You Took My Equity AND Made Me Sign A Promissory Note? Short Sales Info

Real Estate Technology with Content, coding, marketing, host.

Welcome to Earth. You may not get these calls and emails but I do. "Ken, I enjoyed your video about short sales on YouTube. I recently had the bank accept a short sale offer on my home for less than I owe and they are asking me to sign a $65,000 promissory note. Have you heard of this and do I have to sign it?"

Thanks. Yes. No, they won't shoot you if you don't. But ...

Of course I have heard of the lender asking a seller on a short sale to sign some form of indemnification against the loss to the lender or their investors. What, you think all those people who took a risk in loaning you money should just say, "Oh, that's okay honey. We understand you did the best you could. Now run along and play."

Loan Flow Chart to Investors

In the flow chart above we go so far as to show the ultimate holders of mortgage notes. What this is intended to demonstrate is that the actual investors in mortgage notes (where the lenders get their money) are people like the Wiclows and Marcus and Chenice. They are people who invest into these instruments in order to build their retirement, take care of their family (older and younger generations), re-invest into the community and sometimes just pay their bills. Insurance companies have their own investors who depend on positive return on investments as do unions, and retirement fund managers.

Now that you have made it to this point understand that every foreclosure, every short sale and even every late or missed payment affects people just like you would you like to drive out to Marcus and Chenice at their home and tell them you're just not going to make your payments anymore and you have no intention of ever repaying them for the money they loaned you?

Yes, the lender may/will ask you to sign a promissory note. A promise to repay something you already promised to pay once. It's not Marcus and Chenice's fault you can't/don't want to pay your debts. So you can refuse to sign the promisory note and the lender can foreclose and get a deficiency judgment against you and still make you indemnify their investors against the loss. You will take responsibility for your debt one way or another. The only way around this is if you live in a non-recourse state or otherwise have some form of non-recourse loan.

Now before you go blasting me I know there are times when people fully intended to repay the money Marcus and Chenice loaned to them and they get sick or lose their income and cannot replace it. We have always had remedies for people in those situation: bankruptcy, deed in lieu of foreclosure, welfare assistance, and others. This short post is aimed at those who have a job and can afford their payments but drive $700 a month cars, have every cable channel imaginable, eat out every meal, has vredit cards

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I started writing on Active Rain in 2006 when I was representing the mortgage industry. I am no longer in that industry and many of the older posts contain outdated information. Please do not contact me for LENDING or MORTGAGE questions but rather contact a licensed mortgage professional from your area. I have always been in marketing and branding and that is still what I do. Thanks for reading!

Comments (8)

Sandra White
John L Scott Real Estate - Port Townsend, WA
Experienced Residential Resale Broker

Very interesting information. Thanks for the chart. Will check out your video on Youtube.

Apr 30, 2009 07:32 AM
Daniel Seider
BTRE Big Trees Real Estate - Arnold, CA

This is good information. I will also check out your video on You tube.

Apr 30, 2009 07:59 AM
Janna Scharf
Keller Williams Realty Coeur d'Alene - Coeur d'Alene, ID
Coeur d'Alene Idaho Real Estate Expert

Very idiot-proof explanation. You left just one key questoin unanswered.  Who are Marcus and Chenice???

Apr 30, 2009 09:34 AM
Susan Neal
RE/MAX Gold, Fair Oaks - Fair Oaks, CA
Fair Oaks CA & Sacramento Area Real Estate Broker

Hi Ken - This advice must be tweeked a bit in California.  Most of our home loans are secured by trust deeds, and almost without exception a foreclosure would be non-judicial, and whether or not the lender is able to seek a deficiency judgment depends on whether it is a recourse or non-recourse type of loan.  If a seller has a non-recourse loan and it is foreclosed on, the lender gets the property, period.  If he requires a promissory note to approve a short sale and if the seller would rather walk away and let it go to foreclosure, the lender would be better off letting the seller try to short sell it - this would reduce the lender's loss significantly.

Granted, in a perfect world, each borrower should pay all his debts, but this is a far from perfect world - especially right now.  Any seller in Califonria who is concerned about this needs to discuss the recourse issues with someone knowledgable and determine the best course to take rather than just accepting the lender's demand for a note.

Apr 30, 2009 10:46 AM
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Sandra - thanks for commenting! Get some popcorn and enjoy the video.

Daniel - thank you, I'll see if Sandra will share some popcorn with you.

Janna - I think that is today's version of Mr. and Mrs. Jones :)

Susan - you are correct and a handful of other states as well. I didn't get into it in detail for sake of not turning the post into a book so thank you for adding details on the subject I only mentioned in the post. Appreciate your addition! There are lenders who will not lend in non-recourse states for this reason. More states are non-judicial than non-recourse. Maybe I'll post a chart ... thanks!

Apr 30, 2009 11:31 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Ken, Being in the thick of short sales like I am I have heard it all. I try to get as much documentation as I can upfront so I can make a decision as to whether or not I want to help the sellers but still.....some withhold info from me. There's nothing worse than being months deep into short sale negotiations only to have the seller finally reveal that they really can afford the property but just don't want to live there anymore. They haven't made a payment in over a year but neglected to mention they have been placing the payments in a savings account!!!! Some days I hate my job :)

Apr 30, 2009 11:39 AM
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Bryant - and you get the point! Of course I would expect nothing less. Fun chatting with you on Google video the other day.

Apr 30, 2009 12:06 PM
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

Yep... those big faceless banks are ok to rip off.  But, what people don't realize is that the people getting the shaft are teachers, cops, auto-workers and retirees.  They loaned the money...

Apr 30, 2009 04:36 PM