Short Sale HELP!
Foreclosure is a disaster for everyone, homeowner and lender alike. There is no sense going to foreclosure when your property could be sold. Even if you are not facing foreclosure, but are holding too much debt relative to the decreased value of a property, it makes sense for you to restructure out of the precarious situation.
Short Sales are being encouraged. The Federal Government is paying Lenders to do them. It is attempting to minimize its own losses as Lender of Last Resort. New Guidelines under HAFA Home Affordable Foreclosure Alternatives became effective April 5, 2010. In addition, Fannie Mae introduced new penalties on June 23, 2010 for Borrowers who walk away,i.e. Strategically Default,encouraging them to work with their servicers in good faith to pursue alternatives to foreclosure, a short sale being the best alternative.
The lender may or may not allow a short sale file to proceed unless you are in pre-foreclosure,i.e. delinquent. Lenders are at liberty to make their own determination.
The amount of debt in excess of proceeds from sale is called the Deficiency. in many cases, the deficiency is completely forgiven, and written off by the lender. In some, the lender reserves the right to seek recovery of the deficient amount.Your lender looks carefully at your financial position. If your situation has become dire, you are months behind, have little or no money or assets, and no immediate likelihood of a change for the better, the lender has little to gain by asking you to pay the deficiency, or pursuing it legally. It is a business decision.
When you DO have assets and income, but still need to restructure for simple prudency’s sake—where YOU are making a business decision, the lender may forgive the deficiency entirely or MAY ask you to pay some or all of it.
When you are asked to pay some of the deficiency, and agree to do so, it is typically pursuant to an unsecured promissory note at little or no interest. The terms will be very lenient, and you’ll have a much smaller debt going forward. (You get a write off versus the debt, too—see your Tax Adviser.)
Some homeowners who wish to do Short Sales are very sensitive about their personal credit. They may be Federal Agents, work for Government Contractors, have Security Clearances, or for whatever reason wish to maintain pristine credit. (Note: Fully-disclosed short sales where the deficiency is NOT fully paid off are not viewed as an issue precluding issuance of a security clearance, but when not fully paid off, they do affect credit score.)
Short Sales take longer than a normal real estate sale because the lender must examine your financial position, assure that the property (its collateral) is being sold at fair market value, and account internally to its Management, its Investors, Mortgage Insurers, and Regulators.
In doing a short sale, when the debt is cancelled, the cancelled amount becomes ordinary income to you, but The Mortgage Forgiveness Debt Relief Act of 2007 keeps you from having to pay taxes if the sale is of your personal residence. If you’re an investor, you’ll likely not pay taxes if your debts exceed your assets and you are therefore Technically Insolvent. If you’ve realized a loss on the property, you may also be entitled to deduct it under Code Section 1231.(See your Tax Professional on these questions.)
Short Sales are usually precipitated by hardship, or the aforementioned business decision called strategic default, but without the walk away. Many folks are somewhere between the extremes.They have reached a point in holding onto their homes where they are in financial hardship, but have not yet reached a point where they have become unable to make payments. But, they can easily project that they WILL be in that position in the near future. They have run up their credit card balances, and borrowed from family or their retirement plans. They are Robbing Peter to pay Paul, as an old saying goes.
That IS hardship and it IS prudent to commence restructuring proactively to preclude occurrence of a more dire set of circumstances. The lender may want to attempt a loan modification first, before a short sale. But you cannot be forced to accept a loan modification.
In any instance, the lender wants an explanation of the circumstances. This is referred to as a ¿Hardship Letter.¿ It should be a basic narration of the facts. (Some lenders are no longer requiring this explanation.)
SELLING YOUR PROPERTY:
If you choose to do a Short Sale, we ask that you formally list the property with Tracey and Scott by signing a listing agreement.You may rely upon us to:
Properly list the property for sale and get it sold quickly
Negotiate with Agents representing potential Buyers
Coach those Agents in such a manner as to bring about a fully-workable Offer—we ask your indulgence of tactics learned from experience
Negotiate with your Lender
Get your Short Sale through Settlement
Any sales contract / purchase agreement entered into must state that the purchase price is contingent upon your lender’s written approval (¿Third Party Approval if there will not be sufficient funds to pay the lien on the secured property in full. This is required by our regulations and local rules.
We’ll price your home based on analysis of recently completed Sales of Comparable Properties in your neighborhood. Short sales are priced at fair Market Value for liquidation within 30 days. (Remember that your lender wants to receive Fair market value for its collateral.)
This is done by checking comparable completed sales (Solds that have settled in the preceding 90-180 days. Your property must compete with other distress sales like foreclosures on basis of price, even though it may be in much better condition.
We’ll compare any purchase price offered by a buyer to this calculation of Fair Market Value.
We realize that you as short-selling owner are NOT price sensitive. You receive nothing from the sale since there is NO equity.
In a Normal sale when you receive purchase offers, you as seller are in a very different position. You are evaluating the net dollar amount coming to you for sale of your home, and the proposed timeframes, repair requests, and the like.
You are in a very strong position and are the ultimate decision maker. You are in position to deliver marketable and insurable title to your buyer and pay off your lender.
In a short sale, while you are the decision maker, your decisions are subject to your lender’s approval with regard to release of its lien and its willingness to compromise with you. You are not in position to deliver insurable and marketable title to your buyer, absent your lender’s agreement.
We are required by statute to submit any and all offers received for your property promptly to you for consideration. A prevailing notion underlying this requirement is that you ARE in the position of the normal seller, which is inaccurate. We will immediately forward all offers received to you.Buyer Agents know that we must submit all offers to you promptly. Sometimes they attempt to rush us hoping that their being early in submitting their offer to you will be to their advantage versus competing offers, again likening you to a normal seller / decision maker.
It is common that offers forthcoming, absent direct input from us on your behalf to Buyer’s Agents before their preparation of the offer, will NOT be fully workable to assure an approved short sale.
GETTING A GOOD PURCHASE OFFER TO PUT UNDER CONTRACT AND NEGOTIATING WORKABLE TERMS
The Terms of an offer are critical to its attractiveness and successful acceptance and ratification by you, and eventually your lender. The Devil IS in the details of the terms you accept.We understand that you are not in position to evaluate such matters as fair market value, seller concession percentages allowable for payment to your buyer by your lender, earnest money deposit amounts, when they’re to be deposited in escrow, definitions of what constitutes full ratification of the offer, time allowed for your lender’s approval, requests that your lender provide a home warranty, and so forth.
REQUIRED DOCUMENTS: (Your checklist)
¿ Signed Authorizations authorizing release of financial information to us as your representatives
¿ Complete financial information from you in the form of a financial information form: Income, expenses, assets and liabilities
¿ Current Mortgage Statements so we can get account numbers and balances
¿ A written hardship letter from you outlining your financial situation and the events that caused your financial hardship.
¿ Your most current two monthly bank statements, all accounts all pages with Bank Logo at time we receive offer on property
¿ Your last two paycheck stubs or other thorough proof of income such as unemployment at time of offer. If self-employed—last six months’ P&L
¿ Your two most recent Federal tax returns with all schedules
¿ Copies of any delinquency notices, Notice of Trustee’s Sale, Notice of Default and any other documents that you have received, or will receive from the lender
¿ Most recent detailed statements for any 401k, retirement, or investment accounts. Other real estate holdings if any—location, value, mortgage
DEFICIENCY JUDGMENTS:
In foreclosure, and in short sales when there has been no ¿full and final settlement,¿ the deficiency survives foreclosure or settlement of the short sale and may later be sought by the lender or its successors. The probability is small, but the possibility is there.
(Consult your Attorney!)
Virginia is a non-judicial foreclosure state. However, it does not have an anti-deficiency statute. A lender may seek a deficiency judgment legally. And the Statute of Limitations is five years.
It seems imprudent and unlikely that a lender would sue a destitute homeowner from whom the likelihood of recovery is minimal. Conversely, if a homeowner has substantial assets, it would seem prudent to take legal action to recover some of a deficiency.
The issue with regard to deficiencies and enforceability is the nature of the note.
A mortgage is not a loan; a mortgage SECURES a loan, and the loan is evidenced by a promissory note. So, the mortgage secures payment of the note. The degree of security a mortgage gives depends on the terms of the mortgage and the note, but a major distinction is between recourse and nonrecourse mortgages.A nonrecourse mortgage is one in which, by the terms of the note and mortgage, the mortgagee (creditor) agrees to look solely to the secured property to satisfy the note, in the event the note is not paid when due. That means that the mortgagee can seek to have the property securing the note sold and have the proceeds paid to the mortgagee to satisfy the note. They foreclose. However, if the proceeds are insufficient, the mortgagee has no recourse to the other assets of the debtor.
Generally, a note is an obligation to pay and must be paid in full. So, unless a note is explicitly nonrecourse, the creditor can seek to apply any of the debtor's property to its payment (subject to bankruptcy limitations).
The general rule is that notes secured by mortgages on property in Virginia are NOT nonrecourse.
A full and final settlement forgives the deficiency in its entirety. If you do not have a full and final release, the lender reserves the right to pursue the deficient amount.
It seems very unlikely that major lenders will seek to enforce collection of deficiencies even against homeowners who have the capacity to pay them. That would necessitate the lender’s hiring of Counsel in the Counties of the Debtors’ residencies, filing lawsuits, deposing the debtors to discern the existence of assets to enforce against, securing the judgments and enforcing them.
Given the numbers of homeowners and jurisdictions involved, the extraordinary cost, blatant inequity and discrimination involved, the inefficiency of the institutions themselves, HAFA Guidelines to the contrary, and the difficulty of collection, it is difficult to foresee.
Further, it is hard to imagine that major banks, themselves on the dole from the TARP Program, will sue two whole classes of former homeowners, those foreclosed and those who have done short sales, for deficiencies that they themselves have passed along to the Taxpayer! And the recent HAFA Guidelines contain specific language precluding Deficiency Judgments.Such lawsuits, if successful, would result in very large judgments which would seriously increase the rate of bankruptcy filings. That does not seem like very good public policy!
Disclaimer:
In this piece, we have been discussing short sales and matters such as real estate contracts, and debt collection. These considerations potentially involve matters which are legal in nature.
Debt collection and real estate law are truly serious legal thickets when things go awry or when there is significant disagreement among parties.
Where legal issues are involved, YOU are advised to seek counsel.
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