Articles Posted in Short-Sales

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The Federal Housing Finance Agency (FHFA) recently announced that Fannie May and Freddie Mac are issuing new, clear guidelines to their mortgage servicers that will align and consolidate existing short sales programs into one standard short sale program. The streamlined program rules will enable lenders and servicers to quickly and easily qualify eligible borrowers for a short sale.

The new guidelines, which go into effect November 1, 2012, will permit a homeowner with a Fannie Mae or Freddie Mac mortgage to sell their home in a short sale even if they are current on their mortgage if they have an eligible hardship. Servicers will be able to expedite processing a short sale for borrowers with hardships such as death of a borrower or co-borrower, divorce, disability, or relocation for a job without any additional approval from Fannie Mae or Freddie Mac.

The FHFA’s new guidelines:

• Offer a streamlined short sale approach for borrowers most in need: To move short sales forward expeditiously for those borrowers who have missed several mortgage payments, have low credit scores, and serious financial hardships the documentation required to demonstrate need has been reduced or eliminated.

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On February 9, 2012, the attorney generals from all 50 states entered into a settlement agreement with five of the largest mortgage lenders in the country. This settlement agreement was subsequently submitted to federal court, and was approved on April 4, 2012. The five mortgage lenders agreeing to the settlement were Bank of America, Chase, Citibank, GMAC/Ally, and Wells Fargo.

The settlement targeted changes in these lenders foreclosure practices which were done in contravention to state and federal law. Included among those practices were the now infamous “robo-signing” (in which mortgage lender’s employees signed foreclosure affidavits under oath without reviewing the accuracy of the sworn statements), and dual-tracking (the practice of offering loan modifications while simultaneously proceeding with foreclosure). These practices, and others identified in the settlement agreement, are believed to have led to many improper foreclosures and exacerbated the housing crisis.

The settlement also provides monetary relief aimed at redressing several different issues. First, the settlement provides $17 billion to assist borrowers to stay in their homes. No less than 60% of this amount will be utilized to reduce the principal balances on loans now in default or at risk of default. Second, $5.2 billion will be allocated to facilitate short sales, payment forbearance for those caught between jobs, relocation assistance, remediation for blight, and even waiving deficiency balances.

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So your home has negative equity, and it appears that it will remain that way for a while. Things are tight and you have either missed some mortgage payments or are about to. You are weighing your options – short sale, foreclosure, deed-in-lieu of foreclosure, and even bankruptcy. You have worked through the requirements of each, consulted with a knowledgeable Arizona real estate attorney, and considered the costs of each scenario. All the costs that is, except for how your choice will affect your credit score.

This has always been a difficult cost to assess in part because the credit reporting agencies (Experian, Equifax and TransUnion) use proprietary formulas in calculating your score. Each uses the information they receive about you differently. Due to the uniqueness of each person’s set of circumstances, it is thus difficult for these agencies to express in terms of averages, how your decisions regarding your house will impact your credit score in terms of how many points your score will drop because there are just too many variables

However, CNNMoney.com reports that Fair Isaac (who developed FICO scores) did provide some estimates of how various mortgage delinquency issues can affect your score. These estimates were based on a two different hypothetical persons – one with a higher initial score, and one with a more modest score. Under the hypothetical, one had more credit accounts than the other, one had no adverse credit history, while the other had two “damaged” accounts, and neither had any accounts in collection.

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As a result of the declining real estate market, many homeowners are faced with the prospect of losing their home to foreclosure. If the proceeds of the foreclosure sale of the property secured by a mortgage or by a deed of trust are insufficient to pay the full loan balance, the mortgagee or the beneficiary may be entitled to a judgment against the homeowner known as a “deficiency”. The question then becomes when can a lender pursue a homeowner in the event of a deficiency?

The Arizona Legislature enacted two anti-deficiency statutes barring the right of certain beneficiaries and certain “purchase money” mortgagees from seeking a deficiency judgment for certain types of residential loans. The Arizona statutes that prohibit deficiencies are found in A.R.S. §§ 33-729(A) and 33-814(G).

Purchase Money vs. Non-Purchase Money Loans

The Arizona anti-deficiency statutes protect borrowers against deficiency judgments involving single or two-family dwellings on 2 ½ acres or less where the loan is “purchase money”, meaning it was used to pay the purchase price of the property. In this instance, the homeowner has no personal liability for the loan, unless the lender has committed waste to the home. Therefore, the lender’s only recourse after loan default is to foreclose on the home, and the lender cannot waive foreclosure and sue to collect the balance owed on the loan. If, however, the loan was not used to purchase the home, i.e. a home equity line of credit, the lender can waive foreclosure and sue to collect the remaining balance on the loan.

Even if the loan is a non-purchase money loan, the lender will be barred from seeking a deficiency judgment if the lender chooses to foreclose by a trustee sale rather than a judicial foreclosure. Trustee sales are an option for the lender when the loan is secured by a deed of trust. Trustee sales are quicker and less expensive than judicial foreclosures.
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Bank of America is reportedly rolling out a new short-sale process which is designed to reduce the time it takes to obtain approval from the bank by as much as half. Purportedly, the reduced time to obtain a decision is a result of improvements in their management software. For more information, click here.

A short sale is a sale of your home for less than what is owed on it. Typically, after an offer is received, the seller has to obtain approval from the bank to release its lien on the property. Whether or not the balance of the debt owing on the property has to be repaid is a matter of negotiation between the bank and the seller.

The new process is set to make its debut this Saturday (April 14, 2012). Whether it will work or not only time will tell. But, even if it does not deliver as much of an improvement as promised, any changes which reduce the bank’s processing time is long overdue.

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In our practice we have noticed that more Clients are experiencing deficiency lawsuits–but not as a result of a foreclosure. These Clients have sold their homes—they were short sale sellers—and failed to negotiate a release of personal liability as a part of the short sale transaction. Many were not aware that negotiating such a release was an option, nor were they aware of the risk they were taking by selling without obtaining a release of personalliability.Arizona’s anti-deficiency statutes do not apply to short sales. Release of the real estate lien on a home does not release the borrower from financial responsibility. It is a harsh thing to learn these facts after a claim has been made.

With the large volume of short sales in Maricopa County,we anticipate that the numbers ofthese lawsuits will only increase. So what do you do when faced with such a claim? The amount of these claims can be very large and payment isoften not possible.

The answer starts with a complete review of all of the documents generated during the course of the short sale as well as all loan documents evidencing the financing on the home sold. Many times defenses–either partial or complete–can be developed. Modest settlements can often be negotiated. Third parties, usually the Seller’s Real Estate Agent, may be fully or partially responsible for this loss if they did not adequately disclose and inform the Seller of the risks they were assuming.Where a third party has responsibility the cost of settlement can sometimes be shared or shifted entirely. The lender, itself, may not have custody of the original documents upon which its claim is founded and this can create vulnerability. Most of the time a well researched response will result in an affordable resolution ofthese claims. Where this is not possible, a final option is to consider filing Bankruptcy under Chapter 7 or 13. Bankruptcy, however, isoften unnecessary.

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A short sale agreement should, ideally,provide inclear and explicit languagethat a seller is released from all financial responsibility upon closing of the short sale. Some agreementsdo so provide. Butoften specific release language is omitted and the short sale agreement provides only that the lien will be released to enable the sale to close.

Where does this leave the Seller? Is the Seller responsible for any deficiency remaining after the short sale? Arizona caselaw provides some help. Tanque Verde Anesthesiologists, L.T.D. Profit Sharing Plan v. The ProfferGroup, Inc., et al 836 P.2d 1021, 172 Ariz. 311 (Ariz. Ct. App. 1992) provides authority for the propositionthat a Seller must affirmatively agree to pay a Short Sale deficiency to be bound. A short sale agreement that is silent on this point is not enough. In order to hold a Seller responsible, a lender must have some evidence that a Seller agreed to repay a deficiency remaining after the deed of trust has been released. The best evidence of this agreement, of course, is adocument signed by the Seller. However, other evidence such as correspondence or e-mailmight be sufficient to show the existence of such an agreement. The Tanque Verde case is helpful, but is not dispositive in all instances. Each case will be determined on its unique facts and circumstances.