Richard Zaretsky, Florida Real Estate Attorney

I was negotiating on a very large problem mortgage today with a high-up executive at the servicing firm. He made a comment that I thought peculiar and I called him to task on the matter.

The comment was that "after the foreclosure sale, lenders seldom bother to get a court ordered deficiency judgment". I knew this to be false, because lenders today - more than in the past - are investing a few hundred more in attorney fees to get a deficiency judgment. I will tell you why.

But first, lets all get on the same page. A deficiency judgment is obtained when a property is foreclosed and sold (usually at the courthouse by the clerk of the court) to the highest bidder. In most states a "deficiency" judgment can be obtained for the difference between the high bid and the higher foreclosure judgment amount. Usually the court determines which value is higher, the high bid or the appraised value of the property on the date of the public sale, and the higher of the two is taken to determine the difference from the judgment amount, and this difference is the deficiency judgment.

Ok, back to the discussion. Deficiency judgments are just that - judgments. They are a pain in the neck to the debtor and can only be removed by paying it off or by bankruptcy. Further, money judgments usually earn interest until paid. In Florida right now that rate is 11% a year - better than the bank by far!

Now the bank that gets the deficiency judgment might have said that they seldom enforce a deficiency judgment. They are right. They sell the judgments for 5 to 10 cents on the dollar. So for a $100,000 deficiency judgment they invest $500 in attorney fees and get $10,000 in return just for pushing paper.

The problem with a money judgment, which is just what a deficiency judgment is, is that it won't allow you to buy anything on credit! New house? Forget it. New car? Forget it. You want to sell a house? You got to pay off the judgment (there are some exceptions to this rule).

So the question then can be brought over to unsecured promissory notes on short sale shortages. Yes, the banks do the same thing. They get about 5 cents on the dollar.

The executive on the phone laughed and told me I was right - both in the concept and in the pricing and that his firm helps companies that hold these packaged notes collect them from the borrowers.

There is a lot of discussion about how a short sale vs. foreclosure affects a FICO score. Frankly, even if it were the same, the differences in having a deficiency money judgment and a negotiated note are HUGE differences and that alone should settle the dispute.

Copyright 2008 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

In a discussion today with a client we addressed the question of credit scores and short sales. This is a hot topic and there is information everywhere on what happens and when and for how long. No where have I found information that I would swear by, and for this reason I am posting this Blog.

The question is, "HOW DOES A SHORT SALE AFFECT CREDIT SCORES?" The obvious follow up question is, HOW DOES A FORECLOSURE AFFECT CREDIT SCORES?"

My client had a discussion with someone who says they have experience with the ISAAC scoring methods, and here is the email (in somewhat redacted form to protect names). Please discuss in this Blog what your REAL experiences are with this subject -- PLEASE - NO SUPPOSITION.

The email goes like this:

A short sale will be reported as "settled," but that's not good. Settled is considered seriously negative by scoring models. It would be better if they just showed it as paid $0 balance and left it at that. But you won't have any say so over how they report it.

I know you're getting conflicting info but the only source that you should be listening to is someone from Fair Isaac.

Those other parties that you mentioned don't know their way around credit scores. And the worst are mortgage brokers and realtors. I can't tell you how many messes of theirs I've cleaned up in my time. In fact, I place the majority of the blame for the meltdown on brokers and realtors. Being commission based is too tempting for many people to do the right thing. I'll tell you how it's treated so you can stop getting the run around...

Short sales are as bad as a foreclosure. Credit scoring models have what's called a "Performance Definition" or Perf Def in my world. A Perf Def is essentially what the model's primary design objective is. The FICO score's Perf Def is to predict likelihood of someone going 90 days past due or worse in the subsequent 24 months after scoring. A settlement (or short sale) is considered payment not in line with original contract terms so it's treated by default as negative.

Anything that's treated as negative (or "major derog") is for all intents and purposes the same. So, a settlement is the same as a repo, foreclosure, charge off, collection, etc etc. It may be better from a lender's policy perspective but not from a scoring perspective.

So there you have it. Active Rainers - if you have REAL real life experience and can comment on the statements made above, please do so and we can all learn together.

Copyright 2008 Richard P. Zaretsky, Esq.

In this environment of the short sale it seems apparent that the bank controls the sale. Some might say the buyer controls the sale. My opinion is that both statements are primarily incorrect. The seller owns the house. The seller must sign the contract. The seller must sign the deed. Of course, if the seller can't sell and the bank forecloses, then the bank will likely have the REO and the sale is now with them - as the new owner. The issue is that the bank is the "reluctant" owner. The bank has already determined (by working with the seller and buyer in the short sale process) that it is in the bank's best economic interest to sell the house outside of the foreclosure process and prevent an REO occurance. If the bank won't go down low enough and tries to beat up the seller or seller broker - the seller can say NO. What choice does the bank have? It's like playing poker - who is bluffing?

The short sale enterprise is a game. There are usually 3 main players - the bank, the buyer and the seller. Assisting the players are the seller broker and the appraiser, and sometimes the buyer broker (if 2 brokers are involved). Playing the game takes expertise and knowing how the opposing players think.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Beware the WHITE KNIGHT -

R. Ford McDonald, Senior Claims Counsel at Attorneys Title Insurance Fund, wrote an article on this subject recently and I would like to share some of the tidbits from it.

Apparently there are lots of "White Knight Claims" being made against title insurance policies. Here are some of the fact patterns:

1. Fraud in the Inducement:

A homeowner who is in financial distress for non-payment of the mortgage or taxes or whatever, is contacted by a company that promises to "save you from foreclosure" or whatever. They promise the homeowner that they will help them refinance the house to cure the financial distress and maybe give them some cash too. The homeowner has to sign a lot of documents that they are rushed to do, and one of them is a deed to the White Knight and usually a mortgage. If the homeowner asks about these documents they are told they are additional security and will not be recorded. However, the White Knight records the deed and the mortgage. Soon afterwards, the White Knight sells the property to a "straw man" with whom the White Knight is affiliated. The straw man then sells the property to a real buyer, usually a "new" unknowledgeable investor. The original homeowner still lives in the property and the new buyer thinks he is a tenant. Next step - the courthouse.

2. Friendly White Knight:

Here the homeowner approaches the White Knight for assistance. Usually the White Knight is a relative or neighbor or friend. The White Knight agrees (at his suggestion) to take title and refinance the home using his good credit. Title is passed and the refinancing does occur. There is an oral agreement that usually includes the homeowner continuing to live in the property; the homeowner pays the taxes and upkeep on the house and the mortgage payments; after a few years the White Knight deeds the property back to the homeowner; the agreement does not contemplate a default by the homeowner; the friendly White Knight gets no compensation. What goes wrong is that the homeowner messes up paying the mortgage or taxes or HOA dues and the White Knight must sell the property. Litigation is next.

3. White Knight Flip:

Not mentioned by McDonnald but one we have seen is where the White Knight sells to the straw man and then orchestrates a new, larger mortgage. The money in hand from the new mortgage, the straw man along with the White Knight disappear, leaving the homeowner with an even bigger mortgage and no title to the house.

BEWARE of White Knights! Some offer buy-back scenarios and I think that is the most familiar. At least there the homeowner has the ability to sue and treat the lease as a mortgage that needs to be foreclosed (the old "if it looks like a mortgage or smells like a mortgage, it must be a mortgage" statute).

These situations are VERY prevalent and all brokers should be attentive to anything that seems unusual.

Copyright 2009 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

SHORT SALES AND IRS LIENS

This being my first blog entry, I figured to talk about something simple.

In my law practice we see a lot of short sales. Indeed, we offer a service to Realtors and Sellers to process their short sale material with the lenders (without the downward pressure and lowball influence from an investor handling the process). I have worked statewide with lenders - visting their loss mitigation departments and sitting in on committee meetings. Knowing the process is key knowledge to improving the percent of short sale lender approval.

Now that you have the approval, what other bug will kill the deal. There are plenty still to come. Today we will address a likely culprit - an IRS lien for unpaid taxes.

The IRS lien can only be avoided if the lien was filed after the mortgage was recorded or if the mortgage money (all of it) was used to purchase the property (a "purchase money mortgage"). And the avoidance only takes place in a foreclosure.

If you are doing a short sale, you are looking straight in the eye of the IRS. The solution is that you are doing a short sale because of no equity and the homeowner is selling without getting any cash. There are procedures to get a release of the lien of the IRS from the house (not a satisfaction of the lien - just a release). The procedure is to contact the local IRS regional office and be prepared to offer up the same information as to the banks - and if you already have a bank short sale authorization that will be a plus.

The problem is that the IRS can take a month or longer to process the request. Hint - WALK the request into the regional office, wait an hour or so and then walk out with the lien waiver. Easier said than done. Fortunately for my practice, we have the regional office across the street and a lawyer in my office is a tax attorney and works with the people over there regularly. It's a pain (and I hate paying the extra freight) but getting the lien release is another step in the short sale process.

Any of you have any experiences you want to post?

Copyright 2009 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES