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SHORT SALE APPROVAL LETTER MISREPRESENTATIONS - PROMISSORY NOTE RELEASED?

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

My law practice entails a significant number of clients that come from other "short sale experts" - both attorneys, title companies and experts come lately.  Sometimes (ok, many times) the client has arrived because of a troubling experience. Here is an example caused by misrepresentation that does not sit well with the client.

Below is a an approval letter from Third Federal that states that the lender will accept about $41,000 in the short sale provided certain conditions occur.  The letter closes with no more than, "...Third Federal will release the mortgage on the above referenced property."

The often asked question of the short selling borrower is, "Is this a release of my liability under the promissory note?"

The answer is not easy to provide and many factors need to be examined.

First, does the letter state that the remaining liability for payment of any deficiency or of the promissory note, is being released or forgiven? In this letter the answer must be, no.

Second, does the letter specifically state that the mortgage is being "satisfied"?  Satisfaction of a mortgage usually (but does not necessarily) includes language that the underlying obligation (the promissory note) is paid in full. Better language in the letter would be the mortgage is being "fully satisfied" or even the "mortgage and note are being satisfied".  None of that language is present in this letter.

The borrower client in this letter decided to do dig around the Internet to find out what liability could exist based on the language in the letter.  The short sale had been negotiated by a title company associated with a law firm in Boca Raton, Florida, and the borrower told me that the law firm was being paid at the closing - so the fee was contingent on the deal closing.

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The email exchange moves from excitement of getting the approval lletter to questions about it. Out of the box on October 21 the borrower inquires about the debt (promissory note) being settled in full, and that a full settlement is of prime importance to this borrower.

The initial response is not an answer but throws out another question - "... why would the bank give you a letter that says that what you are asking for (the release - Ed) before the closing?  If that letter said that you already have the debt forgiveness before they receive the funds why bother to pay them"?   This response is clearly twisted, but I cannot imagine a knowledgeable short sale "expert" dispensing this type of response.  Thankfully the writer suggests the borrower call the bank.  The additional emails state that AFTER the closing the bank will issue a letter to the borrower that the debt is forgiven.  The short sale "expert" says you do get the forgiveness letter, but just not before the closing.  Has any reader of this blog found that to be the case?  I haven't as of yet.

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The final response email attaches the 2007 Mortgage Debt Forgiveness Act.  The MDFA does apply to forgiven debt, but the use of this information and "the beauty of all this" is totally misleading and skirts the question about whether or not the debt is being forgiven by the letter that does not contain that specific statement.

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I do want to point out that some bank letters say that the lender may pursue the deficiency and those banks will simply not issue any clarification or back-off of their "may pursue" statement.  However, I have noticed that usually the recorded mortgage satisfaction or mortgage release specifically states that the lender is "satisfying the lien of the mortgage having received payment in full of the indebtedness". 

My clients thus far have successfully used a copy of the lender's own recorded document (the Satisfaction of Mortgage or the Release of Mortgage) to end calls from the lender's collection department for those calls that may begin after the closing. These documents seldom make it to the Broker who handled the sale as it is typically a title underwriter reviewed document several weeks after the closing.

What has been your experience?  Remember, unless the deficiency has been forgiven, waived or satisfied in writing, the lender retains the right to collect the unpaid promissory note until the statute of limitations has run.  See FORECLOSURE DEFICIENCY JUDGMENT or SHORT SALE PROMISSORY NOTE or BANKRUPTCY - REVISITED

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

Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Sam

I see this often.  The letter you signed was before the deal closed and it was notice that the short sale if finally approved may provide that the lender can collect the deficiency.

Notwithstanding the acknowledgment of the lender's rights, the lender by giving the full satisfaction of mortgage including the indebtedness (the Note), has provided to you a full waiver and satisfaction of your indebtedness to them.

We have seen the lender collection department proceed to contact a borrower for funds notwithstanding this provided release of indebtedness.  In our cases we simply provided to the collection department the full satisfaction and they stopped calling.

Anyone else with a different experience?

Jan 18, 2010 02:51 PM
Anonymous
Sam

Thank you Richard for the good news maybe !     I was negotiating with the LENDER COLLECTION department last week on trying to settle the debt with 10% payment to them......... because I thought I had to since I signed the " dreaded charge-off collectible balance letter" prior to closing....but they would not accept my offer.  Then I looked in public records and saw my "Satisfaction Of Mortgage" as stated above.      So perhaps I do have some defense here now.... I hope.   I lost sooo much money on trying to hang onto the property for two years and was hoping to settle...but now maybe I don't have to borrow the money to settle and just provide them with the satisfaction of mortgage.  Hopefully it will make it all go away....    does this mean I may get a 1099C for the deficiency ?

Also - on the charge off collectible balance letter I signed prior to closing...there are no terms, no payments indicated, no nothing...just a letter stating "they will agree to the short sale for xxx amount of dollars and upon receipt of xxx amount of dollars they will Release the Lien and charge off the remaining debit as a collectible balance and our recovery dept will in touch with you to make payments on this balance"....etc.         then they changed the loan/account number to a different loan/account number recently from the original loan number  ( I was notified by mail)  and now my credit report shows I have a closed account with a charge off mortgage with a one year term with the new loan/ account number plus almost $33,000 more than what the original charge off mortgage credit report said with the original loan number.      ??    What are they doing ??      

 

Jan 19, 2010 07:55 AM
#13
Anonymous
Sam

Richard - one more question I thought of after I sent the previous one.....the charge off remaining debit as a collectible balance letter" prior to short sale closing......that is not the so called "promissary note" is it ?? 

what actually is this promissary note every one is talking about ?  I never signed anything other than the one page short sale approval letter with the language as stated above in my previous posting..

look forward to hearing back from you or anyone who is reading these blogs.

Richard...you are so much help in understanding and clarifying these stressful situations !    

Jan 19, 2010 08:47 AM
#14
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Sam

The issue of the promissory note is an interesting one.  If the terms of the new obligation to pay are different than the original promissory note that was secured by the mortgage, then you need to enter into a definitive agreement as to what those terms are - this can be a modification of the existing promissory note or it can be a new substitute promissory note.

Remember, the old promissory note remains unless satisfied or substituted with a new written obligation.

The letter you signed agreeing that the lender may pursue a deficiency (unless otherwise agreed) is not a definitive separate agreement and does not change the terms of the existing promissory note.

Of course seeing the whole package would make providing some advice easier.

With the above being said, please understand that this response is a general comment about the law and is not expressing a legal opinion about the very general fact pattern raised herein.  As such, this brief response may not be relied upon for any purpose.  Please consider obtaining formal legal advice if you have a specific fact pattern with respect to which you need an answer.

Jan 19, 2010 11:56 PM
Anonymous
Sam

Thank for your comment Richard about the promissary note explanation.  Much thanks for that clarfication.    I totally understand these are not legal opinions and only a general comment about the law.

Please read my previous post dated January 19th, above the promissary note post questions AND in the 2nd paragraph starting with the words "then they changed the loan  account number..." as I am curious to get your insight about the lender switching around account numbers and that whole mess going on now.  I don't know what they are doing.

once again....look forward to hearing from you.  

 

Jan 20, 2010 07:20 AM
#16
Anonymous
Sam

I forgot - one more question for you Richard....do you only practice and serve the west palm beach area for clients ?      

Jan 20, 2010 07:23 AM
#17
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Sam -

Please contact me at my office - conducting this private conversation on the blog is inappropriate for the privacy you need.   561 689 6660.

Jan 20, 2010 02:24 PM
Jeff Rainwater
John L. Scott MPV - Maple Valley, WA

If they intend on giving full settlement language AFTER closing, and they say it's not LEGAL for them come come after them......Then why in the world would they not simply state in writing that they "will provide a statement of final and full satisfaction at closing if those requirements are met" ? I mean isn't that basically what they are saying in that conversation? Shouldn't their promise of her getting that at closing be good enough to hold them to it if they don't follow through on that promise?

Jan 23, 2010 03:53 AM
Kelly Willey
Coco Plum Real Estate, Kelly Willey, FLORIDA KEYS - Marathon, FL
Florida Keys Luxury Sales, Marathon, Key Colony

My procedure is to advise my short sale sellers to contact their attorney before accepting the short sale approval. The banks are rascals and there are too many ways of wording this. Best for sellers to have legal counsel so they understand exactly what is happening. What do you think about those sellers filing bankruptcy if the banks come after them for the deficiency?

Jan 23, 2010 12:56 PM
David Dee
RMX REALTY - Alhambra, CA
Real Estate - San Gabriel Valley (L.A.) & N. Orang

From the desk of David Dee,

Richard, good blog. The topic of deficiency judgment is what catches many borrowers off guard. Banks can be tricky in their approval letter.

Feb 02, 2010 05:11 PM
Brian Sharkey
SharkeyRE LLC - Singer Island, FL
SharkeyRE

Thanks for the blog Richard.  Hope to see you soon.  Sharkey

Feb 04, 2010 08:47 PM
Anonymous
Frank M

I'm in the middle of such a gray area, myself.  Here in FL, short sale.  The lender has said in their approval letter that upon receipt of the funds from the short sale in the approved amount they would send the borrower a "Release of Lien" and a "Discharge of Mortgage".  No mention of deficiency or a new promissory note.  To me and what I have been able to determine, that "discharge" means satisfaction.  If, after close, they modified the terms or included wording to the effect they reserved the right to collect, would one be able to argue deceptive practice or fraud?

Apr 09, 2010 05:01 AM
#23
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Frank

I wouldn't want to have to convince a judge on that - You'll need experts and the bank will have experts to testify as to what it means.  Generally plain meaning is what prevails.  You'll need some extrinsic fraud - like a smoking email to show you proceeded with the lender provided knowledge that you were being relieved of the deficiency.

Some lenders have a policy (no one has seen it in writing) not to collect.  Is that policy something you have knowledge of and used to make your decision to follow thru with the sale?

I am not saying don't do it - but you need to know that what you think and what the judge thinks could end up being something different - if it ever comes to that.

Apr 10, 2010 03:16 PM
Anonymous
Frank M

I agree it would be a stretch.  That last question was more or less speculation on my part.  My thought was that in an environment in which a common practice was to require a promissory note at closing for any deficiency balance if the lender chose to collect same,  wording that would imply release and then a different type of collection effort might at least be considered somewhat shady.  Yes, a grey area.   The wording of the draft short sale agreement includes the terms "release the first lien position", "we will issue a discharge of mortgage to the borrowers".  To me - I am not a lawyer - the two components of a mortgage are a lien and a promissory note.  OK, the lien is released otherwise the sale could not take place; the discharge of mortgage, unless one uses a "special" form other than the customary ones, is satisfaction of the mortgage.  

 

So, I guess my real questions are if the above "definitions" of mortgage and discharge are within the realm of reason and, if so, should a lender try to sell off debt to a collector (no promissory note would be signed at closing) that there might be considered some deception.  No, I'd not want to be in the position of arguing that.

Apr 11, 2010 07:12 AM
#25
Anonymous
Pat

Hello,

I just completed a short sale with B of A in July.  There was a deficiency of twenty thousand dollars.    they did not ask us to siagn a note. the satisfaction filed with the county said full payment & satisfaction of said note & mortgage deed, and surenders the same as canceled, and hereby directs the clerk of said circuit court to cancel the same record.  Does this mean they will not try to collect deficiency?  Thanks for your input.

pat

Aug 23, 2010 02:07 PM
#26
Anonymous
Dawn

i completed a short sale a year ago in Florida and now i'm trying to buy the house i live in.  I received the satisfied mortgage letter with no additional requirements.  The letter "ackinwledges that the lender has received full payment and satisfaction of the same and in consideration thereof does hereby cancel and discharge said Morgage". My problem is that they have placed a tagline on my credit indicating that it was a shortsale.  Does this letter give me enough to fight the tagline?

Apr 09, 2011 03:57 AM
#27
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

it should be reported as a paid for less than the full amount of the debt.  That is a short sale and it is reported correctly.

Apr 09, 2011 03:51 PM
Anonymous
Nancy Tedeschi
I am in New York and the statue of limitations to come after someone on a deficiency judgment after a foreclosure sale is 90 days, do you think that would carry over to a short sale?
Oct 15, 2011 07:23 AM
#29
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Nancy - don't confuse court rules on procedure with statutory times for enforcement of a right of action.  Although not a NY attorney, I think that the note still survives the mortgage foreclosure as being not fully paid, and a new action can be brought just on the note for its unpaid balance.  That statute of limitation would start on the date of the foreclosure sale.

Oct 15, 2011 08:01 AM
Anonymous
T

I short sold my home back in Nov of 2011.  To my understanding the Mortgage was fully satisfied.  When I looked at the Satisfaction of Morgate online, part of it read as follows:

"Holder hereby certifies as to the satifaction of said mortgage, without satisfaction of the indebtedness secured by said mortgage, and hereby directs that the same be canceled of record."

Does "without satifaction of the indebtness" mean I still owe the debt?

Thanks

T

Mar 26, 2012 02:05 PM
#31