Lender’s short sale approval letters often lack specific language clarifying whether or not the lender is going to forgive the debt, cancel the promissory note or otherwise refrain from pursuing a deficiency judgment in association with a short sale. A vague short sale approval letter is typical when dealing with the lender directly, outside the scope of aggressively defending a foreclosure suit. However, following the initiation of a foreclosure suit, [when the lender has an attorney] settlement agreements are often done between the borrower’s and lender’s attorneys that clarify whether the lender will refrain from pursuing a deficiency judgment. When the lender does not utilize an attorney, the lender typically goes with a one size fits all solution. The lender’s representatives are simply told by management, the terms are what they are, and they cannot be modified.
Inside the scope of aggressively defending a foreclosure suit however, settlement agreements negotiated between borrowers and lender’s attorneys specifically spell out, or should spell out the rights and duties of the parties following a short sale. In fact, one of the best reasons to employ a foreclosure defense attorney is to attempt to avoid a deficiency judgment altogether. If you do not defend a foreclosure suit, the lender could go unopposed to get a deficiency judgment. Another reason to employ a foreclosure defense attorney is to put affirmative defenses in place within the foreclosure suit to help avoid the deficiency later if lender attempts to pursue a deficiency judgment following a short sale or foreclosure. Finally, there is a huge value associated with knowing, with some degree of certainty, that you will not be sued or harassed for a deficiency following foreclosure or short sale. It is still amazing to me how few foreclosure suits are ever defended. A foreclosure suit is likely the largest lawsuit the average person will face their entire life, and yet, the vast majority of foreclosure defendants never consult a single attorney, let alone getting a second and third opinion from several attorneys.
Back to short sale approval letters. In looking at the approval letter itself, there are often positives and negatives concerning whether the lender would try to sue you or otherwise pursue other collection efforts concerning a balance owed or a deficiency following a short-sale. Where the lender uses the term “discounted payoff,” when I was in banking, I understood this to mean that the lender was resolving an obligation for less than the face value of the obligation. It is also helpful where the lender agrees to execute a “full satisfaction and release of mortgage”. While the promissory note is the operative document that establishes the debt or obligation itself, the particular wording used in a satisfaction of mortgage could be evidence of a lender’s intent to forgive a deficiency.
Other paragraphs found in short sale approval letters could prove to be problematic for borrowers. Many short sale approval letters contain a statement that “Except as stated above, all provisions of the Note …. shall remain in full force and effect.” This same paragraph is often found in short sale approval letters that state that the short sale is approved as a “discounted payoff”. This statement is clearly inconsistent with the idea of a “discounted payoff”.
We do not currently know of any clear-cut case law that defines the term “discounted payoff”. If an appellate court undertakes to define the term “discounted payoff”, it would likely be sending hundreds of millions, if not billions of dollars one direction or another.
Lenders intentionally create vague short sale approval letters so that they can sell the opportunity to pursue a deficiency balance against XYZ borrower to collection companies. Deficiency balances that remain following a short sale are an opportunity for a collection company to make some money dialing for dollars. Collection company’s purchase these opportunities to pursue a deficiency against you / opportunity to sue on the promissory note itself. Such a sale or collection efforts could occur immediately following a short sale or foreclosure or years later. Such opportunities to pursue deficiency balances are often sold in bulk for pennies on the dollar. If you find yourself being pursued for a deficiency balance following a short sale or foreclosure, you should speak with a competent attorney.
One thing I would like to mention here is that a large portion of the leverage that borrowers possess is their ownership of the property and their ability to deed the property to a person who is willing to pay the lender something for the property in a short sale transaction. Ownership of the property gives standing to defend a foreclosure suit. Following foreclosure or short sale, this leverage is gone. The borrower should utilize such leverage while its available, prior to being defaulted in foreclosure suit.
I would also encourage borrower facing a deficiency balance to refrain from attempting to clean up your credit rating following a short sale or foreclosure. When I was in the lending business, we purchased opportunities to pursue deficiency balances along with other loans and assets. As such, we rarely pursued people with low credit scores – it would have likely been throwing good money after bad.
In short, if you choose to close on the sale of your property in a short sale transaction under a vague short sale approval letter, you will likely face collection efforts ranging from dialing for dollars to a full-blown suit bases on the promissory note. Speak to a lawyer before deciding. For that matter, speak to a lawyer before missing that first payment. There are a few things that borrowers can do prior to missing that first payment that could eliminate or go a long way towards preventing the lender from pursuing a deficiency balance.
Finally, there is some value to you in a vague letter that would appear to let you off the hook. A vague letter cuts both ways. There is also value in being rid of an upside-down property. There are also no guarantees of permanently resolving the deficiency judgment issue inside of the foreclosure suit. However, your success rate will likely go up exponentially where you engage competent legal counsel.
Defending a foreclosure suit can provide not only legal leverage but also time to get a loan modification, to conduct a short sale or to avoid a deficiency.Learn More
A deficiency judgment can last up to 20-years unless paid or otherwise resolved. A deficiency judgment can be a lien on all non-homestead real estate and other assets.Learn More
Even if you perfectly “qualify” the lender does not have to modify your particular loan. Lenders cannot modify everyone’s loan; it’s simply not economically feasible.Learn More
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Castle Law Group helps clients decide if a short sale is right for them by explaining the risks and potential rewards relative to our clients’ unique financial situation.Learn More
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