Short Sale FAQs

What is a short sale?

A short sale is a transaction in which the owner sells a property for an amount that is less than what is owed on the mortgage loan and other liens. In other words, the total proceeds of the sale fall short of being able to pay the entire outstanding balance of the liens. The lender(s) may choose to accept a reduced amount and forgive the remaining debt. Some lenders may reserve the right to pursue the owner for some or all of the remaining balance after the sale. In most cases, a seller cannot receive proceeds from a short sale transaction.

If you would like more information about shorts sales, please call me and I can go over your questions with you.

Here are some more questions and answers you may find interesting.

How do I know if the lender is forgiving the remaining debt?

Each lender has a different type of short sale approval letter.
Some are one page long, and others may be 10 pages long.

Below are phrases that indicate the remaining debt is being forgiven:

-       “Under this Bank of America Cooperative Short Sale Agreement, Bank of America and/or its investors and/or insurers will accept less than the payoff balance on the above referenced property and release you from any further financial responsibility for the outstanding first lien mortgage.”

-       “JPMorgan Chase Bank, N.A. agrees to release its security interests to the above collateral AND forgive any deficiency balances upon receipt of $112,168.12 in certified U.S. funds.”

-       “The owner of your mortgage note, the mortgage insurer (if your loan is covered by mortgage insurance), waive their right to pursue collection of any deficiency following the completion of your short sale and your debt is considered valid.”

-       “PNC Bank, N.A. will not pursue collection of the remaining deficiency balance (‘Debt Forgiveness’) after the closing, which after receipt of the Proceeds of Sale will be approximately $8,931.29.”

-       “Upon receipt of certified funds, the debt will be considered to be fully satisfied for less than the amount due and no remaining deficiency balance will be owed.”

Below are phrases that indicate the remaining debt is not being forgiven:

-       “Upon receipt of the funds, we also agree to release our interest in the subject property by satisfaction of the lien of record.  Acceptance of this offer does not relieve the borrowers of their financial obligations of the loan deficiency and any derogatory credit reporting that may arise from it.”

-       “We agree to release the lien but not the underlying note.”

-       “The Bank is willing to accommodate the Borrower in releasing the Mortgage, provided that the Borrower affirms its obligation to pay the outstanding balance due, including principal, interest and any other charges, under the Note, after applying the ‘Required Proceeds’, as defined herein, to the obligations under the Note, and further provided that the Borrower otherwise fully abides by all of the terms and conditions of this Agreement.  The Borrower acknowledges and affirms that following application of the Required Proceeds, the Borrower shall remain fully obligated to pay the Deficiency that shall remain due and owing under the Note, and that the Note and the Borrower’s obligations thereunder shall remain in full force and effect notwithstanding the release of the Mortgage by the Bank.”

 

 

What rights do tenants have in a foreclosed home?

The Protecting Tenants at Foreclosure Act of 2009 provides additional protections for certain tenants in a foreclosed residential property.  The Act is effective from May 20, 2009 until December 31, 2014.

Tenants with a bona fide lease that was signed before a notice of foreclosure can reside in a foreclosed home under the terms of their lease for at least 90 days.  The new owner must give a notice to vacate to the tenant at least 90 days in advance of the termination date.  The tenant must pay rent under the terms of their lease, although the rent will be paid to the new owner after the date of the foreclosure sale.  Some states provide additional protections to tenants in foreclosed homes.

A bona fide lease is defined in the Act as one in which:

-       The tenant is not the borrower or the child, spouse, or parent of the borrower.

-       The lease or tenancy was the result of an arms-length transaction in which neither landlord nor tenant has a familial or prior business relationship.

-       The rent is an amount considered to be fair market rent or close to it, or the unit’s rent is subsidized by local, state, or federal funds.

 

 

Will the bank forgive my debt on a commercial property or vacation home?

Everything in real estate is negotiable, although some things are far more negotiable than others.  Many lenders are willing to forgive the remaining debt on short sales involving commercial properties, vacation homes, and multi-unit buildings.  The decision whether to forgive the debt or pursue the seller for a deficiency judgment is up to the lender.  If the bank believes that the seller is destitute, then it does not make good business sense for them to spend thousands of dollars trying to collect money from someone who does not have it.

The bigger issue for a short sale seller of a commercial property, second home, or investment building may be the tax consequence of the forgiven debt.

If a business owner has $200,000 of debt forgiven on a commercial building, then that owner will probably be liable for paying income tax on that $200,000.  If the phantom income, as it is called, is not offset by losses or expenses, then there will be a hefty tax due.  $200,000 of added income in a 25 percent tax bracket means that the person could owe $50,000 to the IRS.  Anyone considering a short sale should consult with their advisors about the potential tax consequences.

Make sure you read our article about the IRS insolvency exemption, titled “Do I Have to Pay Tax on my Forgiven Debt Now That the Mortgage Forgiveness Debt Relief Act has Expired?”

 

 

It’s the end of dual-tracking as we know it, and I feel fine.

The Consumer Financial Protection Bureau (CFPB) introduced new rules that became effective in January 2014.  Dual-tracking is a situation where a mortgage lender continues a foreclosure action against a delinquent borrower while simultaneously working with the borrower to avoid foreclosure.  The new rules originated from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The problem with dual-tracking for borrowers is that many people were foreclosed upon even though their lender told them they were being considered for a loan modification, short sale, or deed-in-lieu of foreclosure.  We have seen situations where a homeowner was told that their short sale was verbally approved and that a written approval was coming in the next few days.  However, the bank foreclosed on them shortly thereafter, having never issued a written approval as promised.  The lender’s negotiators typically take no responsibility whatsoever, claiming that they could not convince their own employer to stop the foreclosure action.

Lenders preferred to engage in dual-tracking because they could quickly foreclose on a borrower if the loan modification, forbearance, short sale, or deed-in-lieu process failed or if the process was taking too long.  However, in many instances the process was taking so long because of the lender’s bureaucracy, high staff turnover, and ever-changing policies.  So, the lender created the very situation that caused them to fail to make a decision on whether to approve an alternative to foreclosure.

The new CFPB rules do not prohibit dual-tracking entirely.  The rules do impose some limits.  The main stipulations are:

-       A lender cannot initiate a foreclosure until 120 days after a borrower falls delinquent.

-       A lender cannot start a foreclosure if a borrower has a pending application for a loan modification.

-       A lender must give borrowers who are two months behind written notice of alternatives to foreclosure and examples of those options.

-       A lender must provide delinquent borrowers with direct, easy, ongoing access to staff responsible for helping them with their application and reporting the status of an application.

-       If a borrower asks for a loan modification after the 120-day delinquency period, the lender may continue the foreclosure process.

-       A servicer must offer all foreclosure alternatives available from the investor or loan owner, and not just the option that is most financially favorable to the servicer.

-       Before interest rates adjust, lenders must provide clear mortgage statements with warnings about the upcoming adjustment.

-       Lenders must consider and respond to a borrower’s application for a loan modification if it arrives at least 37 days before a scheduled foreclosure sale.  If the lender offers an alternative to foreclosure, they must give the borrower time to accept the offer before pushing for a foreclosure judgment or a foreclosure sale.  Lenders may not foreclose on a property if the borrower and the lender have agreed to a loss mitigation agreement, as long as the borrower abides by that agreement.

-       Banks that service 5,000 or fewer loans are exempt from certain requirements.

-       Lenders must provide to the borrower advance notice and pricing on force-place insurance if the lender has reason to believe that the property is no longer insured by the borrower.

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The bank won’t stop calling me. Should I talk with them?

 We believe you should communicate with your bank on a periodic basis.  If you are behind on your mortgage payment, expect up to four phone calls a day.  You will also receive a lot of mail. 

It is unwise to completely ignore the bank.  If you do not communicate at all with your lender, they will probably put you in the category of the people who refuse to pay.  That is the worst category for you, as that means they will move the foreclosure process along as fast as possible. 

You do not have to answer the phone every single time the bank calls, but it is good to communicate with your lender at least twice a month.  If you are considering a short sale, tell the representative.  Ask them to send you the bank’s short sale paperwork package. 

If you are already attempting to sell your property, then tell the person on the phone about it.  Reiterate your hardship each time you talk with your lender.  If you are still occupying the property, tell the lender so they do not send someone over to verify occupancy. 

 

 

The National Association of REALTORS® continues to lobby for an extension of the Mortgage Forgiveness Debt Relief Act.

 

The 2014 President of the National Association of REALTORS®, Steve Brown, reported via his video, the number of people using the debt forgiveness exemption has increased every year.  He lobbies for Congress to extend the exemption.  Brown states that NAR’s best estimate is that Congress will pass some extension of this law in late 2014.