Many Upside Down property owners seek to sell their property and avoid foreclosure through a “Short-Sale”. It’s called this because the amount a Buyer is willing to pay is “short” of enough money to pay off the existing debt. If the sale is to close, the shortage has to be dealt with to get the lender(s) to release their lien on the title.  The whole issue is about who should take the hit on covering the shortage. Typically the Seller/borrower submits a “Hardship Package” to the lender to convince them that the Seller cannot afford to pay the difference. The lender could accept the hardship and agree to eat the difference but more and more, they’re trying to preserve a right to collect the difference from the borrower later.

A year ago, lenders often submitted a “Promissory Note” into the short sale escrow demanding that the borrower agree to repay the difference at a later time. However, in many states (such as California), the lender might be barred from seeking a deficiency if they foreclosed so most borrowers refused to sign. Short sale success rates were running 4-12%.  About 6 months ago, lenders started dropping the Promissory Note demand and instead began putting language in their short sale consent documents stating that they were merely releasing their lien and “reserving their rights” to go after the borrower for any deficiency. Again, depending upon the laws of the particular State, such a reservation may have been unenforceable and meaningless.

Recently, lenders have begun using a consent form that goes beyond the reservation of rights and actually has the borrower sign a document confirming that only the lien is released and that the deficiency will be collectable against the borrower.  This is much closer to the original Promissory Note and may equal an enforceable re-affirmation of the debt. Understandably Seller/borrowers are refusing to sign.  The result is a stand-off. Does the lender really want to foreclose? Agents and Buyers are caught in the middle. 

How should a short sale seller/borrower respond to such a situation?  First, get advice on what recourse the lender realistically has against the borrower if it goes to foreclosure. If there is none, then the borrower has much more leverage in getting the recourse provision dropped. If the lender has recourse or if their are junior lenders that would get recourse from a senior lender’s foreclosure, then the short sale is an excellent forum to negotiate a resolution of all liability.  Remember, just because the lender says they want it all, does not mean they won’t settle for less. 10% of the shortage is not an unusual settlement amount.  If you need help with this analysis, we have a $200 flat fee consultation program that can be done in person or by phone that goes through the analysis and leads to a strategy for the borrower and their real estate broker to use in the negotiation. Call us at 916-966-2260 for more information. If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/