7 Things to Know about Mortgages, Foreclosures, and Short Sales

Transcription

1 7 Things to Know about Mortgages, Foreclosures, and Short Sales TABLE OF CONTENTS 1. Being in Default is Not Necessarily Being in Foreclosure 2 2. Foreclosure 2 3. Short Sales 3 4. There is No Right to a Short Sale 4 5. Junior Creditor 5 6. Risks and Other Options 6 7. Fraud in Short Sale Transactions 8

2 7 Things to Know about Mortgages, Foreclosures, and Short Sales 1. Being in Default is Not Necessarily Being in Foreclosure a. "ʺNot every default is a foreclosure but every foreclosure is a default."ʺ b. Mortgage Foreclosure is a statutory proceeding. i. Notice of delinquency or default is not the beginning of the foreclosure process. c. The beginning of the foreclosure process is the service and filing of a Notice of Pendency of Foreclosure of the mortgage, followed by service of a Notice of Mortgage Foreclosure Sale on the occupants. d. The lender must strictly comply with the foreclosure statute. Even minor errors can cause the lender to have to recommence the foreclosure process. 2. Foreclosure a. What Type of Foreclosure? i. Advertisement. Most foreclosures are by advertisement. Foreclosure by advertisement allows the foreclosure to proceed without court intervention. ii. Action. Foreclosure by action is the commencement of a lawsuit which is selected by the lender to clear up title issues, resolve defenses and/or allow for the creditor to pursue a deficiency judgment against the mortgagor (borrower). b. Sheriff s Sale i. At the Sheriff'ʹs Sale the property is sold and the sheriff will issue a Sheriff'ʹs Certificate of Sale to the highest bidder at the sale. In most sales, the lender bids the amount of its indebtedness plus 2 additional charges. In some sales, the lender may bid less than the full amount of its indebtedness to spur potential purchasers or redeemers. ii. The Sheriff'ʹs Certificate of Sale does not bestow upon the holder fee title. It is the promise of fee title if the owner (and potentially a junior creditor) does not redeem. c. Redemption Period 2

3 i. The redemption period is the time given to the owner to redeem (pay back the indebtedness). During the redemption period (which is typically six months but can be longer or shorter depending on certain circumstances), the owner of the property still owns the property and may occupy, lease, sell or refinance the property. d. Expiration of Redemption Period i. Upon the expiration of the redemption period and if the owner has not redeemed nor has a junior lienholder redeemed from the sale, the holder of the Sheriff'ʹs Certificate of Sale becomes the fee owner of the property. e. Deficiency Judgment i. In some cases the amount recovered by the foreclosing mortgage holder is insufficient to recover the indebtedness. If the foreclosure was by advertisement, the mortgage holder is by statute barred from seeking a deficiency judgment in most situations. If the foreclosure was by action, the foreclosing mortgage holder may pursue any deficiency that may arise. f. Junior Creditors/Lienholders i. Some debtors have second or third mortgages on their home, or live in a Common Interest Community. We call these junior lien creditors. A first mortgage holder'ʹs foreclosure will extinguish all junior liens (absent junior lien redemption) but does not extinguish the debt. A junior lien creditor can still pursue the debtor to collect on the underlying indebtedness. 3. Short Sales a. Definition i. A short sale is a transaction wherein the property is sold for less than the total indebtedness owed on the property. That is why an agreement that the lender, upon the sale of the subject property, will agree to accept less than the amount owing is necessary. Typically, short sales will only be considered by the lender to the debtor'ʹs primary homestead and not to second homes or investment property. b. Is this a Potential Short Sale Transaction? 3

4 i. What is owed (first and second mortgages)? Accurate information is needed of what is owed on the property. The owner may not have a clear idea of what is owed. ii. Potential sale price. Real estate agents can do a comparison market analysis (CMA) or broker price opinion (BPO). The potential sale price compared with what is owed will tell you if the possible sale will be a short sale transaction. iii. Retain an experienced real estate agent with short sale experience. Experienced agents can help determine the potential sale price as well as assist the parties through the process and help them understand what lenders are looking for with respect to documentation. iv. Timing. A determination needs to be made of where the owner is in the default or foreclosure process. Is there time to do a short sale? Lenders may take time to respond to potential offers involving short sales and as such sellers need to determine whether there is enough time to accomplish marketing of the property, getting an offer, submitting the paperwork and offer to the lender, getting approval and closing within the time existing. Once the redemption period expires the owner has no claim or rights to the property. v. Recent changes may help: 1. The Federal Housing Finance Agency has directed Fannie Mae and Freddie Mac to develop processes to streamline the short- sale approval process. a. Servicers need to respond to requests for short sales within 30 days of receipt of short sale offer and borrower packet. b. Make a final decision within 60 days. 4. There is no Right to a Short Sale a. Lender s Option i. The lender is not obligated to discount the amount it is owed to consummate a sale. In some cases, it may be in the lender s economic interest to allow the short sale to proceed but that does not mean that the lender has the obligation to agree to a proposed short sale. The lender needs to approve the offer as that will determine the amount of indebtedness the lender is discounting and the lender has to determine 4

5 if the owner is financially eligible to be considered for a short sale. The lender does not have to accept a purchaser s offer or agree that the owner is financially eligible for a short sale. b. Mechanics of a Short Sale i. Offer on the property. The property needs to be marketed and a purchase offer needs to be obtained for the property. ii. Request and compile necessary documentation. The lender when considering a short sale will need financial information from the owner. The lender will dictate what they need (tax returns, hardship letter, bank statements, pay stubs, etc.). Getting the necessary information from the owner and getting it to the lender is critical in avoiding delays and getting the possible approval. Do not assume that the lender will call you to tell you that you did not submit the necessary paperwork. iii. The Lender will also typically need a hardship letter. It is the explanation of why the owner cannot pay. What'ʹs a hardship? 1. No longer have to be in default. 2. Owner falling on hard times: a. Unemployed b. Divorce c. Medical emergency d. Bankruptcy e. Death 3. Things that usually are not satisfactory hardships: a. Bad buying decisions b. Bad investment c. Buying another home d. Pregnancy 5. Junior Creditors a. Other Liens i. The existence of other liens (second mortgages, home equity loans, homeowner association liens, etc.) on the property complicates the short sale approval process. The existence of these junior liens needs to be addressed so as to allow clear title to pass to the purchaser. The 5

6 inability to provide clear title will, in most situations, cause the property not to close. b. First Mortgage Approval of Payments i. First mortgagees will usually allow modest payments to junior liens to secure release of junior liens. These amounts depend upon the variety of factors including the amount of discount taken by the first mortgagee. The junior lienholders do not have to release its liens in exchange for amount the first mortgage holder agrees to pay. c. A Release of the Lien does not Release the Note i. A typical loan transaction involving the security of real estate includes a mortgage and a Note. The Note is the contractual obligation to pay back the money loaned. The mortgage is the security in the event the money is not repaid. The release of the mortgage (lien) by the junior lienholder does not automatically mean the underlying Note or indebtedness is extinguished. In most cases, the junior lienholder will agree to take modest sums to release its liens but preserve the right to pursue its indebtedness after the short sale is closed. In some situations, the junior lienholder secures a reaffirmation of the debt from the debtor as a condition of its approval of releasing its lien. It is critical that the debtor 6 understand if there is going to be a continuing obligation to pay back the Note or indebtedness even after the short sale is closed. 6. Risks and Other Options a. Risks of Short Sale i. The sale of a property as a short sale is not without its problems and risks. The most important point to make to owners hoping to enter into a short sale is that a short sale is not a right. Lenders do not have to agree to a short sale. 1. Buyer may withdraw offer before approval from lender. Lenders take what may be perceived as excessive time to consider short sale paperwork. During this time the buyer may withdraw their offer. 2. Mortgage Forgiveness Debt Relief Act. A forgiven debt is a taxable event. The Act was passed to avoid this effect but it has limitations (i.e. primary residences). 6

7 3. Credit rating damage. There are varying implications to an owner'ʹs credit rating when doing a short sale. In many cases it will depend on whether there is an existing deficiency or default. While foreclosure may have a more damaging effect on an owner'ʹs credit score, deficiencies and default do have negative implications nonetheless. Short sales are sometimes reported as "ʺPaid in full for less than agreed upon amount"ʺ. 4. Continuing obligation under junior lienholder note. If there are junior mortgage holders that are not allowing satisfaction of their notes then the client needs to be made aware of these continual obligations and the likelihood of a suit to collect the note. b. Other Options Besides Short Sale i. Ride out foreclosure. In some cases the foreclosure may be the best option for the owner. 1. Live without mortgage payment. Lenders have been slow in commencing foreclosures and this delay allows owners to remain in the property without making a mortgage payment. 2. "ʺCash for keys."ʺ Lenders in an effort to avoid the cost of eviction and to facilitate an orderly departure will offer the former owners money if they will leave the property in a clean condition and with all the appliances intact. ii. Deed in lieu of foreclosure. This is a process that has not been used much in the past but is making a comeback. The process allows the lender to avoid the foreclosure process and agree with the owner to submit a deed. The terms of any continuing obligation on the note would need to be addressed as well as any other mortgages that are on the property. Usually not an option if there are junior liens, taxes owed, or judgments against owner. iii. How much was bid at the sheriff'ʹs sale? Lenders can bid less than the amount owed. In so doing, the owner has the right to pay that amount bid and not the original amount of the indebtedness. Some owners may be able to redeem at this lower amount. If the owner does redeem at this lesser amount, the owner should determine if they will have a taxable event on account of the indebtedness that was forgiven by the owner paying less than the amount owed. 7

8 iv. Loan modification. 1. Federal programs. Home Affordable Modification Program (HAMP). 2. Service providers. Nonprofit housing counselor network ( 3. Many sham companies claim to offer services for a fee. The Federal Trade Commission passed rules which require notices by these providers and does not allow them to collect fees in advance, only upon completion of the task (MARS). In addition, the users of these services can cancel at any time prior to modification. v. Bankruptcy. 1. Depending on the circumstances, Chapter 13 may "ʺstrip off"ʺ the junior mortgage and notes. 2. Consult with a bankruptcy attorney. 7. Fraud in Short Sale Transactions a. Definition i. "ʺAny misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approve had all the facts been known."ʺ (Freddie Mac 2012) b. HUD Settlement Statement i. All financial arrangements need to be accurately disclosed on the HUD Settlement Statement. 1. Putting an entry on the statement but labeling it as something it is not is improper. a. Attorney Liability b. Criminal Investigations 2. Many short sale fraud schemes involve facilitators retained by listing agents or selling borrowers. 3. Red Flags a. Sudden borrower default b. Borrower current on all other obligations c. Conflicting financial information d. Buyer of property is an entity 8

9 e. Purchase agreement has option clause to resell property c. Typical Fraud Schemes i. Flopping: When a property'ʹs value is depressed to effectuate a short sale and then a subsequent (usually quick) re- sale at a substantially higher price. ii. Undisclosed Payments: All payments made as part of a short sale transaction should be disclosed to the lender and other parties approving the short sale. 1. All payments should be disclosed on the HUD Terms such as "ʺoutside of escrow"ʺ or "ʺoff the settlement statement"ʺ should be red flags. iii. Predatory Short Sale Negotiators: Individuals calling themselves "ʺshort sale negotiators"ʺ or something similar guarantee results and play on people'ʹs vulnerability. In most cases, they take money up front and do little or nothing. 9