What did I say on December 18th? Lender's can't afford just to completely write off all the losses from short sales and not giving 1099's to the bailing home owners. So what's the new trend in short sales? Promissory notes the homeowner is to sign to indemnify the lender against the loss. No thanks, I'll take my 1099 and take my chances with the IRS.
It's not coming - it's happening.
AGENTS: When you are making an offer on a short sale you will need to be aware of this. It's nothing new but it's "the trend" among lenders because of the change in the law with 1099's. It's not your responsibility as the buyer's representative but you will encounter it. I was at a meeting with Lane Bailey this morning when an IM came on my Treo that a buyer is wanting to back out of a "cleared to close" short sale because he feels so bad for the seller because the lender is requiring them to sign a $25,000 promissory.
BUYERS: This doesn't affect you it affects the seller. It doesn't affect the deal unless the seller refuses to sign a promissory note and then it could kill the deal or not. Take it one step at a time and you may only want to prepare the seller for it as in it being a possibility until we see how prolific this becomes.
I have been doing and teaching short sales for many years. It seems like now there are short sale "experts" at every turn. Taking a course or being an agent on a couple of short sales does not make one a short sale expert.
17 Comments on Project: KNEEJERK - Short Sales Elimination of 1099 Creates Promissory Note Dilemna
JAN
16
2008
Ken, what a great favor these lenders are doing for sellers by providing them with the opportunity to sign a promissory note! With friends like these, who needs enemies?
I have a better idea: the sellers can pay their payments like they already promised. Get rid of the BMW or Lexus, stop eating out, get a second job, do what their parents did and take care of business. They signed the loan papers and they KNEW they had an adjustable rate. Greed got them into the deal and hard work can get them out. It's crunch time. Every time somebody gives up it doesn't just cost the lender. It costs YOU and ME. Higher interest rates so lenders can recover, higher mortgage insurance if we have a loan over 80% thank God I don't and less available funds to finance your next commission check. I know there are real circumstances where people have real and incurable problems - but NOT the majority - far from it. I will stop feeling this way when ONE PERSON produces EVIDENCE that a borrower didn't know they were getting into an adjustable rate mortgage or that the loan officer held a gun to their head while they were signing.
n light of the info we talked about earlier (70% of foreclosed apps having false info), I can't blame the lenders for beating the borrowers. Borrowers need to suck it up and make good their word. Maybe if we are lucky, homeowners will start to see that the people that just fold up and let the foreclosure happen are the new pariahs.
Lane - that's absolutely correct - as many as 70% of loans facing foreclosure were issued to applicants making or endorsing false statements on their loan application or in their loan documentation. By the way - I saved the deal with about a 2 hour additional examination of the transaction and a couple of phone calls. There are now two more happy agents in this world who WILL remember my name!
Ken, I just turned down a short sale listing earlier this week. The guy bought the house last year using a 100% stated income, low doc loan. In order to qualify he of course lied on his income. He added his girlfriends income into the deal. About 6 months after moving in they broke up and he moved out and back in with his parents. The girlfriend is still living in the house and they quit making payments about 4 months ago. My response was, "NO SHORT SALE FOR YOU!!" :)
This is nothing new. VA "Compromised" sales have always involved an agreement between the Verterans Admin and the seller whereby the seller agrees to pay the deficiency to the VA.
I'm going to post something short about this. There are too many folks who seem to believe that the shrot sale is FREE to the owner.
So what you are saying is that lender's will require a promissory note to be signed at close that the buyer will be given a 1099 if they have to sell by short sale? Lenns says it's been done for years on VA loans, which I have never had a buyer use.
Bryant - at least you didn't put sardines on her muffler.
Lenn - yep, I haven't seen it in a while but you are 100% accurate on that. As normal.
Missy - the buyer wouldn't use what Lenn is talking about. It's not the buyer. Here is what we are saying: Until a few weeks ago the seller (home owner) would get a 1099 in the amount of the deficiency (difference between payoff and short sale price) and that was it. In the future (and obviously starting now for sub-prime and FNMA and FHLMC defaulted loans) the lender will require the seller to sign a promissory note to indemnify the lender for the loss. Call me if you don't follow that.
Sandra - there are way too many things about short sales that consumers and agents don't fully understand and agents generally know way more than consumers. What kills me is how many clueless people are "teaching" short sales these days!
I don't think singing the promissory note would be a problem if they didn't want is secured with Real Estate the seller owns. Any advice on this situation? Will the seller loose there home if they file bankruptcy at that point?
Amber - if it's really bad enough for the homeowner to file bankruptcy (have nothing to divest like expensive cars, too many big screen TV's etc) then I would leave it to the courts. As far as not having the promissory note tied to real estate it really doesn't matter because if the home owner doesn't pay as agreed then then it's possible even with the new laws they can't get protection under bankruptcy. But let me make it perfectly clear that I am not an attorney and I do not give legal advice.
The Promissory note becomes unsecured which can be included and discharged if they file bankruptcy. Short sale is not going to benefit the seller because it is easier for the seller to file the bankruptcy. The bank will see that and they will be stuck with another load of homes this year.
Stella - it can be included and discharged but any assets and possible future assets or income (depending on the bankruptcy court ruling) may be attached for the purpose of making the lender whole - yes, once again the lender will be - for lack of a more appropriate term - "stuck". Thanks for your comment!
Brian - that's an amazing compliment which I treasure (but doubt!) I believe you'd be just fine without any of my help. I would certainly love the opportunity to handle the financing for some of your deals - we are familiar with and licensed in Florida.
Oh fine, just when I start to agree to taking short sales! Getting so much debt forgiven was so surreal for too long!
Golf clap for those that are sucking it up and making it work. I wonder if anyone understands rental reality here in the Las Vegas valley who finds it so easy to walk away or short sale the property.
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What did I say on December 18th? Lender's can't afford just to completely write off all the losses from short sales and not giving 1099's to the bailing home owners. So what's the new trend in short sales? Promissory notes the homeowner is to sign to indemnify the lender against the loss. No thanks, I'll take my 1099 and take my chances with the IRS.
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