the borrower a credit for the difference. This prevents lenders from seeking a large deficiency judgment simply because a foreclosure sale yielded an unusually low price, which can happen in distressed sales or quick auctions.

• Example 1: Residential Home Foreclosure

  Imagine Sarah owned a home with a $300,000 mortgage. After losing her job, she couldn't make payments, leading to foreclosure. At the foreclosure auction, the house sold for $220,000. However, an independent appraisal determined the home's fair market value at the time of the sale was $280,000. The bank then sought a deficiency judgment for the $80,000 difference ($300,000 loan - $220,000 sale price).

  How it illustrates fair-value law: Under a fair-value law, a court could reduce the deficiency. Instead of Sarah owing $80,000, the court would likely calculate the deficiency based on the fair market value of $280,000. This would mean the deficiency is only $20,000 ($300,000 loan - $280,000 fair market value), giving Sarah a $60,000 credit because the foreclosure sale price was $60,000 less than the property's true worth.

• Example 2: Commercial Property Foreclosure

  A small business, "Bright Ideas Inc.," defaulted on a $1.5 million loan for its office building. The bank foreclosed, and the building was sold at auction for $1.1 million. The bank then pursued Bright Ideas Inc. for a $400,000 deficiency. However, an expert real estate valuation showed that similar commercial properties in the area were selling for $1.4 million at the time of the foreclosure sale.

  How it illustrates fair-value law: A fair-value law would allow the court to consider the $1.4 million fair market value instead of the $1.1 million auction price when determining the deficiency. This means the deficiency would be reduced from $400,000 to $100,000 ($1.5 million loan - $1.4 million fair market value), providing Bright Ideas Inc. with a significant credit and preventing them from being penalized by an unusually low auction price.

• Example 3: Agricultural Land Foreclosure

  A farmer, Mr. Henderson, had a $700,000 mortgage on his farmland. Due to a severe drought, he couldn't make payments, and the bank foreclosed. At the public auction, the land sold for $550,000, partly because of the distressed market conditions in the agricultural sector. An independent agricultural appraiser, however, valued the land at $650,000, noting its long-term potential and soil quality.

  How it illustrates fair-value law: If a fair-value law is in effect, the court would likely use the $650,000 fair market value to calculate the deficiency, rather than the $550,000 foreclosure sale price. This would reduce Mr. Henderson's deficiency from $150,000 ($700,000 loan - $550,000 sale price) to $50,000 ($700,000 loan - $650,000 fair market value), acknowledging that the auction price did not reflect the land's true worth.