Have you seen the new Bank of America/Countrywide short sale approval letter? It is sending shockwaves to unsuspecting short sale sellers. Here is a portion of the new approval letter:
The key statement of concern is Bank of America "may pursue a deficiency judgment for the difference in the payment received and the total balance due..." There are two contradictory elements in the demand letter:
1. The letter states that Bank of America has "agreed to accept a short payoff". Now, how can they "accept" a short payoff, then state they "might" collect the rest? They either are or are not.
2. It states "there may be tax consequences for entering into a short sale". Again, the statement concedes it is a "short sale", and alludes to the 1099-C, where cancelled debt is reported to the IRS. Either the debt is cancelled or it is not. Why would Bank of America reference short sale tax consequences if they were, in fact, collecting all the debt?
Neither contradiction supports their reference to collect the deficiency in the future. Since I have had several concerned sellers who have received this approval letter, I emailed a Bank of America escalation negotiator to get their explanation. Here is what they said:
Countrywide/Bank of America cannot remove the deficiency verbiage from the approval letter. We must reserve the right to collect the unpaid balance of the loan for the benefit of our investors and mortgage insurance companies that insures payment on the loan. The purpose of the short sale letter is to properly disclose this to the borrower so they may consider all of their options with respect to their mortgage loan.
In my experience with short sales, I have never know anyone to pursue the deficiency once the short sale has closed.
So, how can you alleviate concerns when receiving this letter? Of course, talk to your attorney if you do not feel comfortable, but consider the alternatives if you do not accept the short sale. Deed-in-lieu of foreclosure, which will produce the same deficiency, and be worse on future borrowing ability? Or foreclosure, with severe future borrowing constraints, liabilities and consequences? None of the choices are that palatable, but short sale is still clearly your best option.
Wendy Rulnick, Broker, CRP, CRS, GRI, ABR Rulnick Realty, Inc.
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This site, Wendy Rulnick or Rulnick Realty, Inc. is not providing legal or tax advice. The information provided is for educational and informational purposes only. It is recommended that sellers considering a short sale should consult an independent legal and tax advisor for more information.