Idaho Falls, ID

A lot of people have been required to sign a promissory note as a condition to the lender approving a short sale.

The promissory notes are usually for a small to moderate percentage of the deficiency balance, paid over ten (10) years, with no interest. The promissory note requirement is usually a good deal, and see my other articles on this subject concerning predicting when a promissory note will be required.

However, many homeowners are in severe financial distress, and the thought of having another payment following the short sale is not a happy one!

Most borrowers after a short sale need to find a place to rent, and another payment on top of rent might often push the borrowers over the edge. It is often the case that a short sale falls through simply because the borrower rejects the idea of a promissory note.

However, do not despair! There is a way out of it.

Your seller may only have to make the promissory note payments for a year, or even less.

Why? Because after the file is closed and the new loan (promissory note) has been set up for collections, a short time is required for the lender to see that the borrower makes faithful payments. If so, then about a year out (often as soon as immediately, depending upon the lender), the borrower can seek to settle the debt for a fraction of what is owed.

"But for how much?" you might ask. Almost any lender will settle a promissory note for 80%, without hesitation. 60% takes some discussion and effort to convince them, but many will do it. To settle the debt for 50% may require financial distress on the part of the borrower, with low income and difficult circumstances.

The best way is to go to a lawyer and have the lawyer draft a letter and fax it to the lender's customer service department (collections), with a copy to the lender's bankruptcy department. The lawyer can state that the borrowers have come to him to discuss the promissory note obligation, and their difficulty paying it. They are considering bankruptcy, but this promissory note is the only issue causing that consideration. The lawyer then makes an offer for 10%-30% depending upon the borrowers' financial condition.

In my law practice, we often contacted various creditors when the clients did not really need a bankruptcy, but did need relief. 10%-30% was often the amount for which the lenders would settle. However, it was often the case that my being an attorney was the instrument that got them to agree. Why? Because the lenders know we are serious.

Best wishes,

Ken Lawson, JD

TheLawsonGroup Mediation Services

In the last article, we discussed the basis upon which lenders will seek a deficiency balance and how to predict it.

The question then comes to the issue of when a promissory note will be required as a condition of approval of the short sale. Since the debtor owes the entire deficiency, a promissory note with no interest and easy terms for only a portion of the balance is not unreasonable.

Although usually the secondary market investor (SMI) requires seeking the deficiency balance after short sales, but sometimes it will be the servicing lender.

I am poviding merely a guide. Promissory notes are not always required, but the following factors may be helpful to be prepared if a promissory note is required in your short sale case.

1. Borrower has assets. A borrower with a true hardship may still have substantial assets, even if those assets are exempt, such as IRAs and retirement funds. Even though creditors may not be able to forcibly take those assets, a borrower may still pursue a short sale. However, the SMI is not required to approve the short sale unless the borrower agrees to the promissory note.

2. Borrower is an investor. If the borrower has other property and making other mortgage payments it may trigger the requirement for a promissory note. When lenders see mortgage payments being made to other entities, they may require a promissory note.

3. Borrower rehabilitation. When the entity sees the borrower unloading a lot of debt with a good income, they may require a promissory note. Borrowers with deteriorating health or elderly are less likely targets of a promissory note, but borrowers young enough to be financially rehabilitated may be so required.

4. Lender/SMI needs. Entities in deep financial trouble may increase the cutoff for requiring promissory notes.

5. Purchase price below net to lender minimum threshold. Some SMIs will allow an offer to be approved even if the offer is below the net to lender minimum threshold percentage of the fair market value. An offer that is $20,000 below may require up to a $20,000 promissory note.

6. Lender requires a financial statement. Whenever a lender requires a financial statement to be completed 0by the borrower, it may be not only to confirm hardship, but it may help determine if they are going to require a promissory note for part of the deficiency. Some lenders require them of all, but for others it may be a clue to whether they are seeking the promissory note.

These 6 factors are not in themselves reliably predictive of whether a promissory note will be required as a condition of short sale proposal, but they can alert the short sale Realtor to brace for that possibility.

If I can be of service to any of you, please do not hesitate to contact me.

Best Wishes,

Ken Lawson JD

TheLawsonGroup Mediation Services

Many homeowners and agents alike as what the odds are they will be required to pay a deficiency balance after a short sale. Many bank release documents will not specificially state whether the short sale will be in full satisfaction of the debt.

We've noticed a gradual change from a willingness to include language forgiving the debt to some even stating specifically that they are leaving open the possibility of seeking the deficiency balance, even though in fact they may not likely pursue it, unless of course, the debt is far in excess of the fair market value and the homeowner may either have assets or can be rehabilitated.

Pursuing the deficiency balance

The decision whether to pursue a deficiency balance rests with the secondary market investor (SMI) unless the servicing agreement permits the servicing lender to do so.

Then, the policy decision may be made from a public relations and political analysis. With the federal government so actively involved in the explosion of foreclosures, bailout programs, and attempts to reduce foreclosures, there is presently negative pressure on lenders to not pursue deficiency balances. This pressure will help determine whether to go after only the most egregious cases or to expand the criteria.

Finally, the decision for pursue a deficiency balance involves the a nexus between the capacity of their legal, bankruptcy, and collections departments and the facts of each case. A certain predictable percentage of their customers will file bankruptcies, so these entities will determine how many and which customers to pursue for the deficiency.

The borrowers likely to be pursued are those who the lender sees may become solvent in a reasonable length of time. If the servicing lender owns the note, they may be more aggressive. A medical doctor in his 40's, with a good income with a temporary financial trouble due to loss of business from the clinic mismanagement will likely recover financially after his change of clinic. Particlurly if a deficiency is large, the greater the likelihood they will pursue the borrower.

How to know when the borrower is in the clear

Each state has laws called "Statutes of Limitations" or "Limitations on Actions". These are laws that place a time limit after which the creditor can no longer sue a debtor for a debt, which can range from 2 years to 10 20 years. However, the borrower will seldom need to wait this long. Even the IRS does not collect tax debts after 10 years, with exceptions.

If the lender required a Promissory Note for part of the deficiency, it is highly unlikely that they will seek more. Indeed, if they do, the lender may face some legal trouble, for which they are fully aware.

If a lender is going to seek a deficiency, it most likely will occur within the first year. Each year, in January, the lenders must issue their 1099s. A 1099A or 1099C will be the form they use to report to the IRS the amount that has been forgiven in a short sale or foreclosure. So, if the borrowers receive a 1099 for the deficiency balance, the lender may be "estopped" thereafter from pursuing the debtors. The lender receives a tax benefit from the forgiveness, and the borrower may incur a taxable event as a result, so the lender may be estopped from further action.

This discussion is only a guide, and there are differences between specific lenders and SMIs. It is important to encourage your sellers to consult with a competitent attorney in their local jurisdiction.

Please note: I have endeavored to provide general guidelines. Because there are a lot of SMIs, and even greater numbers of servicing lenders, many thousands of varying loan products, and often different procedures in different states or regions, many of you may find cases that deviate from the above discussion. Please keep this in mind.

Best wishes to you all,

Ken Lawson JD

TheLawsonGroup Mediation Services

Training, Coaching, and Mediation of short sales

I often find agents mistaken in their beliefs why short sales are not approved, or do not otherwise close. While I certainly applaud successful short sale agents, there is widespread misunderstanding and misinformation about this topic.

As an attorney who has not only sold real estate (well, for a year and a half, that is), and has represented and dealt with servicing lenders and secondary market investors (SMI) over the last 20 years, I have a unique understanding of these entities and relationship with them. A number of those institutions have managers and executives who are friends of mine, and we have on numerous occasions discussed the issues causing short sales to not be approved.

So, here are the top reasons that a short sale does not close as I experience them with the agents who work with our firm and confirmed by my contacts in the mortgage lender/SMI industry.

6. Not submitting multiple offers. I'm sorry, but I must respectively disagree with those who hold contrary opinion. My contacts tell me that providing multiple offers have indeed helped them to see that the agent is doing all they can do to get the home sold. When there is a borderline case, the multiple offers can make the difference. However, the servicing lenders generally do not like them. There is also a side benefit: if the selected buyer walks, there is another purchase contract that can carry the deal to close. However, in some areas, multiple offers are not permitted. Some say they are not legal. Wrong! They are legal, however, both the listing and the purchase contracts must be drafted properly.

5. Not submitting a proposal. Many short sale instructors merely teach to send in a complete short sale package. It is true that you must have complete documentation, but it is important to draft a full proposal, as well. Organizing your request to approve a short sale has often made the difference between success and failure with the agents who work with our firm. The proposal should contain specific features and I outline them at length in both of our publications. My SMI contacts state that properly drafted proposals are given very careful consideration and they have approved our format.

4. Causing the proposal to be tanked. Many agents still think that the servicing lender is the one who approves the short sale and that they can actually negotiate with that lender's "negotiator". However, most loan notes are actually owned by the SMI and either they, or an MI insurance carrier if they have paid off a claim, approve or reject the short sale. The servicing contracts provide limited authority to servicers and it is very common for servicer employees to cause the proposal to be tanked if they can get away with it. Any excuse may trigger this behavior: incomplete or mistakes in drafting proposals, getting them angry, etc, can cause your proposal to be tanked.

3. Not communicating adequately with parties. Buyers are patient...to a point. Same with cooperating agents. We provide weekly updates to all parties, more often when things happen. Buyers must be part of the process and be motivated to hang in there when approval takes a long time.

2. Not meeting the definition of "hardship". Like a criminal case wherein each element of the criminal statute must be proved, in short sale cases the hardship letter and financial documents must prove each element necessary for a secondary market investor to render a finding of "hardship", and approve the short sale. The hardship metter must contain certain elements, without which, the case will be rejected.

1. The most important reason that a short sale is not approved is not meeting the net to lender minimum threshold percentage of the fair market value. In the past, secondary market investors utilized the short sale versus REO comparison analysis to approve or reject a short sale. However, almost all SMIs have changed over to the minimum threshold analysis. That analysis ignores the amount of the debt and focuses on proof of the current fair market value of the property. For different SMIs and even different products, there is a set minimum threshold percentage of the fair market value that must be received in order for the proposal to be approved. Many agents eroneously believe they are still using the old comparison analysis.

So, the bottom line is this: if a proposal meets the definition of hardship, that hardship is supported by the financial documents, you do nothing to cause the servicing lender to tank the proposal, and the offer meets the net to lender minimum threshold percentage of the fair market value, the short sale will be approved and if a qualified buyer remains, the transaction will close.

Best wishes,

Ken Lawson, JD

TheLawsonGroup Mediation Services

There is circulating a popular legal concept for the homeowner to require the lender to produce the original promissory note in the event of impending foreclosure. The lender who is the holder in due course (this is legal speak for the entity that actually owns the Promissory Note) must prove that the debt is due when the servicing lender forecloses on the property.

To produce the note is sometimes very difficult because the note may be in the possession of the servicing lender, the secondary market investor, or someother entity as the note passes to various entities. With all of the mergers, bank failures, and takeovers over the last several months, many records have been lost.

To prove that the foreclosing entity has a rightful claim merely reequires the "keeper of the books and records" to testify that the debt is owed and they have the legal right to collect.

In order to offset the testimony of the keeper of the books and records, the homeowners would need to produce evidence that the entity does not know for certain that the note has not been transferred, or that the debt is not owed.

Obtaining proof is accomplished through discovery actions where you force the lender to produce the records that prove they have the legal right to collect or foreclose. You will need a competent attorney to do this properly. If you can prove that the lender cannot prove they have the legal right to collect the debt, then you can win.

In most cases, either the note will ultimately be produced or adequate testimony will prove the debt. However, this procedure will lengthen the time required to foreclose, providing additional time to get the short sale approved, even if the debt cannot be set aside. Remember, the homeowner is not saying they do not owe the debt; only that they may not owe the debt to this particular lender. With so many bank closures, mergers, and takeovers, that may be a fact.

When I represented consumers, it was not uncommon to find clients who experienced a foreclosure by the servicing lender, only to result in the actual holder of the note later suing them for the entire debt.

Technically, representing oneself can be done, but not well advised. Most short sale homeowners do not have the funds to take on a case using this strategy, and in most cases, the proof of debt will be presented with only a short delay in the case.

In judicial states, an answer to the original court Complaint or Petition must be filed within the time frame permitted by your state law. Then the discovery process would begin. It is possible to file a simple letter answer, which is often accepted by judges and deemed to be a legal Answer to the Complaint or Petition out of an abundance of caution. Then even at trial, this strategy could be implemented. However, it is best to let a good attorney handle it.

In non-judicial states, a lawsuit must be filed by the homeowners before the date of the trustee sale. Again, it is much more likely to be successful if a lawyer does it. The Complaint or Petition must assert a denial of the debt to the defendant. In some jurisdictions it is enough to state that plaitniffs are uncertain that the debt is owed to this defendant, while in other jurisdictions the plaintiffs must allege that they have reason to believe that they do not owe the debt to defendant. Again, taking these actions are costly if the homeowners hire an attorney. The Complaint or Petition would ask the court to require the lender to produce the note.

In any case, the original loan documents should be taken to the attorney for a forensic review because there is a good chance that there may also be TILA or RESPA violations as well. If the violations are serious enough, some attorneys may take the case on a fee contingency if there is a likelihood of a substantial award.

Generally, this "produce the note" strategy is seldom effective in practice, except for gaining time for the short sale process. This objective may well justify this strategy.

Ken Lawson, JD

TheLawsonGroup Mediation Services