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The unsecured promissory note and the Short Sale

The unsecured promissory note is becoming a more commonly used tool to prevent future deficiency judgments. If you haven't experienced this already with a short sale, where you are the listing agent, be prepared because it is coming your way.

Upon bank review of the agreement they will counter the offer to the homeowner requesting them to sign a unsecured promissory note for the remaining short balance. As you can imagine, this type of counter from the bank, can throw a monkey wrench in the entire process and possibly kill the deal.

So how can you prevent the bank from requesting and unsecured promissory note? Well it's all going to revolve around percentages. If the short balance is greater than 15% to 20% of the total amount owed you can most definitely expect the bank to request a unsecured promissory note to be signed by the homeowner. It is important that this possibility be disclosed to your home owner up front when the obtaining the listing so that you don't have any uncomfortable surprises towards the end.

I'm sure your next question is why would the bank make such a demand. The first thing to understand is that the request of a promissory note is the bank's way of telling you and the homeowner they will most likely pursue a deficiency judgment if they agree to the deal. The promissory note is the bank's way of giving your client and out, of sorts. In other words, sign a promissory note today or expect a future deficiency judgment, if they decide to do the deal at all.

Keep in mind this is a business decision the bank is making, they have supposedly done the math, looked at the credit, looked at the assets, read over the hardship and determined the deal may be worth losing. This may sound crazy to you and me however from the bank's financial point of view some deals just aren't worth the paper they're written on and therefore they ask the homeowner to have some type of responsibility and the short sale of their home.

In closing, if you have an experienced a promissory note by now count yourself among the lucky few because I guarantee in this market of uncertainty the unsecured promissory note is going to start appearing more and more often in a short sale situations than it ever has before.

Posted by Jesus (Jesse) Gonzalez, RDCPro on 09/18/2008 09:53 AM

Comments (36)

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36 Comments on The unsecured promissory note and the Short Sale

SEP

2008

That is not going to help get short sales done, and they are already difficult.

I am involved with a short sale on the buyers side and the bank has just come up with this.

We have a good deal on the table and can get it done but this may mess it up.

I just got through my first short sale. I was on the buyer side. The unsecured promissory note did not present itself but I will sure watch for it in the future. Thanks.

Jesse.. I have noticed this as well. This would be great in the short sale support group.

OCT

2008

help. i am right in the middle of this. got an counter from the lender and agreed price from the buyer and then ...whamo promissory note needed by the seller. this is hard to deal with,the amount the lender is geting is a super stretch for this property now,if it forecloses seriously they are looling at over 80,000 less then whats offered. help. is there no reasoning with this mortgage insurance?

First off, you need to get a copy of the appraisal. If the bank didn't use an appraiser to help them determine the value of the home, they had to use something....CMA or BPO, most likely so ask for a copy.

Once you get the copy, then you need to verify it's accuracy. You need to find ways to debunk the value because, the only way the bank is going to back off the promissory note requirement is if you can shrink the short debt.

It's all about precentages.....I don't know what the threshold will be on your deal, only the bank really knows how much they are willing to loose but, if you can shrink the short debt significantly then, most likely it will be easier for them to reconsider the promissory note requirement.

It's all going to revolve around the short debt, it is going to have to be shrunk to make the bank comfortable with wipping away the debt.

Like I said in the blog, the homeowners need to understand, the unsecured promissory note is the banks way of saying, sign this now or we go to court later. In many instances, homeowner need to understand it's better to sign the promissory note, make payments for a year and, try to re-negotiate it later rather than, possibly have wages garnished, savings attacked and other assets forced to sell to cover the deficiency judgment.

Again, the bank is making the determination that they would rather run the risk of lossing the deal all together by asking for the promissory note rather than just giving it away at the agreed upon purchase price.

thanks , i have been stalking and i do mean it,,, 20 calls aday and this lender won't get back. the buyer is done,loan approval,survey, and now a possibly a lawsuit because we can't close with out a approval package. i can show within 2 months sales that they are getting the best price ...ever. for this property but no one to tell since the little people don't count. the seller is confused about what will happen if hew signs an promissory note ,closes and then can't pay it.

OCT

2008

Hello Jesse,

Thank you for bringing this to light. I have seen several short sale agreements with Chase being the short-lender, and they have been utilizing the promissory note also in lieu of the deficiency judgment.

OCT

2008

Hello all, I recently sold my home and was forced to sign an unsecured promissory note for the balance of the short sale, about $65,000. I am wondering how binding an unsecured promissory note is. What happens if I just stop paying it? Also, how willing do you think the bank would be to accept, say, half of the amount of the promissory note now, and wipe out the remaining balance. They are a small local bank located in the Detroit area. Thanks.

A Promissory note, is a promissory note, secured or un-secured, it doesn't matter. In other words, you agreed to pay it so, if you don't, expect collection calls, credit damage and eventually, the possibility of liens against property and an inability to get lending till it's been resolved. Ultimately they can pursue legal action and request a deficiency judgment so, it's best to pay it.

Now, as you may or may not know, typically you can negotiate a lower principal amount once you have proven hardship and an inability to pay, much like you had to do to get the Short Sale approved but, that may not be the bank's first option when working with you. Now, I have heard of some instances where banks will wipe out the promissory note after 1 year but, I have never been apart of any such deal myself. Of course, if you want to request a forgiveness of the debt, then by all means do so but, just keep in mind how hard it was to get them to agree to the Short Sale in the first place and, don't forget, this promissory note was most likely a tool they use in order to avoid legal action so, it may be a battle that you can't afford to fight.

Good luck and just remember, now it's no different than a car note or credit card balance and, will be treated accordingly if you don't pay it.

Jesse... I'm sure the unsecured note has some hefty tie although it is unsecured. Would not want to miss this payment.

OCT

2008

Jesse,

I ended up doing a short sale back in September. I did sign an unsecured promissory note with the Mortgage Insurance Company for 50k. The MI company was going to block the short sale if I did not sign the note.

They basically told me that I need to shoulder a portion of the amount they were going to pay the Bank. In this case the total the MI Company was paying is 170k, 50k of that I would pay to the MI over 30 years.

My question is, if the Deficiency Amount is 170k and that was paid by the MI to the Bank. Essentially satisfying the total amount on the note, would there still be a dreaded 1099 c?

I have called the Bank and they say the balance on my account is zero. I don't see how there could be a cancellation of debt since the note was satisfied between the sale of the home and the MI Company. Keep in mind I am picking up 50k of that 170k paid out. It would really suck if I had to pay 50k AND get a 1099 c. Just wouldn't make any sense. Your thoughts? Thanks in advance.

Jesse... I had a Jr Lein holder demand this before. We actually got around it and closed without a unsecured note

OCT

2008

A Jr. Lien Holder....well now that is some fortitude. I haven't heard of that happening before but, I don't see why they can't at least ask. Truth is, they really should keep thier mouth shut, take the 1,500 - 3,000 they are most likely going to be offered and then go away.

Wow, a Jr. Lien Holder......ROFLMAO!

Hi Michael (posted on 10-29-08 @ 10:13pm)

First off, I am not a CPA so, any opinion I give you should not be considered Tax Advice, for that you need to speak with a Tax Professional, of which, I am not!

Now, let me give you a website to visit, http://www.irs.gov/newsroom/article/0,,id=174034,00.html

This is the IRS Questions and Answer section for Home Foreclosure and Debt Cancelation. In my humble non expert opinion, even if the canceled debt isn't considered income because, you might fall under the protection of the 2007 Mortgage Debt Relief Act, the Lender still has an obligation to report it and therefore you will most likely get a 1099c form.

Now, let me be very clear, NOT EVERYONE WILL BE COVERED UNDER THE PROTECTION OF THE 2007 MORTGAGE DEBT RELIEF ACT. Therefore, it is imperative that before you ever sign a promissory note or compelte a Short Sale, you must speak with a Tax Professional to help you determine your risk.

In your situation, it sounds like that didn't take place so, now you need to go speak with one after the fact and, I honestly don't know what they are going to tell you.

If you don't have a Tax Professional, let me suggest you speak with the IRS's Taxpayer Advocacy Service and their number is 877-777-4778.

On a personal note, for you Realtors out there claiming to be Short Sale Specialist. IF YOU HAVEN'T EDUCATED YOUR CLIENT TO THE RISK OR POTENTIAL TAX LIABILITY, AT THE VERY LEAST EXPLAINING TO THEM IN WRITTING THAT THEY NEED TO SEE A TAX PROFESSIONAL.......THEN YOU NEED TO STOP BILLING YOURSELF AS A SHORT SALE EXPERT!

Ok, enough of the soap box....lol...good luck Michael, I wish the best for you. Keep me posted and let me know how it all turns out.

In closing, you really need to see a Tax Professional. I have provide you with some great resources and I hope it is helpful.

NOV

2008

I signed a $80,500 promissory note to PMI under duress....they approved my short sale but did not tell me until closing. Then the day my first payment was due the PMI sent it to collections. Collections asked me to send a letter with in 30 days if I wanted to contest the note. I did with certified return mail. I received the return certification but never heard from them until I checked my credit file that has 180 plus days late. Since this is unsecured can they attach my wages? Will this go away in seven years?

What many people don't understand is that just because it's "un-secured" doesn't mean the lender doesn't have recourse against you when you default.

In other words, default is still default regardless if it's secured or not. All the "un-secured" does is indicate that you haven't put down any collateral or had any agreement as to what assets you had to give up if you defaulted.

Depending no your states laws, recourse or non-recourse, these lenders can and most likely will go after any assets you may have such as wages, savings, or whatever else they can find.

I am not an Attorney so, my opinions I have provided are strictly my own and should not be considered a legal opinion so, the best advice I can give you is to seek legal counsel At this point you need to ask what collections does your state allow in your situation. Sadly I think you might find you will end up with the short end of the stick here but, once again that is just my opinion.

Good luck and I wish you the best.

NOV

2008

Hi All: I am looking for comments about this one particular situation I am working. I was the fourth realtor to handle the sale. Previously the seller was always chasing the market, and not doing proper price reductions. We agreed to the listing only as a short sale along with guaranteed price reductions. Synopsys of home is: Client received home as part of divorce settlement as it originally had value. Originally listed by realtor No 1 at $370,000 owed $280,000, originally had equity. Final result solid offer $235,000 with 25% down and good scredit scores. Bank in it's infinite wisdom, decission process took three months, along the way, they received updated proposed HUD-1's. Bank did not do an appraisal but a BPO and will not share the results. My belief is that the BPO was right around the $235,000 number. Ulitmate lender (unknown), had one PMI company, they split the risk with two other PMI companies. Two agreed to the short sale with no strings and the third wants unsecured promissory note for $40,000 Client has mediocre job, assests consist of five year old auto that is free and clear. They have large amount of credit card debt, student loans and charges associated with trying to keep the home. The bank has not started the foreclosure process yet. If the client signs the note, they must move out prior to closing which can be accomplished in less than 30 days. When they move out and get an apartment, plus normal living expenses there is no extra money to pay the promissory note. If the note is sold and collecton is started then the client can file bankruptcy and it all goes away, remember they have no assets except for a small job. Other scenario is client does nothing more and allows the foreclosure process to begin, the sheriff sale may be had in 45-60 days, if that, then the redemption period is 6 months, and another 30 days for eviction, remember the client at this point has not made a payment in 5 months. Adding all this together, client may get 14-18 months in the home with no payments being made. Jump ahead, after the foreclosure sale process is complete, the bank takes the property back, gives it to an assigned REO broker, the new sale price is now going to be offered on an REO as opposed to an occupied nice home, I am sure the new offer will be anywhere from 15 - 24% less than the orginal $235,000 price undless the market makes a sudden turn upward. We are in the Detroit market and statistcally we are dropping 1-2% per month as values decline. If house is sold for much less, then the debt owed by the client increases, if the 1099 is issued for the difference as imputed income, it gets reported on the tax return, but has no tax consequence, if law suit is then filed, bank wins, trys to collect, client can still fle bankruptcy, and probalby be successful. I would appreciate any phone calls or written comments, especially what am I missing about understanding the PMI process.

Thanks in advance to anyone that takes the time to read this and respond.

Bill Janiga

RE/MAX Homes Sale Services,

Plymouth Michigan

Cell: 734-564-2729

bjsept23@gmail.com

NOV

2008

Hi Bill Janiga:

First let me say, you did a good job outlining the details for what could possibly happen however, I can't stress enough that a lot of the Short Sale procedures are outside of the realm of a Realtor's expertise. In other words, if I were you, I would advise the client to speak with an Attorney and Tax Professional for advice on what they should do.

Be very careful here, you can open yourself to a future lawsuit if you are not careful. All you need to do is google "Short Sale Risk and Liability" and you will read over the horror stories of agents who didn't know when to stop.

At this point, I have to suggest to you to suggest to your client to go speak with either a tax professional or attorney, if not both.

NOV

2008

Jesse... It is always good to advise the home owner to consult both an attorney and their tax advisor in short sales... I like to put this in the special stipulations of the listing agreement too.

MAY

2009

My daughter, HARD working mother of two girls. Just lost her job in handbag industry. Ex stopped paying child support etc etc etc...then tonight she tells me that when she sold her condo (short sale) two years ago she signed a $20,000 promissory note!!!!!!!!!!! I'm an inactive realtor and was not advised of this at the time as she had too much to handle and was told to just do it. I believe I understand that requesting forgiveness of debt, or bankruptcy are the only answers. Do I understand correctly? She has nothing - barely a rented apt and an old car so there are no assets, as luck would have it we can not help. Please forgive me if this is not well written I feel as though I can barely breathe. I don't know how I found this site but glad I did.

Thank you,

Pam

Hi Pam:

First and foremost, I am not an Attorney nor am I a Certified Public Accountant (CPA). I must first tell you that you really need to speak to one, if not both of these professionals for a more in depth insight as to what can actually be done. I will give my opinion in this matter however, it is just my opinion and you should not consider as legal or financial advice.

To the best of my knowledge and experience, your understanding is correct, asking for the forgiveness of debt or bankruptcy are possibly her only options. Personally, I would ask for the forgiveness of debt first and see where that gets you. In this economic climate, it may be that the banks are more willing than ever to help however, keep in mind any forgiven debt will be counted as income and have tax liabilities but, of course you would need to speak to a CPA for more information on your unique situation.

If the bank refuses to forgive the debt, I would then seek out a qualified Attorney and see what legal process or chance you may have. This, of course will cost money but, it may be less in the long run.

I am sorry to hear about the situation and I hope you can find what you need here. Good luck and I wish you well.

MAY

2009

I am listing agent on a $150K condo. Seller owes $190K. There is PMI involved. Bank BPO came in at $140K. I've presented an offer for $155K ($5K over list). PMI company will only accept if Seller signs a $25K promissory note. Seller is 72, retired, no savings and credit card debt of $68K. He has income of about $64K from pensions and soc. sec. but it all goes out to pay minimums on debt load. Basically, he's broke. I sent him to a Bankruptcy Attorney for advice and once the short sale is done, he plans to file bankruptcy to remove the credit card debt. My question: Can the Promissory Note to the MI company be included in the bankruptcy??? I'm in the State of Washington where non-judicial foreclosures are the norm and there are no deficiency judgments. In reality, I almost think my Seller should take the condo off the market and file bankruptcy on the whole thing. That seems to be in his best interest, rather than signing a promissory note. Am I thinking straight on this?

Mukilteo Realtor:

Well it sounds to me that you are thinking it out correctly however, my opinion shouldn't matter here, especially when you have involved a bankruptcy Attorney of which, i am not. I would seek his opinion on this one.

SEP

2009

Im in CA. Involved in the same situation. Short Sale/solid ALL CASH offer for 380K. Asked by a Promissary note of 140K from my borrower, by the Mortgage Insurer, and 1% from the buyer for admisitration fee to the lender. I'm ready to give up on this file!

My sellers are broke, just got out of a divorce, has two kids, paying court fees to his wife, and in debits. We re-submitted a hardship letter, and still, the negotiator said NO, if the seller doesn't sign the NOTE the file is declined, giving us 24hour notice.

What should I do? Any advice? Anyone had this experience before? I'm not asking legal advice, I'm asking of an experience agent like you, have you succeed in negotating off the NOTE before? if so, what did you do? Or at least get it lowered? This negotiator won't budge-- very firm, and to his word!

I've invested so much time into this, and would hate to let it go.......

Thanks.

Leila

NOV

2009

I have a unique situation...

I had an 80/20 loan in CA, total ~$310,000. The first was ~$250,000 and the second was ~$60,000. Both were used to buy the home to begin with.

After a nightmare year of the banks not communicating with each other, losing 5 buyers, and endless back and forth, we finally got both banks to approve a short sale at $169,000, but the second only would approve it after a promissory note for $6,000 IN ADDITION to the $3,000 they were getting from the closing. We said that was ok, but the sale and closing went by with NO promissory note. Now, they (the second leinholder) are screaming about how they don't have a note and will come after our kneecaps if they don't get one. Now, don't get me wrong, I enjoy my kneecaps. But, do they have any recourse? Or does their complete ineptitude prevent them from doing anything but whining in hopes that I suddenly take pity on their poor bailed-out selves and send them $6,000 out of the goodness of my heart?

NOV

2009

I moved from USA back to my home country of Canada after a short sale, as I am sure you all know close to the deal closing in came the promisary note for 13k if we didnt sign the folks ready to move into our house would be out in the cold. I agreed to sign, we moved out of the country and signed over power of attorney, we just recived a letter asking us to sign the promisary note that this documnet could not be signed by power of attorney. I have a contract job for 3 months then I will be out of work again, the primary reason we had a short sale in the first place, I sent a letter back telling them I could not agree to pay on this until I have a full time job. My question is what can they do now that I have moved out of the country.

Thanks.

JAN

2010

2 days from closing, I was told I would by the title company have to sign a promissory note. I told them I would not and it is supposed to be written off ($79,000). I was then told I would be sued for "poor performance" by the buyers real estate company and the buyer himself if I did not show up to close. I stuck to my guns and told them I would show up, but I would not sign a promissory note and told my agent to get it done. The agent told me all the bank (WaMu) would do is settle for $8000 at closing. I told them I had $4000 and they would not take it and that's all I had but they would not accept it. I did the closing and did not sign the promissory note (it was never presented to me or brought up during closing).

6 months later, the balance was sold off and they are trying to collect. I told them to show me where I agreed to re-pay the balance and they have not responded. So, my question is do they have the right to collect the balance even though I never signed a promissory note? If so, has anyone had any luck settling afterwards and for what amount?

Hi SteveC.

First off, I have to say, you most likely need to be speaking with an Attorney. This is truly a legal question and I am not an Attorney so, I can't offer you legal advice however, I will give you my non-legal opinion and that is, YES....they can come for you even though you did not sign a promissory note.

The realtiy of the matter is, you owe the money. If you or your Realtor didn't get an "Approval to Participate Letter' that outlined all the details as to what the bank would consider as Full Satisfaction.....then, you left the door open for them.

In my opinion, unfortunatey, this is an example of a less than experienced Realtor working Short Sales when they really have no business doing so. Before your agent let you sign on the dotted line, they should have received the Approval to Participate Letter and made sure every single demand by the bank was fully satisfied. He should have also made sure that the Approval Letter it's self said the bank would walk away fully satisfied as long as each of thier demands were met.

I hate to hear about your situation but, in my opinion, you owe the money and yes, they can come after you. Go get yourself an Attorney.

I will. Thanks for the quick reply.

FEB

2010

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APR

2010

Hi everyone,

I have been reading through everyone's situations and I am feeling pretty hopeless. I too was presented with the promisory note "option" from my private mortgage insurance in the amount of 30,000. I have a buyer and contracts in place. I have been calling lawyers and they have not been calling me back. I just can't seem to figure out whether or not signing the note is a good idea.

My husband and I may be able to afford the payments, especially when I get a job. But we really don't want to. We really want to be forgiven and handle the tax repercussions ourselves. The idea of spending 30k for a house that we aren't living in, or recieving any tangible benefit from the use of that money enrages us. We are already taking a hit on our credit and are loosing all the money we put into the house to begin with. But what do you do when it seems to be a loose/loose situation all around? Its either pay now or wait for foreclosure, and then bankruptcy. Right? Am I missing something here?

- Denise

APR

We are in the process of short sale in Reno, NV. We owe 99K, got an offer of 39K. It's now in the hands of the bank for approval. The property was bought as partnership, two single, individuals. This was originally bought as a second home, we live in CA. We've had it for about 7 years. A year ago we decided to rent it out to help out with the payment because I lost my job. I have other properties in CA and have IRAs. My partner has a job and also has assets (primary residence, 401K, IRA). I am already expecting that the bank will not approve the short sale because based on our financial information, it does not sound there is a hardship even though I am now unemployed and not having enough income to pay all my bills. I keep reading about this promissory note ... what would happen if I am willing to sign a promissory note but my partner would not? Will the bank allow a separate promissory note? If that happens, based on our financial and debt amount, what would be the expected amount of promissory note? The buyer is paying cash on this deal, and the property is currently rented out. So it's a good investment for the buyer.

APR

Hi Carmen,

Since I orginally posted my blog, many banks and lenders have changed their definition of what a "hardship" really is. Basically, they have liberalized their definition and now, many more people will qualify for the hardship than ever before. In fact, with the situation as you describe it, it sounds very likely that you will qualify for the hardship. The only thing you can do is to complete the bank's short sale request paperwork, be completely honest and upfront and let the bank tell you what they will or won't do. Don't assume you won't qualify and in return, not fill out the paper work because, you may just qualify.

As for having multiple pormissory notes....that is a bit tougher to answer however, ultimately it comes down to which one of you has their name on the deed? Now, I am not from Arizona so, I can't speak about what would happen there but, I can tell you that in Tennessee, if your name is on the Deed of Trust, your name will be on the Promissory Note. If you are married or have joint tenancy in the property, here in Tennessee, both names will appear as equally responsible because, ultimately each part had equal interest in the property. If you didn't have Joint Teneancy, then most likely, each party will get a separate promissoy note with an equal amount on it.

Now, I say all that but, please keep in mind, many important issues need to be answered before I can give you a reasonable expectation and two, I don't practice in Arizona so, my opinoin should not be considered advice of any kind for you. I can only speak from my experience here in Tennessee with my own clients.

APR

Thank you Jesse for the response. Our property is in NV and yes, it is a joint tenancy. I am just afraid of the mortgage company making us pay for the whole deficiency knowing that we have significant IRA assets. I am relying on this IRA in my retirement since I rolled over my pension plan when I took a buy out from my first employer.

Well, it's a possibility so, you need to make sure that your agent has written in specific protections in your agreement with any buyer that will allow you to back out at the last minute if the UnSecured Promissory Note is broght to the table by the lender the day of closing. This way you can back out and, proceed with something like foreclosure or bankruptcy, depending on whichever would be better for your unique situation.

Now to some specifics...

1. Is Arizona a Deficency State? I don't know but, if it's not....you may not have much to worry about.

2. If it is, you need to speak with a AZ Real Estate Attorney and possibly a Bankruptcy Attorney as to what your best course of action would be if you get a UnSecured Promissory Request.

Now, I don't personally know of any real protections offered by lenders for Investment properties however, AZ is one of the, if not the hardest hit State in the Union with foreclosures so, your State may have some type of subsidized assistance or some other program you could take advantage of.

Here is where having a true Short Sale Specialist for your State will be invaluable.

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Jesus (Jesse) Gonzalez, RDCPro

Hermitage, TN

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