PROMISSORY NOTE ON SHORT SALE - SIGN OR NOT?

Thank you for your comments.  I really want to get to the bottom of this myself.  I've been studying the reasons behind the note meaning the formula used by the MI company that warranted this fill in the blanks style note that does not need a notary.  I do agree that the ultimate decision will be up to my client and her attorney, not me. 

FYI - This is a purchase money first trust deed mortgage.  No second involved.  However, the seller purchased the property with only 3% down, hence, MI insurance was required by the underwriter.  I do not have the terms of the MI agreement which should outllne it's monthly premium, coverage for the lender in the event of default, etc.  My client has put it away somewhere and cannot locate it.  It does not state the terms in the recorded trust deed.

In California, a recourse loan such as a refinance, a HELOC or a 2nd trust deed taken out after the original purchase can be collected through a judicial foreclosure and subsequent deficiency judgment against the borrower.   The borrower may be hit with a double whammy 1099 for the forgiven amount of the loan defined as income to the borrower.  A property foreclosed on through a non-judicial foreclosure or trustee sale does not risk the chance of a deficiency judgment as California rules against deficiency judgments on non-recourse or purchase money loans.

Steve, you make a good point.  Is it legal or feasible for any lender to use an instrument such as this promissory note to manipulate a non-recourse debt into a recourse debt?  I suppose I shall see here any day when I finally have a response from Aurora.

Thank you!

Dear Darlene,  Interesting that you posted your question today as I just researched this issue in depth yesterday evening for another blog site I participate in.  I have included a post written by Steve Beede, a California Real Estate Attorney and advocate for homeowners and investors of real estate. 

In his June 21, 2010 post he goes on to say . . . In another more incredible action, Wells Fargo has actually filed a lawsuit against a Borrower without even foreclosing!  In California (and most States), a lender who makes a loan which is secured by a lien against the real estate must foreclose first before they have any right to pursue any claim against a borrower for a deficiency. This is called the "Security First Rule". In this case, Wells Fargo made a home equity loan to a property owner which was secured with a Deed of Trust against the property. The owner subsequently defaulted on the loan. But, instead of foreclosing, Wells Fargo filed a lawsuit against the borrower, failed to identify in the suit that the loan was secured with the real estate, and instead have treated this like an unsecured personal loan. When confronted with this breach of California's real estate laws, Wells Fargo (through their attorney) has refused to dismiss the lawsuit and comply with the law.  While this reaction demonstrates a very troubling arrogance, it is equally troubling that their attorneys would knowingly violate California law.  Sadly, in this case, the property owner cannot afford to challenge Wells Fargo's actions in Court.

There is no question that these are tough times for lenders as well as borrowers. The lenders created a house of cards by making loans that should never have been made to borrowers who could never have afforded them if they were priced according to economic reality. It could only have worked if real estate prices continued to climb forever. But the real estate economy never works that way. Booms are always followed by busts usually every 6-10 years. The lenders knew this even if the gullible borrowers did not. 

This reality doesn't excuse borrowers from defaulting even if it was foreseeable. The laws on breach of contract are clear... don't pay and you'll be foreclosed. But the borrowers distress certainly doesn't give the lenders such as Wells Fargo any legal right to disregard the law simply because they think the borrower can't afford to stop them.  It is exactly this arrogance that has caused Americans to attack Wall Street for its greed and lack of concern for the damage caused to its investors.  In the lending industry, Countrywide paved the way for the economy's collapse by promoting subprime loans.  Wells Fargo in contrast acted responsibly and maintained their reputation for sound lending. Now however, Wells Fargo's apparent lack of concern for the law may undermine not only its reputation and further damage its borrowers, but may also promote a broader distrust of the lending industry at a time when trust and credibility are needed most. 

Now, back to your question.  To understand your situation further, who actually holds the title to your home currently?  Did the first foreclose therefore extinguishing the second through a trustee's sale?  And the second trust deed holder was secured by your property as a purchase money loan meaning a loan taken out in order to purchase your home originally?  Such as a "piggy back" loan or 80/20 loan.  If that is the case then you are protected under the anti-deficiency laws governed by the State of California as we are considered a non-recourse state. 

SB 1178 is on the assembly floor ready to be signed into effect June 2011 which includes purchase money loans that have been refinanced in order to procure a lower interest rate, etc.  It will not include take out financing borrowers pulled from their equity in order to purchase cars, boats, vacations or other items that did not directly pertain to the home itself. 

By the sound of it, you should be in a position to flick that bug right off your table in regards to owing them any money but the real estate laws are very complicated and I cannot come close to represent that I have the kind of understanding of the law that a professional real estate attorney would have.  Please seek legal counsel to rectify this dilemma you are in.  Stop the harrassment now!  Good luck to you.

Dear Christine, I am sorry for your confusion regarding these matters but rest assured you are not alone.  The statute governing recourse vs. non-recourse varies from state to state as each state as each state does not have the same anti-deficiency rules as we do in California. 

I'm not equipped to answer your question because I am not an attorney specializing in real estate law and I do not know what state you are in or what lender you are referring to as their jurisdiction may be affected by the rules in the state that they are located in.

What I can provide you with is what seemed to work for me and my seller in this situation.  My client refused to sign the promissory note as it made no sense to.  It was an unreasonable request made by the lender.  She did consider signing it with no intention of paying it only to include it in a bankruptcy filing, however that would defeat the whole purpose of the short sale with regards to her attempt to regain her credit worthiness sooner rather than later.

After my client decided that she would not sign the note our buyer backed out.  We immediately received a new offer to purchase which I submitted all over again with updated financials, hardship letter, short sale package, etc.  This time around she was much more destitute than our first submission portrayed.  The first financials indicated that she still had some reserves in the bank.  This time around she had none.  We received our short sale approval with no request for a promissory note and closed escrow. 

With other short sales I have countered back to the lender detailing the seller's inability to contribute to the closing or short sale and the lender has withdrawn the request and we moved on.  It is not your decision to make and you need to be sure that the seller consults with an attorney regarding all legal ramifications of her decision.  I can provide some attorneys that I work with if you email me directly through a private message.  I hope that helped!  Good Luck to you!