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Do Your Clients Get Deficiency Notes?

By Adriana West

Real Estate Agent with Home Expo Gallery, LLC (Keller Williams)

July 02, 2009 02:08 AM

A couple of days ago, I was talking with one of my colleagues about Short Sales. I was astonished when my colleague told me the story of one of her clients in Woodstock, GA. The client had a first mortgage and a line of credit with one of the banks that was saved from collapse by being bought out during the crisis. During the Short Sale process, the second lien holder said that the only way the Short Sale could happen was if the client signed a deficiency note - because when they signed the papers for the line of credit, they signed two types of notes: one against the house, the other was a Personal Note. Since the lender had the Personal Note, they felt they had the right to have a deficiency note signed by the home owner, or otherwise the Short Sale would not happen.

The client decided to sign the deficiency note. Three months later, and life has moved on. They now live in a different state. Their son won a scholarship to go to college, and their life was taking a positive turn.

Last week, they found out that their bank accounts had been frozen. They had left their checking and savings accounts with that same bank that had required the deficiency note. The bank froze their accounts and took all the salary earned by the husband - and did not stop there. The son who was going to college also had his account with that bank, and had received his scholarship payment as well. But since he was a cosigner for them..... The bank took all the scholarship money as well.

How far can a bank go with a deficiency note? Far enough to ruin the life of a student waiting to start his college career, certainly, and without a moment's troubled conscience.

This story has helped me fight even harder every day for my clients, and to NEVER accept a deficiency note in any of my transactions. If you end up agreeing to one on behalf of your clients, at least tell them to make sure they don't have any other accounts with that bank - or any of its tangled siblings as the banks buy each other out.

Please share your good and bad experiences with me - we can learn from each other.

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Satar Naghshineh

Satar - Amiri Property and Financial Services Corp. - Irvine, CA

With a promissory note, your clients agree to pay back on the note. If they fail, then the lender can sue them in court and get a judgement. With a judgement, they can collect by so many methods.

Jul 03, 2009 10:10 AM

Adriana West

Home Expo Gallery, LLC (Keller Williams) - Roswell, GA

Thanks for that great comment. Certainly, when they signed the paperwork they agreed to the debt. What I wanted to share with everyone is that now lenders who do Lines of Credit are requiring both a lien AND a personal guarantee - just because of the current economic situation. Borrowers need to be aware of this before signing.

I also think that it was not appropriate of the bank, whatever the paperwork says, to grab the son's scholarship money.

But the main lesson in all of this is to avoid Deficiency Notes completely if you can. Of all my short sales I have never had a client sign a deficiency note.

Hope you are all having a happy 4th of July!

Adriana

Jul 04, 2009 02:50 AM

Just realize that equity line of credits can be recourse loans and have always been (no such thing as both a personal and secured lien). Therefore there might be times where they can still go after the buyer even when the property forecloses. Know the types of loans available and what your client has to better help them. As it is, you are preaching to the choir.

Happy 4th to you too.

Jul 04, 2009 07:03 AM

Anonymous

kim

I am extremely under water in my mortgage. I have tried originally to modify my loan but that was not good then we hired a realtor to assist in a short sale. I had a buyer within the first month. Well, now they are approving the short sale but want to issue a deficiency amount for the difference. We are talking $170,000. I am so confused because I do not know what to do. I even just hired a short sale/loan modificaiton attorney to step in and they go no further than my realtor did.

Any advise would be grealy appreciated. We are a very distraught family trying to find the best answers to this nightmare.

Aug 01, 2009 05:55 AM

Kim:

I can't give you specific advice for your situation in this forum for several reasons. Primarily because I don't have enough information on the details of your situation, and if even if I did offer specific advice, someone in other circumstances might follow it and get themselves in worse trouble because their situation was not yours.

I suggest that you give me a call at 678-534-2718 and I'll do what I can to help you with your situation. First, there is no cost or obligation to such a call. Your information will be safe with me, I deal with these confidentiality issues every day.

I can only operate in Georgia, so if you live in another state I might be able to help you by referring you to a specialist who could give you the same kind of help I would. I have a network of agents in several states who work with me. There are so many out there who take advantage of this situation and provide no help - examples I've called out in my past blogs - that you almost need to be an expert to know when you're dealing with one. It sounds as if you've fallen into the hands of this sort.

Each state has different laws and requirements when it comes to short sales and deficiency notes, and some banks have found loopholes around some of the laws to get them anyway. If the lender pursuing the deficiency note is because of a line of credit you signed up for after purchasing the house, they have additional methods as well.

The upshot of all this is that anyone would need far more information in order to help you. Private information you should certainly not post in a forum like this. But give me a call and I'll make sure you get pointed in the right direction.

Aug 01, 2009 06:57 AM

Jeff Rainwater

John L. Scott MPV - Maple Valley, WA

Bank of America will never give full settlement language. Regardless of whether you sign the note, their language will always be "may or may not" come after you. And when you question them as to why they wont give full settlement languge... they say "There are reasons we don't"....translated too...WE WILL COME AFTER DIFICIENCY.

The banks have 6 years to collect on difficency....THEN they have an option for a ten year extention...TWICE!!!! That means they can come after them for 26 years for that money.

One of the main reasons for doing a short sale is you can often get full settlement language. Always request it. Sometimes the lender will request a payment like 10% to give full settlement language. Sometimes they wont. If they require 10%, I'd encourage your clients to sell the car and drive a clunker for a few years because its better off doing that and getting full settlement lanaguage than having them come back 10 years later and milking them for a $40,000 difficiency.

Jan 23, 2010 01:19 AM

that is a good point though too....they should use a different bank....and take it one step further by getting a fireproof safe and building up a stockpile of a few grand in that safe in CASH so that if for any reason they have an issue like this and they get their bank account whiped out, their bills won't hit a screeching hault.

Jan 23, 2010 01:22 AM

Jeff: But if they have a "few grand" to put into that fireproof safe (really -- if they could even afford the fireproof safe) they would not and should not qualify for the short sale.

Jan 28, 2010 07:45 AM

Do Your Clients Get Deficiency Notes?

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