We just got a short sale approval letter that only releases the lien but does not
forgive the underlying debt!!
What options do we have? How can we get the bank to forgive the deficiency amount?
Can they pursue the homeowner in the long term and garnish his wages? What if
he doesn’t pay at all?
The homeowner has already had a foreclosure on his credit history and his credit is
already ruined. He will not allow us to close on the house if we can’t get the deficiency
amount forgiven. I realize that after the auction, they may still be able to pursue a
deficiency amount, but regardless of that, the homeowner will not let us close the deal
now if they don’t forgive him for the debt.
If the homeowner is indigent and you can show it, there shouldn’t be a problem with the def. judgement. However with the bank crisis the way that it is who knows what they will do. In past experience I have seen the bank not go after homeowners that file bk and also have really faced adverse financial situations. You may want to talk to the negotiator at the bank and see what the options are. Maybe a higher percentage offer would cause them to foregive the debt. This is a smaller profit margin but at least the deal would go through.
I had a deal closed last week. 1st and 2nd trust. The 1st discounted to 65% of market, however the second which was only $79K took $1000 with the condition that the HO made arrangement to carry $10K. I ngotiated the $10K down to $2K the HO agreed to a payment plan of 18 months @ 4% the lien was released once the HO signed the agreement.
I would suggest you negotiate with the Rep. to get the lowest amount possible and have the HO carry back some amount. Or as the previous poster indicated increase the contract price to accomodate for some of the deficiency amount.
My opinion: unless the homeowner has some serious assets it is unlikely that they will persue a judgement. It will cost them $5-10,000 just to get it started anyhow. And in todays market the lenders seem to typically let it go.
I think that was the phantom income created when the lender forgives the debt. The debt forgiveness prevents a deficiency judgment and creates a tax liability on the forgiven debt. The new law makes the forgiven debt non-taxable.
What the bank doesnt want is for there borrower to file chapter 13. Because basically that delays the foreclosure process by as long as 2 years. Mention the word bankruptsy to the rep, and ask in writing to waive the deficiency judgement. Homeowner already has a foreclosure, so that wouldnt seem to far fetched
I spoke to the bank rep this morning and realized several points:
-Raising the offer would not work, b/c there is no specific offer amount at which the bank would consider waiving the deficiency.
-They have 3 years to pursue this deficiency.
-I told him that the homeowner is considering suing the mortgage broker and bank for loan fraud, given that he received 2 mortgages, 100% financed, at age 22, totaling to about $1M. His response was that it wouldn’t affect anything on his side.
The bank rep made it clear that there’s nothing he can do to waive the deficiency clause. He said in his experience, he’s seen many of these result in 1099s rather than deficiency pursuits, but that really means nothing to me without written confirmation.
I’ll write a second hardship letter on behalf of the homeowner and submit it again, maybe that will help.
Otherwise, I’ll have to wait for the owner’s approval on whether or not to go through with this. Given that he already has a foreclosure on his record, it seems very unlikely that the bank will pursue him in the next 3 years. But, I can’t settle on that uncertainty, for all I know I could get a phone call 2 years from now from an angry homeowner being asked to pay back $200k. He has a good corporate job right now, so garnishing his wages may also be an option for the bank. :angry
Are you in New Jersey?
Here is an Article I found:
Let me preface this by saying that even though New Jersey allows for deficiency judgments the state statute actually frowns upon deficiency judgments. Consider the case law below. Correct me if I am wrong but the majority of mortgage companies provide for short sales it appears because they would rather cut their losses up front and they would rather be in accord with NJ’s feeling on collecting deficiency judgments from a default borrower. However, some institutions like IMB seem to frown on Short Sales and it looks like they are placing deficiency judgments on default homeowners once the foreclosure proceedings are over. I have heard from some of my partners that they actually have an anti short sale policy.
I am also hearing that a number of New Jersey courts are now refusing to confirm the foreclosure sale unless the lender agrees, as part of the confirmation, not to sue the borrower for a deficiency greater than the difference between the fair market value and the balance owed on the loan.
Also, consider N.J.S. 2A:50-1. which forbids a personal deficiency judgment in a foreclosure action. A foreclosure proceeding is an action quasi in rem; the relief granted is against the land itself. Usbe B. & L. Assn v. Ocean Pier Realty Corp., 112 N.J. Eq. 580, 582 (Ch. 1933). An action on a note [or bond] is in personam. Ehnes v. King, 41 N.J. Super. 429, 433 (App. Div. 1956). A foreclosure judgment is res judicata as to the amount of the debt, 79-83 Thirteenth Ave., Ltd. v. DeMarco, 79 N.J. Super. 47, 55 (Law Div. 1963), aff’d 83 N.J. Super. 497 (App. Div. 1964), aff’d 44 N.J. 525 (1965), but not as to the defendant’s liability for any deficiency. Weiss v. Pelton, 132 N.J. Eq. 248, 249-250 (Ch. 1942).
I am not an attorney. You should seek there advice.
If the homeowner already has a foreclosure on his record, why does he care? The new judgment will simply be an unsecured loan and chances are he is insolvent, anyway? Ask for the short sale to be full satisfaction for the loan; some banks allow it–others don’t. Speak to your attorney or try to get someone from prepaid legal to write a letter to your lender. That may help. Otherwise, doesn’t the homeowner get “another” foreclosure on his record anyway, if the deal doesn’t go through?
The thing is, if the homeowner does just let the house go, it is about 99.99% chance that he will get pursued and/or 1099’d. Oh, and that’s on top of losing the house and another foreclosure on his credit. The banks are mad as hell and, while they may have difficulty making new loans, they certainly can hire some mean law firms. (It sounds like you may be dealing with one) Probably much better lawyers than any homeowner could. In all likelyhood, the bank will win against this homeowner (and most typical homeowners). The banks may not be able to make new loans, but they can close out old loans via foreclosure which will mean that they can free up those reserve monies to help them survive.
I hate to be the devil’s advocate, but all these homeowners that thought they could live large and not pay the price - reality cares for no one. This is no different than you speeding and using the excuse that you didn’t know what the speed limit was. Whether that’s true or not, you will still get a ticket. It was up to the homeowner to know what he was getting into. If he chose not to inform himself, that was his fault. It appears that he may be getting the reality-2x4-to-the-face treatment right now.
I know you want to help, and about all shortsale people have that attribute in their being somewhere. But, there are certain limits that we can’t cross unless we want to become non-sustainable charitable organizations. Obviously you can do something to help this person out, but you may have to pay a lot of money to get it done. Possibly more than its worth. You may be able to get the lender (law firm) to let everything go, but you may have to work your way up the chain of command to get to someone that can make the final call. It sounds like you may just be dealing with the “pawns” and “knights” at this point. You need to keep working up till you get to the “king”. Be subtle about that because the “pawns” can still influence the “king”.
Now, how you’re going to explain all this to the homeowner - Have fun! :shocked The bottom line is, if the homeowner does work with you, he won’t have another foreclosure on his credit. At this point of the game, you can’t undo what has already happened. You can only limit the amount of damage that is coming his way.
chuckle That’s cute. I’m gonna have to say that until you are head of management at a loss mitigation department of a major lender, you have just as much clue as I do.
So, I stopped wasting time listening to all the internet infomercial webinars about foreclosures and thought about things for a moment. The most used reason that is hyped about why a lender doesn’t want a house/property/strip mall/apartment complex/etc. on their books is because they have to have a certain amount in reserves to cover the LOAN. Keep that word loan front and center as I deliberate this. The reserves I have heard has been anywhere from 3 to 12 times as much. None of the shortsale “gurus” can make up their minds. Maybe because none of them really know? Anyways, once the lender takes back a piece of property, they aren’t loaning money out on it anymore. They have effectively bought it. Who are they gonna make a loan to? The owner of the property, i.e. themselves? :rolleyes Now, that loan has been cleared out and the lender has purchased capital. Suddenly, they don’t need to keep that 3-12x in reserves anymore because there isn’t a loan that needs it. Now, the lender can do pretty much whatever they want with those reserves. Granted, they can’t make another loan because they obviously don’t have the reserves. But, they now have cash that they can maintain operations with. Or hire a law firm to prosecute. Or hire a collections agency to badger homeowners. Or pay their bills. Or pay their employee wages. Or pay administrative assistants to file nasty things on your credit reports. Or pay for more marketing to get people to invest with their company so that they can build up those reserves and make more loans. Or hire a real-estate company to liquidate the capital in 6-12 months (as opposed to waiting 30 years for the mortgage to complete).
So, running the numbers like us real-estate investors are supposed to do, say that they lender has 100 homes priced $300,000. That’s $30,000,000 of loans needing 7.5 times of reserves (7.5 is the middle between 3 and 12). That equals $225,000,000 in reserves. The lender buys those 100 homes: 225,000,000 - 30,000,000 = $195,000,000 of cash. There isn’t enough money that can be pooled from every person on REIclub to hire a lawyer to combat that.
That’s what I thought about today. Unless someone comes forward and presents a lender’s bylaws of operations concerning loan procedures, I call just as much :bs on you as you do on me.
Dean - I do have a lot of respect for your comments. However I believe in this case you missed the point. Why would a bank need to put money in reserve if they have already disbursed that money when the property was bought? Reserves are needed when banks have liabilities. A Loan made to a homeowner is not a liability, it is an asset for the bank. They don’t make reserves on an asset.
They do however have to provision some money to account for people that will not pay back their mortgages. For example, if a bank has $100 million dollars in outstanding mortgages. He will probably not receive all that money - some people will default. The bank calculates a percentage of default and provision that money in their balance sheet. Let’s say that the bank estimates that 5% of the money will not be paid back - in this case he provisions $5 million. In the end of the day, in the bank’s balance sheet it will have $100 million asset (outstanding loans) - $5 million provision = $95 million asset. That $5 million provision hits the bank’s bottom line at the moment it is provisioned, not when the property is foreclosed.
So the bank is not really “freeing” capital when it forecloses on a property.
I’m not saying that capital is freed when the bank takes back a property at foreclosure. I’m saying that the loan attached to that property is freed. At that point, I would say that the property is capital that the bank has purchased. Similar to if the bank had purchased a moving van or office copier. Those items are considered capital according to GAAP. The IRS follows GAAP - most of the time. Logic would dictate that when a property gets foreclosed, the loan gets taken care of. After the property gets sold, the capital gets taken care of. I’m not sure if banks consider the loans they make as an item of capital. Then again, I don’t write the policies used by a bank, and I’m not all that familiar with GAAP. Thus, my thoughts have about as much validity as the thoughts of any other guru. As do yours.
In any case, I can see things from your standpoint, too. This is the main problem I’ve started to discover with the foreclosure/short-sale “experts”: none of them can seem to come to a solid agreement. That would indicate that none of them truly know. And we’re all investing multiple hundreds of thousands of dollars from what we learn from them… :shocked
From what I’ve been informed, those reserves are a Federal mandated requirement. Mostly done to prevent another Great Depression. The banks/lenders must have those reserves sitting as cash on the loans that they make to others. That money must be 100% liquid; no investing, not even in a 1% guaranteed return investment. Thus, it is just stacks of bound dollar bills sitting in a vault. That way, if people that make deposits with the banks/lenders want their money back, the bank will have the cash to pay out.
One of the problems with the Great Depression was that the banks/lenders were lending out nearly almost all of their cash and they didn’t have any when the masses of people made withdrawls.
Anyways, like I said, this is what I’ve been taught and researched. Until someone from a major bank (preferably the CEO that writes the companies bylaws), presents written documentation to finally clarify this up, we’re all just going to have to go with what we’ve been taught by our favorite guru of choice.
Despite all that, I’m still gonna be working shortsales :beer :cool
Dean - you are mixing two different things in one basket. Reserves have nothing to do with money the banks lend. Banks do not need to keep reserves for money they loaned - the basic idea is that they have already paid that money. Banks need to keep reserves on deposits they receive from customers. In the other hand, banks need to provision a percentage of the loans to account for bad debt. The provision is not money sitting on their vault. The provision is an accounting entry they make to reduce the asset (outstanding loans). It hits their P&L immediately when they provision the amount.
So the information that the banks need to keep 3 to 12 times the money they lend is not true.
Having said all that - nothing that I said should change the fact that banks are foreclosing on properties and that they eventually will need to sell those properties to be able to recover their money. They need money so they can keep their reserves and they can make new loans to good debt risk. We should never forget that banks make money when they loan money. If they stop loaning, they will stop making money and eventually will get in trouble…
Have a nice evening. It is an interesting discussion… :O)
I hear ya j1dias. One thing that the short-sale experts do agree on is that banks aren’t in the real-estate sales business. They are in the money loaning business. And they do foreclosure so as to speed up the process where they can get rid of a non-performing loan that could theoretically take 30 years to complete (typically). The quicker they can get the property back, take care of the loan, and get it all sold off to somebody else, the quicker they can get back to making loans. That’s where us investors step in and get the job done and take our checks at the end of the day. What boggles my mind most is the quantity of people that just don’t care. Since I’ve started with short-sales, I’ve seen literally multiple millions of dollars just fly by my face as homeowner after homeowner basically shrugged their shoulders with a “Whatever”.
Anyways, now that we’ve hammered this stuff out a bit, its gotten me quite fascinated to find out just what is the banks policy on how the treat foreclosures and why. If only J.P. Morgan were meeting me for lunch today… at McDonald’s :shocked Haha! Then we could all get to the bottom of this.
Dean - this is an interesting thing. This evening I went to see a property that is up for auction. When I got there there was this family (father, mother, and 3 kids) walking around the house because they could not get in. I offered to open the door for them so they could look inside. While we were there I started talking with the man. He bought a house for 190k (which is worth probably around 100k or less today) and is paying $1.5k mortgage. He is having problems finding jobs - he does drywall. So he is trying to find another house and buy it. As soon as he does it, he will move out of his current home and let the lender take it. He will simply move into the new house and stop making payments on the first house. He is trying to get a loan to buy the second house - he told me he is working with a friend/realtor who is trying to pre-qualify him.
As I was talking with him I asked if he was not worried with the foreclosure in his credit. He told me that not really - as long as he can secure another property before the foreclosure hits his credit report, he will be fine. He felt that in 2 years the foreclosure would not have a big impact on his credit score… ???
In his mind it was easier to let the bank foreclose on his current property than trying to do a short sale. He simply did not want to deal with all the hassle. He is now focused on getting that new house as soon as he can.
I suggested he discussed that with his realtor. A short sale would be much better than a foreclosure. I told him if his realtor wanted to talk with me, I was available.
So long story short… he doesn’t even want to botter with the short sale. He believes it is easier and simpler to let it go. I believe he will have a reality shock when he finds out that he will not be able to qualify for a new mortgage or even if he does, he will end up paying as much as his current mortgage because of the rate he might get.
I will probably give him a call in a few days to see how his discussion with his realtor went. Who knows… I may be able to help him. But only if he wants to be helped.