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Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios

Basic Primer - the Mechanics of a Mortgage Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios-

We get so many questions about having a "deficiency judgment" entered and how it differs from other possibilities in a deed in lieu of foreclosure or short sale, that a refresher article seems appropriate for Activerain. If you are unsure of what a Short Sale is, then first read the Back to Basics - a Review on Short Sales .

This article is written based on Florida law, but most state laws are similar. 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.

The Law of a Mortgage Foreclosure:

A mortgage foreclosure (some incorrectly call it a "Lis Pendens") is filed by the lender when the Promissory Note that is secured with a Mortgage on some real estate (usually the home) has not been paid on time (the "default").

Let me clarify an important issue that will have meaning later. A "Mortgage" is NOT the obligation to pay the bank. The obligation to pay the bank back the money it loaned along with interest is called the "Promissory Note". The bank makes two types of loans. Secured loans are when the bank wants the Promissory Note to be collateralized with something of value. In real estate that "something of value" is usually a "Mortgage" and it collateralizes or secures the Promissory Note with the house or other real estate. So when we say only the word "Mortgage", technically you are referring only to the security document and not the Promissory Note. Likewise when we say the words "Promissory Note", we are referring only to the obligation to repay the bank.

If there was only an "unsecured" Promissory Note and there was no Mortgage, the suit would demand payment of the Promissory Note and then the judge after hearing the evidence, would likely issue a Final Judgment against the borrower and in favor of the bank for the amount of the unpaid Promissory Note along with accrued interest, late fees and court costs and attorney fees. The Final Judgment would also be entitled to interest (in Florida that rate is now 11% a year) until the Final Judgment is paid in full.

A mortgage foreclosure is actually a four step process.

The first step is to file suit (called the "Complaint") on the non-payment of the Promissory Note. (Yes, there are other reasons for a foreclosure suit to be filed, like an unauthorized transfer of the real estate, or non-payment of the real estate taxes, but we are going to focus on not paying the Promissory Note). An action (the suit) is filed at the courthouse and it consists of 3 documents. The first is a Summons, which directs you to answer the Complaint. The second is the Complaint, which describes why the bank is entitled to the relief it is asking for - the payment on the Promissory Note. The third is the Lis Pendens, which puts the public at large on notice (since the lis pendens is filed in the public records where the property is located) that anyone dealing with the property should know that a claim has been made against the property in the Mortgage. (Lis Pendens literally means "pending litigation" and is one of those fancy Latin words that we lawyers banter about).

Step One: The Complaint will describe that there was a Promissory Note signed by the borrower to evidence that it was to repay the bank the money, and that to induce the bank to make the loan the borrower also signed a Mortgage on some real estate that promised that if the Promissory Note was not paid, the real estate could be sold and the proceeds would be used to pay the Promissory Note. It will also say how much is unpaid and what additional money the bank may want for the non-payment of real estate taxes, for example. It will finally make a "demand", which will ask that if the borrower does not make payment on the Promissory Note to the bank, then the real estate should be sold under court supervision at a public auction, and if there is insufficient money bid for the real estate, the court should give to the bank a judgment for the shortfall (the "Deficiency Judgment")

Step Two: After statutory time periods have run (for example, 20 days to answer the Complaint, the bank can more for a final judgment. This is usually accomplished (in Florida) with a Motion for Summary Judgment, or similar name. Another 20 days must elapse before this hearing can take place, once the motion is filed. In reality (at least in Palm Beach County right now) that time period can be several months before a court date on the Motion for Summary Judgment can take place.

At the Motion for Summary Judgment hearing the bank must prove that there is a valid Mortgage securing a valid Promissory Note and that it is unpaid. The judge will then issue a Final Judgment of Foreclosure that says (1) if the borrower does not pay the bank the amount the bank proved is due to the bank within usually 30 days, the real estate is ordered to be sold by the clerk of the court to the highest bidder, and if the highest bidder bids less than the amount due to the bank then the bank can come back to court and request a Deficiency Judgment. It is important to note that the Final Judgment of Foreclosure is NOT a money judgment against the borrower! However, depending on step three below the bank can move to obtain a money judgment later on.

Step Three: Assuming that the borrower has not paid the bank to the bank's satisfaction during that 30 day period, the public sale (the "foreclosure sale") will occur. It is conducted by the Clerk of the Court and it usually occurs "on the courthouse steps", but more usually in a courtroom or meeting hall or even in a large hallway in some courthouses. The property is announced and bidding starts at $100 and goes up from there. The bank is able to bid for the property and it will do so to "protect" the collateral up to the amount (and usually beyond) the bank has determined the property is worth. Usually the bank will bid up the amount of the judgment it received from the judge. (This is great news for the borrower, but that is another article I need to write). More often than not the property gets sold to the bank for a mere $100 and there are no other bidders at the foreclosure sale.

Step Four: I am now again making as assumption. The assumption is that the bank ended up with the property at the foreclosure sale by bidding one hundred dollars. In that event the borrower still owes the bank money to satisfy the promissory note. The amount of the remaining balance is what is in question.

To figure get the balance of the monies the bank must go back to court to ask the court to award it a "Deficiency Judgment". The amount is what is in question and the amount is measured using various rules. In our example the bank bid $100. The court is not going to say that the house was worth $100 and $324,900 is still owed. For our assumption and as an example we will say that the property is worth $200,000 and the foreclosure judgment is for $325,000. That means the court will ask for an appraisal of the property as of the day of the foreclosure sale and the judge will likely give it that value. So it will be the appraisal value less the judgment amount which will equal the Deficiency Judgment. If the appraisal is $250,000, the Deficiency Judgment would be $75,000. Now if there was real bidding at the foreclosure sale the judge could consider that bidding and instead adopt the selling price under the competitive bidding process that occurred at the foreclosure sale. Then the Deficiency Judgment would be the difference from the foreclosure judgment and the winning bid amount. If the competitive bid was $240,000, then the Deficiency Judgment would be $85,000.

A little issue that comes up is how long the bank has to get the deficiency judgment. The Florida Statute of Limitations (time to enforce) the Promissory Note is 5 years from the time it went into default.

There is also a rule on how long a plaintiff can keep open a lawsuit that has no activity. That rule says after 1 year of inactivity, the lawsuit can be dismissed by the court. The rule is referred to the "Failure to Prosecute Within One Year" rule. IF the court dismisses the lawsuit after one year and before the bank asks for a deficiency judgment, it could be argued that the bank cannot again seek to enforce the promissory note. This concept is untested in the courts of Florida, but see the next paragraph.

Florida courts have noted that a claim for deficiency in a foreclosure action does not accrue until the foreclosure sale has occurred. Thus the five year period starts at the time of the foreclosure sale (not the time of the default). The courts have not addressed the one year "failure to prosecute" issue, but it is likely that a decision on it would consider that a deficiency action is separate and could be filed as new action based on the accrual of the event at the time of the foreclosure sale that resulted in the deficiency. (See Chrestensen v. Erogest, Inc., 906 So. 2d 343 (Fla 4th DCA 2005). So notwithstanding that the court could dismiss the case after one year, that dismissal would not bar the re-filing of the claim during the 5 years after it accrued. [UPDATE; Florida case law now says that the time to file a claim or for a deficiency judgment or new suit for amount of balance of note has a starting date as of the foreclosure sale date.]

Almost every client I meet with first starts out wondering if they should "just give the property back to the bank". I tell them first off that, "it ain't so easy."

A Deed In Lieu has many prerequisites. The first is that the property cannot reasonable expect to be able to be sold within a reasonable period of time. The second is that the bank to receive the Deed In Lieu must be the only lienor. This means there can be no second mortgage and the borrower must be clean of any claims or judgments from other creditors. In other words the title to the property must be "clean" except for the bank's mortgage. (Note that if the bank with the first mortgage also has the second mortgage or HELOC, the Deed In Lieu is still a possibility.)

The issue becomes what becomes of the disposition of the Promissory Note? There is documentation in a Deed In Lieu that is very important to the borrower. This documentation can be an agreement in conjunction with a deed to the bank, or it can be written right into the deed to the bank from the borrower for the subject property. In any event the document(s) must provide that as part of the consideration for the giving the property to the bank the Promissory Note is satisfied in full. If this language is included, then there is no further liability of the borrower to the bank and no lawsuit to enforce the Promissory Note can occur. Most of all, banks don't like to have to sell your property so they don't like taking property to have to manage and sell. It is expensive to take in your property and unless your property is worth more than the amount the bank loaned to you, the bank is likely to only loose more money than if you sold it for them. That is why the do short sales and deeds in lieu.

Short Sale Negotiation:

A short sale by its nature does not encompass a law suit to foreclose the Mortgage or a lawsuit to enforce the Promissory Note and that is one of the primary advantages of this method of loan workout. On the other hand, there is often a Mortgage Foreclosure Suit already in progress when a short sale is attempted to be negotiated. [It is important to realize that a short sale "attempt" does NOT stop a Mortgage Foreclosure Suit. The bank may instruct its attorneys to delay acting on certain aspects of the suit - usually getting the Foreclosure Judgment or if one is issued, then delaying the actual conducting of the Foreclosure Sale].

The short sale does often times result in a "Release" of the lien of the Mortgage but not a "Cancellation" or "Satisfaction" of the Promissory Note. It is this remaining financial obligation that is the crux of so much discussion about "1099's" and forgiveness of debt. Sellers Always Have Income is a comprehensive article on the subject and also deals with recent legislation on how income does not have to be recognized.

Unless a release or satisfaction of the entire Promissory Note or in the case of a property with more than one loan, then each Promissory Note is obtained, there remains the ability of the bank or banks to sue the borrower for the balance of the unpaid promissory note. In the case of a 2^nd Mortgage, this might be the entire amount of that loan if the 2^nd Mortgage bank took nothing so the short sale could succeed.

The documentation regarding a short sale is very important. The borrower needs to know what further obligations could be in the future as a result of the short sale. Like the Deficiency Judgment statute of limitations, the balance of the Promissory Note must be enforced within 5 years of the default or the demand for payment by the bank. The rule about the one year dismissal for lack of prosecution does not apply to the short sale scenario.

If the unpaid balance of the Promissory Note is enforced by the bank, then it can file a lawsuit against the borrower (if done within that 5 year period) and the result will likely be a Judgment for the payment of money in the amount of the unpaid portion of the Promissory Note. Many persons that short sell and do not get a release of the Promissory Note utilize an offer to pay back all or a portion of the Promissory Note balance with a new unsecured promissory note. This new promissory note replaces the old Promissory Note. The new promissory note can also be enforced by the bank in the same way as the old Promissory Note, but the time to enforce it will be based on whatever new default might occur if the terms of the new promissory note are not followed by the borrower.

The Second Bite from the Apple

An interesting twist is being used by the banks. They take the now unsecured remaining balance of the promissory note, or the new negotiated promissory note, and sell it to investors for 5 to 10 cents on the dollar. Then the new investor tries to collect on the promissory note. This is mentioned in my article on Negotiated Paybacks. Obviously this represents an opportunity to negotiate the remaining balance a borrower may have on the old loan - sort of a second bite at the apple.

Opportunity abounds for finding solutions for those that need a short sale or find themselves in a foreclosure action. No solution is a panacea for the borrower's troubles, but the solutions present an ability for a borrower to make a bad situation a little less bad, and it gives some control to the borrower over what is otherwise a nightmarish situation.

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 find articles at Need Short Sale Information? - These Articles Probably Answer Your Question

Posted by Richard Zaretsky, Florida Real Estate Attorney on 06/10/2008 10:56 PM

Comments (57)

Deficiencies After Foreclosure/Short-Sale in the Mortgage / Finance Channel

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57 Comments on Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios

JUN

2008

Richard, This is an awesome article. There is so much incorrect information out there about promissory notes and "deeds in lieu of" that it's great to get the real scoop. Have you thought about writing a book?

Brian - Frankly I have by now almost gotten enough written to compile it into one. It is a thought!

Thanks for the compliment and I hope the A/R community can utilize the information.

I require all of my Short Sale prospective clients read these articles BEFORE I agree to represent them. An Educated Consumer is our Best Customer - as it is said.....

Thank you for all the very good information and writing it in an understandable manner. I emailed your post to a client embroiled in the process.

Geat article. It's like I was back in Real Estate School again. I will save this article for future referance.

Thanks for such an informative article. You are what blogging is all about.!!!!

Such a needed topic and you sure hit the facts in a manner we can clearly understand! KUDOS to YOU!

The whole process is a nightmare and for anyone going through this it is so much easier to said than done but PLEASE do not let this rock in your life steal your joy or rob your of your family! ROB - You are a great attorney - NO DOUBT in my mind! Write the BOOK - Self Publish! I will buy it!

JUN

2008

Fantastic article Richard. This is an incredible resource. Very nice job.

Richard- This is a great post and very indepth with a lot of information that I hope will be read by many agents. We have been very fortunate thus far in our short sales in that we have been able to negotiate for the sellers a fully satisfied mortgage at the closing. We also have had homesteaded owners who have lived in their homes for at least 2 out of the last 5 years which makes their debt forgiven with the debt fogiveness act at this point in time. Thank you for taking the time to write this post.

Thank you for taking this important information and writing it up in such a coherent format.

Nestor and Katrina - what better way to spend my weekend? too much sun and fun can't be good for you - so I write!

Great article and explanation how it just isn't that easy to "walk-away". It's also a good explanation of why agents should not negotiate short sales and leave the consulting on behalf of the client to an attorney.

Tina in Virginia

Great article but I have have a question. Here in California we have what are called non-recourse and recourse loans. In this case I believe that the homeowner notes are non-recourse which means that they must accept whatever the auction $'s are as payment in full. Is this correct?

Richard, it looks like you have written extensively on this subject and I appreciate the article. However, am I correct in assuming that Florida is a "Mortgage" state, rather than a "Deed of Trust" or "Trust Deed" state? It is my understanding that the vast majority of states use the Deed of Trust to secure the Promissory Note. Foreclosure in those states is a non-judicial process. The process that you describe in the article does not even remotely resemble what happens in these states. In Utah, and I believe it is very similar in most states, a Notice of Default is recorded, beginning a 90 day period in which the borrower can reinstate the loan, followed by a 30 day publication period, advertising the Trustee Sale, ending in the actual Trustee Sale where the property is conveyed to the high bidder, usually the lender, via a Trustee's Deed.

I don't know if this is within your experience, but is it as easy to pursue remedy based on the Promissory Note alone, after the Trustee Sale has taken place in a Trust Deed state? I have never heard of this, ever happening, and I have been involved in this arena for decades, on 4 different states.

Richard, you're always a wealth of fabulous information. I so appreciate the time that you take to share your abundant knowledge. Very well written. Thank you!

Wow, thats a lot to know. Thank goodness for attorneys. You lost me at Step two..........

Hi Richard, Thanks for the treatise on lending. Might have to re-read this on some points but it is extremely well written.

Richard, thanks for the wonderful and much needed information and clarification regrading the short sale process.

My question is the following: If the lien holder agrees to short sale the subject property and the agreement has been prepared by the loss mitigation negotiator on behalf of the bank, why does the lien holder still has the right to file for deficiency judgment with the allotted time?

All the agreement we receive from the loss mitigation for the short sale have the language that the mortgage company will not pursue any judgment against the borrower.

Please advise.

Regards

Non Recourse means the sole recourse is the collateral. There is no further obligation of the borrower.

Great article, consumers need to understand their different options.

I liked the way you explained all this. It's a well deserved star blog.

Thanks for this timely information and putting it into a post. We appreciate it. All the best.

GREAT post and well outlined... There are several issues in the process of the foreclosure or deed in lieu that I was not aware of. Thanks!

Paul "Matt Locke"

consider googling terms like "short sale insurance" or "subject to insurance" for insurance related issues

Richard... This is a great post and full if informative information

JUN

2008

Thanks for your articles on the nitty-gritty details of what to expect of shortsales/foreclosures/DIL. This detailed of information has been hard to find. I will forward your blog to my customers and I'm sure all will appreciate it.

Juris Prudence!

Nice post Counsel!

Yes we do short Sales in Northern Virginia with a greater than 90% success rate..call us or email at bankowned@longandfoster.com

or joe.henry@longandfoster.com

(571) 282-8249

24/7

JUN

2008

Richard,

Two things here.

1. How important is the role of negotiator to get the best deal for the Seller in short sales? As far as I understand the banks have room, so is it possible to negotiate with them less damaging (or no damaging provisions? Like have them agree not to sue the Seller for the remaining of the mortgage? How feasible is this? Is that something that you do when you handle the transaction? What is the success, if any, in negotiating with the Lenders? Are some easier to work with then the others?

2. "The Second Bite from the Apple". If the Lender sells it for pennies on the dollar, is is possible to be proactive and offer the Lender the arrangement with $0.10 on a dollar, or the Lender would not do it with the client. Can all that be done as part of the short sale, or it has to be done later?

Also, THe Statute of Limitations to initiate a lawsuit for the balance in Short sales is 5 years, but if they sued and obtained the judgement, is there the Statute of Limitations in this case, or this judgement stays forever? If there is the judgement, is it correct that the Lender than has to collect and will give it to the collection agency or sell to the investors? If the collection agency or the investors get it, is there a limitation as how much time they got to collect? For unsecured debt in Florida it is 4 years (correct me if I am wrong). What would be the case with short sales.

I am sorry for asking so many questions, but I am sure others most probably do not have the answer to them as well. Could be another star blog for you.

Thank you

Jon

1. First off, the banks have NO room to negotiate - any dollar that they discount to the borrow is a dollar loss to the lender and its investors and stockholders and bondholders. What the lenders have is reality to deal with and this gives the incentive to "mitigate" the inevitable loss to the smallest loss for the lender. Different lenders have different strategies regarding what happens after the short sale or deed in lieu or foreclosure. For a foreclosure the borrower has no leverage on that future. For a short sale there is leverage because the borrower can always say NO to the lender's terms for the post short sale future. The lender WANTS the short sale, so things that get in the way of the short sale need to be dealt with by both the lender and the short seller.

2. We are finding that the lender, especially second lenders that would be getting wiped out by a foreclosure, will often take 5 or 10 percent of the loan in full satisfaction of the full amount of the subordinate debt. Usually it is done prior the short sale closing but there is no reason it cannot be done afterward if there is a residual note. The leverage is with the borrower though in the short sale since lack of cooperation by the borrower will mean a foreclosure and litigation costs for the 2nd mortgagee.

IF the lender timely gets a judgment in a foreclosure action for the balance due (a deficiency judgment) or if the lender sues on the new negotiated promissory note and gets a judgement (a Final Judgment), those judgments are (in Florida) good for 20 years. Both the judgment and the note are assignable so there are no new starting times for statute of limitations if there is an assignment. The Assignee takes what the Assignor has to give and nothing more. Again, the statute of limitation on a written instrument is 5 years in Florida.

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 Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com

JUN

2008

Richard,

I want to thank you for the amazing amount of time and dedication you spend writing these much needed post on short sales and in helping to educate both Agents and the consumer about the processes, pitfalls etc.

AUG

2008

Great Article. I often wonder when we will see these debt collectors start buying up these judgements. Interested to hear your thoughts on that. Thanks again.

Josh

AUG

2008

Really glad I stumble upon your profile. Super info. It's so easy to get zoned in on the same stuff each day, so thanks for the info from a different perspective, helped me step outside the box.

AUG

2008

Richard, this is very informative and a big help. Personally we are faced with an approximate 35% decline in the market value of our property in north central Florida, while at the same time we are paying off an enormous amount of debt owed to various banks. Unfortunately we experienced two large downturns in real estate values (once in upstate New York, and then here in Florida). Our realtors and bankers each time encouraged us to borrow from our credit cards to pay off the notes at closings for the two houses. Now I understand that this was probably not our best option.

At any rate, this situation has led me to consider selling our new house here and then renting for 4-5 years while we pay off the debt. We owe so much that we cannot pay off the debt in a reasonable time while making mortgage payments. Of course it is extremely unlikely that we would be able to sell at anywhere near what we owe. In fact we had this house on the market earlier this year for about four months, with only about four showings and no offers. We have only one lien (a first mortgage) against this property.

I'm curious about something you wrote above. You wrote It is expensive to take in your property and unless your property is worth more than the amount the bank loaned to you, the bank is likely to only loose more money than if you sold it for them. That is why the do short sales and deeds in lieu. I don't understand this paragraph. I can see that the bank would like us to sell short, and then pay off the note over some negotiated period, in preference over foreclosure. But why would a bank accept a deed in lieu? Since they have to manage and sell the property anyway, is the only benefit to them that there is less cost with this process? And since Florida is a recouse state, why would a lender ever sign a letter saying that the Promissory Note is satisfied in full in this situation?

SEP

2008

Richard,

One question that i am debating with someone can a deficiency judgment be discharged through bankruptcy?

SEP

2008

Noel -

This is not worth debating and I hope you are on the right side!

We explain to our clients that bankruptcy is a "last resort". Short sales and deed in lieu and even dreaded foreclosure are better solutions to bankruptcy. Here's why.

Consider what happens when you have drywood termites in the back door of your house. First option is to spot treat. The spot treatment has almost no effect on the rest of the house which is great since the rest of the house does not have the termites. If that spot treatment does not work you then have the option to move to the full house tenting, which of course will kill every thing in the house.

Short sale or deed in lieu and even in many cases a foreclosure is like the spot treatment of financial distress. Done correctly and under many circumstances they can have little effect on the rest of the client's "financial body".

Bankruptcy is the full house tenting of financial solutions. It affects almost all parts of the financial body of the client. And it eliminates the deficiency judgment or if one does not exist yet, it eliminates the ability to obtain the deficiency judgment against the borrower.

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 Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com

Richard - Thank you so much for the time you have taken to post this wealth of information, it is unbelievable. I have a question regarding a buyout of a 2nd mortgage. If everything goes well and I am able to do this, I would like to know if there is something that I can do in the negotiations to keep the bank from selling to a collection agency their deficiency judgment rights? Thanks again!!!

Ivonne -

I think what you are saying is that you are getting the 2nd lender to take a short payoff of that mortgage and you expect the shortage to be salable to a collection agency or other investor.

The way to prevent that sale from occuring is to not agree to the short payoff unless you get a release. Alternatively (and this is something I have not yet tried but in theory can be done) you could negotiate a "right of first refusal" that if the holder of the note is going to sell it, you have the first right to buy it under the terms offered by a buyer when those terms are otherwise agreeable to the seller (holder of the note).

OCT

2008

This was a private question sent to me and it deserves reading by this blog's readers -

Subject: Short Sale Deficiency Judgement Question

Dear Richard,

I have learned so much reading your blogs on short sales/foreclosures on Active Rain. Thank you very much for the information.

I have a question I was hoping you wouldn't mind helping me with. Is there any case law in Florida regarding a lender pursuing a deficiency judgement against a borrower after a successful short sale transaction, and the lender winning in court after being challenged by the borrower? Also, is the lender required at the time of the short sale agreement to inform the borrower that they have the right to pursue the dificiency judgement?

Thanks again for all the great information you provide.

Sincerely,

Christine

My Answer --

Without researching the matter, I am sure there is case law on the matter since short sales (called various things before it got the name "short sale"). My article on the matter pretty much covers it. If you don't get a release of the financial obligation the bank has the ability to pursue the shortage by suing on the promissory note balance within 5 years from the date of the promissory note default (although some attorneys will argue it is the later of the default or the payment of the short sale proceeds to the bank). And no, there is no obligation to inform of the existing right to seek an enforcement of the note. Your reference to a "deficiency judgment" is using incorrect terminology as a deficiency judgment is only allowed in a foreclosure proceeding to pursue the shortage after a sale of the property pursuant to a court ordered foreclosure sale.

Hope this helped.

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 Website www.florida-counsel.com

NOV

2008

I got some good questions today from Greg and I wanted to share the questions and answers:

-----------------------------

Hi Richard,

First, thanks for taking the time it takes to share your knowledge. You do a thorough job, and I'm sure many appreciate it as well as I do.

I want to make sure my understanding of what you've shared is correct on the treatment of deficiency after a short sale (SS). Let's assume that the scenario is the bank did NOT ask for a "new"note to be signed and simply agreed to the SS as a release but not a satisfaction of the debt.

1) Am I correct in understanding that a judgment for the unpaid balance of the promissory note after a Short Sale, is a different type of judgment then a deficiency judgment that is granted after a foreclosure?

2) If yes, how are the judments treated differently? Specifically does one allow garnishment and the other does not and do they have different interest rates (statutory vs original note rate)

------------------------------

Greg:

The first answer is yes. So now I have to answer the second question.

The deficiency after a short sale is not a judgment. It is just a deficiency - an unpaid amount (remaining balance) on a partially paid promissory note. You still have to pay the remaining balance according to the terms of the promissory note unless you and the lender holding the promissory note agree to different terms. If you don't pay the agreed terms, the promissory note can be enforced by the lender going to court and filing suit to enforce the terms of the promissory note by getting a judgment against you for the unpaid balance. But unless the lender files that new lawsuit there is no judgment.

The deficiency after a foreclosure is the same as the deficiency after a short sale, but the lender can enforce the deficiency by merely having a hearing with the judge without filing a new lawsuit. The judge confirms the amount still due (see the article on how this works) and enters a judgment against the borrower for that difference.

So in the foreclosure example the result of a judgment for money (the deficiency judgment) is highly likely. However so far lenders in short sales have not made it a habit of starting a lawsuit to collect on the unpaid promissory note.

There is only the right to enforce a judgment (through garnishment or attachment) when there is a judicial judgment. Further, the interest rate on a judgment is fixed by the legislature. The interest rate on a promissory note is according to its terms.

I hope this helps.

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

NOV

Great article Richard. What I find interesting is that many of the short sale approval letters I have either negotiated or reviewed -initially- refer to a "release of mortgage", "a satisfaction of mortgage" or even a "full satisfaction of mortgage." Now this is especially troublesome when applied to loans made for California properties.

Why? In CA we have notes, loans and deeds of trust. People really do not want to hear that a release of mortgage does not equal a release of deficiency on the loan or note. I will now refer them to this excellent article. Thank you - you have saved me hours of debate with my clients, a few Realtors and the lender's negotiators.

(I am licensed as an attorney and real estate broker in CA - and licensed as an attorney in Fl. Since I live in San Diego the large majority of my work is based on CA law)

Note: to Californians -- Loans which may qualify as non recourse Purchase money loans under CCP 580b does not necesarily mean they are non recourse loans in a short sale negotiation. In my opinion there is a difference between a non recourse loan by virtue of negotiation with a lender (most frequently seen on commercial properties) and a purchase money protected loan which is deemed non recourse by operation of the law after a foreclosure.

There are at least three points to consider - what if the approval letter is silent on the subject of deficiency, what it it reserves the right to collect, or what if it asks for a new note? If someone tells you a loan is non recourse in a short sale negotiation - ask them for case law.

If anyone can prove to me why a short sale automatically relieves someone from a deficiency in the state of California. I will praise them effusively here on my blog and on UpsideDownRealEstate.com. I will also contribute 1000 dollars to children charity.

Finally a short sale may have different tax consequences in 2009 vs. 2008.

MAR

Hi Richard,

Thank you for the usefull info. I am currently in negotiations for a short sale on my Primary Residence in Florida with the Servicing Company ("Lender") handling my loan. The difference between the amount the lender is getting from the short sale after closing costs and the amount owed under the note is around $125K. My lender has approved the short sale with 1 contingency, the Mortgage Insurance Company (not lender) is demanding I sign a $3500.00 unsecured promisory note in order to approve. My attorney (friend of mine) and I agreed to this as long as the lender and the Mortgage Insurance Company agree to sign a a General Release stating that their will be no Deficiency Judgment sought. Both the Lender and the Mortgage Insurance Company have told us that they typically do not seek Deficiency Judgments, but will not sign a Release stating this. The foreclosure sale is set for June, so if the short sale does not go through, than the foreclosure is. I do not know what to do. Should I go through with the short sale and pay the $3500.00 and pray that they do not seek a Deficiency Judgment in the next 5 years or should I tell them that I will not go forward with the short sale unless they sign a General Release waiving any right to a Deficiency Judgment? I feel like I am stuck between a rock and a hard place. Also, have you ever heard of the Mortgage Insurance Company asking someone to sign an unsecured promissory note? By the way this was my first and only home and I have no real Assets. What a mistake it was to buy a home.

Any guidance you can give is appreciated.

Thanks

Bill

MAR

Hi and thanks for all the great info.

I am actually in a similar situation as Bill noted above, however, I am in Virginia. I have offers for a short sale and the difference will be about $60k. It hasn't happened yet, but I am told that I will be asked to sign a promissory note for all or a negotiated part of the $60k for them to approve the short sale.

If I don't do this and foreclose I understand they can get a deficiency judgement. If I do sign it, what collection actions can they take (wage garnishments, liens)? I dont have any assets anyway. If i do not pay on the new note, are they likely to sue? Or would it be better to not sign it to begin with?

Thanks for any help you may have.

Michael B

MAR

Thanks for the great article. It answers many of the questions I have. I am also in a similar situation to Bill. The bank has accepted an offer for a short sale on my home for 199k and I owe 280k. The problem i have is when the buyers lender requested an appraisal the house only appraised for 175k. The bank is asking for me to pay 24k which is the difference, in order for the shortsale to go through. It seems that right now nothing is black and white there is a huge gray area as to how the banks plan on attempting to recover much of there losses.

APR

Rick

It sounds like you are resigning yourself to a future of mediocrity -- be more positive about yourself !!!

Assume that deficiency judgments are the norm. Then see if you want to have a say in your future.

Don't be afraid of saying NO to the bank. But also realize that there must be a subtaintial reason for you to say NO!!! If there isn't then you need to reassess your aversion to paying some realistic number to the bank - either up front or over time.

Bill and Michael -

I just hate it when the lender says "they don't usually pursue deficiencies". Is that person going to be around so they don't? It's really a joke and they banks should be telling you the truth - the TRUTH is that they don't know what they are going to do -- but you better bet on getting sued for the money you owe them !!!!!!!!!!

Signing a note usually is part of the path of no deficiency being sought. When a mortgage insurance company wants a note I always ask, "Why?" Did you pay for MI or did the lender take out their own MI? If the latter, then you have no obligation to the MI company -- you should only be dealing with the company that owns your promissory note and mortgage. You could give your bank the promissory note and they may assign it to the MI company but that is their thing to do - not yours.

Signing a promissory note while you still have a promissory note unpaid (ok, partially unpaid) raises an interesting legal situation called "novation". Since the bank gave you no new consideration what really happened is that the old note was modified ot the new note. That would mean that the old note cannot be further enforced since the new note (and smaller note) is its substitute.

If that legal argument is correct then the old note cannot be used for a deficiency.

Consult with your own legal counsel to see if this theory will work for you in your state and your particular situation.

APR

Hi Richard,

Thanks so much for such incredible resource on short sale/foreclosure. Your blogs gave me great understanding/knowledge on the situation I am going through right now. Thanks again.

I am in a process of short sale my house in Tampa Florida and have similar situation with Bill and Michael above. The MI requests 25k note (10 year payment plan) and 12.5k one time before they approve on the short sale. I believe my lender took out their own MI (I put down 5% for down payment and had only one mortgage), how do I confirm this?

My auction date for the house mentioned above is in 3 weeks and the final judgment of foreclosure stated "plaintiff (my lender) waives the right to seek a deficiency judgment against defendant (me) in this case, as this action is solely In Rem". What is the chance for the lender to change their mind and file for deficiency judgment against me after foreclosure?

Thanks so much for your time.

Tammy

Tammy -

The bank is barred from seeking a deficiency judgment unless they get the judge to change the wording of the judgment. If they don't change it by the time the property is sold at the court house steps, I would think that they can never change it because of the prejudice to you that cannot be "undone".

Now it may be that they did not get you served with notice of the lawsuit? If so, they can still sue you on the promissory note and the judgment wording is not a complete bar to enforcement of the financial obligation to the bank.

You should have an attorney in Florida examine the loan documentation and the lawsuit pleadings.

Dear Richard,

Thank you very much for your prompt response. You are awesome!

APR

I'm so distressed I can hardly digest this very valuable information. I purchased a preconstruction condo in Florida. Since I couldn't get closing date while had good loan rate, I lost the lock and ended up with HORRIBLE 10-year-interest only in 2005 for 95% of condo's value. THEN I had structural defects which exposed me to EVERY noise and vibration in overhead unit (tile floor). An expensive two-year legal pursuit against builder was unsuccessful because he claimed bankruptcy 2 weeks prior to mediation. My upstairs neighbors were cruel and literally drove me out. Had to purchase another home. Have had condo for sale 15 months - was even going to short sale myself and pay full note due. Due to other foreclosures, it's now only worth about $150 of the $220 owed - I have assets to cover that but it makes me ill to think of it. Sought legal council who gave guidance on options. Based on what was discussed foreclosure seemed best solution. I'm beside myself that after losing 50% of assets in stock market, and my nightmarish condo experience, that I could lose my remaining assets that took me 20 years after being widowed to build up on top of being forced out of my home. What assets are seizable and what is protected besides homestead? Is my 401K threatened, my vehicle for employment transportation, my stocks and some cash?

APR

DANGER ROSE -

Except if less than 1% of the cases I see is Foreclosure the solution. Indeed, our motto in our office is that foreclosure is NEVER the solution -- it is a result of bad planning and even worse decisions - usually by the owner.

I have a lot of visualizations describing a foreclosure vs negotiated settlements but I won't do them here -- they usually involve gore and guts. Well, ok here is one -- Foreclosure is like treating your ingrown toenail by cutting of your toe. The real treatment is painful but recovery is assured with, over time, no deficit and no memory of the pain of fixing it. Can't say that for the foreclosure -- your missing toe and lack of firm balance is always a reminder.

Your 401k or other retirement funds (ERISA Plans) are expempt in most states from attachment. Your other assets are reachable except for exemptions that may apply to you in your state, which could include limits on garnishment or attachments of certain amounts of money or type of use items. Check you state laws.

Do a foreclosure and you have (in Florida) another 20 years to worry about the knock on the door. A short sale is a negotiated settlement and you know what is happening to you since you agreed in advance to the cost to you of the transaction. So - decide yourself or leave it to some stranger to decide - what do you think?

MAY

My Wife and I are on Social Security and retirement pension and GMAC mortgage is going through the foreclosure proscess even though we tried working out a deed-in-lieu at no success, even though the promised us a deed-in-lieu if we would put our home back on the market for additional thirty days, which we did, and we got a offer. I tried to get something in writing on agreement to shortsale but they said they couldn't give us nothing in writing so I declined to sign a purchase agreeement with out some kind of legal paper that would give us permission to accept a offer, GMAC close our file and we recieved a summons of complaint to anwser. I have anwered the compliant and waiting for the court to send me a reply, and we wasn't served personally with the complaint in came restricted mail. So, I would like to know if there is anything we can do to keep our house.. even though we moved out on GMAC advise in order to qualify for a deed-in-lieu we had to move out of the house and put in on the market to sixty days which we did, now we live in a appartment and I am maintaining the property and keeping insurance on it and doing the lawn care. Any advise would be appreciated.

JUN

Steven - It would be helpful to know what state your property is in.

Expecting something in writing from the lender is expecting the impossible - certainly for what you asked.

The mechanics of short sale is you FIRST get a contract, and you sign it and then you submit it to the lender. Be sure there is a good short sale addendum that protects you from having to perform under the contract if you and your lender cannot come to terms.

This thing about a Deed in Lieu with you going through these mascinations is crazy and makes no sense (so what else is new?). But I think if you went to a supervisor the information provided to you would have been over-ridden. Just get a contract and submit it to GMAC! Having a KNOWLEDGEABLE Realtor will certainly help!

SEP

I just lost a Summary Judgement Hearing in Osceola County Florida on a property I tried I guess half heartedly not to close back in March 2006 due to substantial loss of income and projected total job loss within a year. The lender insisted I had to close. I believe they had the house over appraised to get the loan through. This was suppose to become my primary residence, but like I said the job situation change so moving to Florida would have been a mistake. I tried selling the property from day 1 because I was pressured by the lender to close since my wife and I did a NO-DOC loan application. The market crumbled and the home was on the market for now over 3 years. We had a contract for $264K in July '07 and I was willing to go to the table with $36K to make up the shortfall. I requested the bank waive the prepayment penalty. That did not work out. Then lender guidelines changed, lost the buyer and continued to try selling. The bank took six months on a few offers to basically tell us nothing. After paying for 21 months, and warning the bank of my financial situation, I could get nowhere unless I defaulted. They dragged this out so long. I believe this is because I live in New York and have equity in my home here. Can a deficiency judgement in Florida be enforced in New York if they are awarded it in FL? Can I fight the Summary Judgement and stall the December sale date that is scheduled? Not being from Florida and not knowing a stand up attorney, I don't know what to do. I do have a pending short sale, but who knows if it will ever get completed. My luck seems to have run out on this. Is there anything I can do? Thanks for your advice.

SEP

Steven - To answer your questions:

1. the uniform enforcement of foreign judgments act will allow the lender to enfoce in New York the Florida judgment.

2. Likely you cannot "fight" the summary judgment - it is already entered. Luckily you have a sale date 3 months away, which hopefully will allow the short sale to go through. We often see the bank cancel a sale if they think the short sale is iminent.

3. I would like to think I am a "stand up" attorney. In that respect I am going to suggest you don't hire me and just make sure the real estate broker handling your sale is working with you and the lender to get the short sale approved. It is a very very slippery slope! On the other hand, a lot can be accomplished in 3 months if you have the right team on your side!

Good Luck!

OCT

Richard, thanks for the great info you provide. I am a Realtor in Destin, FL working on two of my own personal short sales with Bank of America, both homes are in FL. The final negotiator called me today. He said the investor on my primary residence is going to want a cash contribution at closing of $55k or a promissory note of $110k (total loss of approx. $400k). He also said they would not waive their right to pursue the deficiency.

I am concerned about them pursuing the deficiency amount at a later time as I have excellent credit (I am current on my loans, but facing huge upcoming financial obstacles) and I have some assets. If I understand correctly, they have 5 years to try to collect. However, does a cash contribution to complete the short sale or the signing of a promissory note at closing restrict their ability to pursue the deficiency in FL? If so, is one better than the other to reduce the likelihood I will not later be sued for the deficiency.

Thanks again,

Brent

That is a big loss for the bank assuming I read correctly that they are, before the demanded contribution, looking at a $400,000 loss. BoA typically will demand either zero and reserve their rights to the deficiency, or a payment by note or cash basically in proportions you state, although the proportion can be different from time to time. What is unusual is to demand such amount and not give a release for the balance - but with the size of the loss in your situation the demand could be different.

I would ask for a clarification on this issue from the final negotiator. The reason I suggest this is that reserving their right for a deficiency and demanding a promissory note are inconsistent demands (not that consistency or logic has anything to do with it). This is futher evidenced by the discounted cash offer. Both of these demands are consistent with a full release for the balance of the indebtedness.

Have you clarified your tax result if $300,000 or more is forgiven?

As to your final question, it relates to the clarification mentioned above. Any contribution merely decreases your liaibility for a deficiency. The timeline still starts from the date of the default for a suit on the note.

Richard,

Thanks for the help. I am going to double check with the negotiator.

As I understood it, even after signing a promissory note or making the cash contribution, they still have the right to pursue the remaining deficiency. I'm in agreement with you. I would think the cash contribution or the promissory note should be a settlement for full release of the deficient balance.

I will get back to you once I have a response. I may be interested in retaining your services moving forward. Thanks again!

Brent

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