Recently a seller let an approved short sale go to foreclosure over a deficiency clause. This is a situation where everybody loses, the seller, the buyer, their agents, the servicers and the lenders all who spend their time and money to negotiate the approval. All wasted over two little sentences.
“BAC Home Loans Servicing, LP and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law, if the short sale closes on the loan referenced above. In addition, if this loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller for the deficiency based on the terms of the mortgage insurance policy.”
Initially the servicer, Bank of America, claimed that if there was Mortgage Insurance (MI) or a second lien on a file they couldn’t remove a deficiency clause. However, there was no MI on the loan and the second lien holder was a different lender who had already accepted the terms of approval. The seller consulted an attorney who advised him that unless the deficiency clause was removed from the approval, that he should go ahead and let the property foreclose. This would protect the seller from owing the deficiency since California is a nonrecourse state. Hoping to salvage the deal, the seller offered to pay a promissory note in lieu of the deficiency clause. This should have been a reasonable offer to Bank of America considering that according to an article by Jason Opland on Aug. 17, 2010
Bank of America’s previous Senior Vice President of Credit Loss and Loss Mitigation, Mr. Jack Schakett, stated that if a borrower proves he can no longer pay the mortgage and has a few or no assets, Bank of America will waive it’s right to a deficiency judgment during the processing of the short sale deal. But, if a borrower can afford to pay or has assets, the bank will try to negotiate a set fee for the borrower to pay at closing. “We want to help customers who legitimately can’t afford to make payments, but we don’t want the one’s who have a bunch of money to just be able to walk away. These individuals will have to share some of our loss.” Mr. Schakett acknowledged that short sales in which the bank agrees to accept less for the home than the balance of the loan are less expensive to process than foreclosures, and thus they want to encourage more homeowners to pursue this course by making it clear they do not intend to pursue homeowners for deficiency judgments.
However Bank of America didn’t get to make that decision because Freddie Mac who held the note would not allow it. The negotiator responded saying the investor would not accept the promissory note and refused to remove the deficiency clause. They pointed out that the approval letter states the deficiency clause can be enforced “unless agreed otherwise or prohibited by law” and that California won’t allow it. This isn’t entirely true. The current statutes prohibiting deficiency judgments only pertain to foreclosures, not short sales. SB 931 which would prevent deficiencies on short sales, has not been signed into law by the governor. He has until September 30, 2010 to do so. Even then, we don’t know when the law will take effect, likely after January 1, 2011. This means if the seller had completed the short sale with the deficiency clause intact he would’ve been at risk of Bank of America coming after him for the deficiency until the statute of limitations had passed (about four years). Based on this information the seller decided to follow the advice of his attorney and let the property foreclose and be protected from the lender pursuing the deficiency judgment.