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Countrywide/Bank of America Approvals- Deficiency Threat Sends Shock Waves

By Wendy Rulnick

Real Estate Broker/Owner with Rulnick Realty, Inc.

May 15, 2009 01:14 AM

Countrywide Deficiency

Have you seen the new Bank of America/Countrywide short sale approval letter? It is sending shockwaves to unsuspecting short sale sellers. Here is a portion of the new approval letter:

Bank of America short sale approval letter`

The key statement of concern is Bank of America "may pursue a deficiency judgment for the difference in the payment received and the total balance due..." There are two contradictory elements in the demand letter:

1. The letter states that Bank of America has "agreed to accept a short payoff". Now, how can they Bank of America Approval Letter "accept" a short payoff, then state they "might" collect the rest? They either are or are not.

2. It states "there may be tax consequences for entering into a short sale". Again, the statement concedes it is a "short sale", and alludes to the 1099-C, where cancelled debt is reported to the IRS. Either the debt is cancelled or it is not. Why would Bank of America reference short sale tax consequences if they were, in fact, collecting all the debt?

Neither contradiction supports their reference to collect the deficiency in the future. Since I have had several concerned sellers who have received this approval letter, I emailed a Bank of America escalation negotiator to get their explanation. Here is what they said:

Countrywide/Bank of America cannot remove the deficiency verbiage from the approval letter. We must reserve the right to collect the unpaid balance of the loan for the benefit of our investors and mortgage insurance companies that insures payment on the loan. The purpose of the short sale letter is to properly disclose this to the borrower so they may consider all of their options with respect to their mortgage loan.

In my experience with short sales, I have never know anyone to pursue the deficiency once the short sale has closed.

So, how can you alleviate concerns when receiving this letter? Of course, talk to your attorney if you do not feel comfortable, but consider the alternatives if you do not accept the short sale. Deed-in-lieu of foreclosure, which will produce the same deficiency, and be worse on future borrowing ability? Or foreclosure, with severe future borrowing constraints, liabilities and consequences? None of the choices are that palatable, but short sale is still clearly your best option.

It's Wendy!

Wendy Rulnick, Broker, CRP, CRS, GRI, ABR Rulnick Realty, Inc.

Destin FL Real Estate

Destin Short Sales & Pre Foreclosure Help.

Read Destin Real Estate Blog

Call toll-free 1-877-ITS-WNDY (1-877-487-9639) or local 850-650-7883 ext 204

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This site, Wendy Rulnick or Rulnick Realty, Inc. is not providing legal or tax advice. The information provided is for educational and informational purposes only. It is recommended that sellers considering a short sale should consult an independent legal and tax advisor for more information.

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Comments(18)

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Eric Reid

Renaissance Realty Group of Keller Williams Atlanta Partners - Lawrenceville, GA

I have seen this happening more and more ,, my worry is that someday banks are going to start selling these rights to some 3rd party company to collect for 10 / 20 / 30 cents on the dollar

May 15, 2009 03:57 PM

Anonymous

Lisa Hayashi

Wow! It seems strange that a bank or any other creditor for that matter would waste their time beating a dead horse. For them to say it's just a formality for their investors, doesn't seem to give the investors any real recourse, so why even print it? In fact, it would seem they would try to use that clause just to sell the "dead horses" to an even more desperate collecting agency.

May 16, 2009 01:58 AM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Eric - Mine, too! Scary.

Lisa - There seem to be discrepancies in the letter, for sure. I had an attorney tell me it might be for accounting purposes.

May 16, 2009 02:14 AM

Bill Gassett

RE/MAX Executive Realty - Hopkinton, MA

Metrowest Massachusetts Real Estate

I figured the explanation you got was exactly what they would say. Afterall they are a bank that has their you know what up their &^%!

May 16, 2009 03:40 AM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Bill - It is really sad, in a way. I've been told many sellers are cancelling their short sales after they receive this letter. But the consequences are worse.

May 16, 2009 03:49 AM

Walter Getz

1st Choice Mortgage Resolutions - Rochester, NY

Wendy (and others) - Please allow me to see what I might be able to do to clear up any confusion. Understanding this matter may help when explaining to your clients what this means:

"may pursue a deficiency judgment for the difference in the payment received and the total balance due..." & "agreed to accept a short payoff" - Any lender will post this matter. Unfortunately, for them to advise you that they put it there for the purposes of appeasing investors/note holders is just plain ludicrous. This only goes to show how much is to be learned by everyone in this industry, including the employees of the lenders themselves, not to mention attorneys who are "guessing" why it is there. This is placed there for legal reasons. The lender does not agree to a short sale to remove all obligation from the borrower, it only in fact, agrees to a short sale as an alternative to foreclosure. Obviously, workout makes sense for both homeowner and lender alike, most notable reasons being credit consequences for homeowners, and loss of asset for lenders.
"there may be tax consequences for entering into a short sale" - another "necessary evil" for legal reasons. These letters are a general population, to help the lender to have to avoid hiring special letter writers. This statement is indeed true. The Recovery Act of 2008 has increased the amount of penalty free forgivable debt to homeowners to an unlimited amount. However, it only applies to homeowners who are asking for principle reduction on their primary residence. And, they must be living in the home at the time the agreement is made, or they will not qualify for the tax exemption. All other principle forgiveness is considered income and the homeowner should expect a 1099 from the bank. I would advise my client to request this item before filing the next years tax return. Be warned! Most lenders will not send the 1099 unless requested!
"In my experience with short sales, I have never know anyone to pursue the deficiency once the short sale has closed." - This is a true statement. I have never seen a lender/investor/note holder actually pursue the deficient amount owed. This is due to several reasons. The lender only has a certain amount of time to collect on the deficiency (varies by state, average of 2years from date of agreement), and in nearly every case, do not believe that the homeowner has assets they would be able to collect on. Most homeowners will need a minimum of 2 years to bounce back from something like a foreclosure, and it is not likely that they will be in a position to make payments before the collection time is up.

Eric - the likelihood of the banks selling off debt is next to none, for reasons explained above. Still, I dont have a crystal ball :P

I hope that this is helpful to everyone reading, and invite your comments or questions. Please forward them to me at info@1stchoicemortgageresolutions.com

Sincerely,

May 16, 2009 06:15 PM

Sally K. & David L. Hanson

EXP Realty 414-525-0563 - Brookfield, WI

WI Real Estate Agents - Luxury - Divorce

We have had that experience and got another letter with that language stricken...and told the lender if it was not...the seller had an appointment with a bankruptcy lawyer....and they did...but thankfully, didn't have to keep it ! Good Luck !

May 17, 2009 12:31 AM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Walter - Thank you for your deep insights :) I agree that the statement from BOFA/CW does not make sense.

Sally & David - Did the approval letter come recently? Was it *without* the deficiency language? Countrywide told me recently they will NOT strike it.

May 17, 2009 03:03 AM

Joanne Johnson

West County, MO

I had a seller balk at this letter too. They had already signed & returned the form to the title company when their lawyer called and told them they shouldn't have signed it. The issue as I see it is would you rather be sued for the difference between the deficiency or would you prefer being foreclosed upon and have them come after you for the entire amount plus the cost of foreclosure and interest penalties? There is no perfect scenario here. When sellers have cashed out huge sums of equity there isn't going to be a perfect scenario in which they will be absolved of their obligations. The short sale letter is nebulous but at least it does say "agreed to a short sale payoff". It also stipulates the amount of the payoff agreed to. I believe a lawyer would be able to argue intent with that language and of course, it has to be better than the alternative I mentioned earlier.

May 18, 2009 10:19 AM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Joanne - Right on! I cannot disagree with you. What would the lawyer have as an alternative?

May 18, 2009 10:44 AM

Heather Bennett

Remax Preferred Properties - Vienna, VA

I've been in the situation as well and my client did not sign the letter. Since my client was behind on the mortgage for some time, the recovery dept had already contacted them and wanted basically 10% upfront (at closing) of the deficiancy balance and then a note for 25% of the remaining. Although talking w/ different short sale analysis you never get the same story, some told they can but most likely they won't and others said they will pursue a defiancy balance. Honestly, the bank probably doesn't know what their going to do. They would have to set up a whole other infrastructure to pursue all those exborrowers?

May 19, 2009 12:42 PM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Heather - I don't know if they would do it either. I imagine there might be class-action lawsuits if hundreds of thousands of short sale sellers were contacted in a few years. Right now, government is in "Save the People" mode. I got one attorney's opinion, I'd like to hear others.

May 20, 2009 12:37 AM

Anonymous

John

Walter,

Your comment on this blog has got me wondering.... in the second bullet comment about the Recovery Act, you mention that the homeowner must be living in the home at the time of sale to qualify for tax exemption on forgiven debt in a short sale. As I understood things, The Mortgage Forgiveness Debt Relief Act exempts taxes on a principal residence related cancellation of debt and the IRS does not necessarily define a principal residence as one that is being occupied by the owner at the time of the cancellation of debt (or whatever scenario needs to apply this definition- capital gain exemption of certain amounts on the sale of a property for example, can be avoided if the home is lived in two out of the past 5 years preceding the sale). Please clarify this for me someone, as I am going through a short sale right now but not living in the home (however I would consider it my principal residence).

I believe the confusion here is that to qualify for a refinance in the 2008 Recovery Act, it has to be on an "owner-occupied principal residence"
Please anyone who knows about this confirm???

May 20, 2009 03:00 AM

#13

Tisha Lawrence

Maximum One Realty-Fayette-Henry-Clayton-Fulton - Fayetteville, GA

South Metro Atlanta Agent 470-239-0330

I am about to list a Countrywide/BOA short sale. Its great to know this before my sellers get this letter.

Jun 14, 2009 12:29 PM

Anonymous

I'm a bankruptcy attorney, and I can tell you a short sale is NOT always the best option. Further, Bank of America's letter is not confusing. It has a lien on any houses that it gave borrowers mortgages on preventing any such houses from being sold unless the bank either gets paid in full or agrees to a short sale. In the letter Bank of America is saying that it is agreeing to allow a short sale and give up it's rights as a lien holder (e.g. prevent the sale of the house without getting paid in full). It, however, is not giving up it's right to pursue the deficiency balance after the sale is completed.

It is true, banks holding a first mortgage typically do not pursue deficiency judgements. The questions remains though, are the banks going to sell the debt to third party collection agencies that have every motivation to pursue the deficiency balance? If they do, the short sale might hurt many borrowers because owning the house might help them be able to file Chapter 7 Bankruptcy, where once they give the house up they might not be eligible to file Chapter 7 Bankruptcy. Further, if the borrower lets the house foreclose he can live in the house rent free for sometimes longer then a year. Going the short sale route potentially will cost the borrower thousands that could be saved living in the house free, and the ability to file Chapter 7. That means the borrower has exposed themselves to having twenty five percent of their wages garnished or having to file a painful Chapter 13 Bankruptcy which goes on for three to five years.

In some states, like Michigan, a collection agency has up to seven years to sue for the deficiency balance. It can list that money owed on a credit report for seven years. That would mean essentially no credit building while that is on the report. Further, in Michigan once the creditor sues, it has up to twenty years to collect it. That is a lot of time to be looking over your solider.

Jul 02, 2009 02:36 PM

#15

Anonymous

Terrin

PS:

What would be real helpful is finding a few people who live in States like Michigan who have agreed to such short sales and where the Bank retains the right to sue. Specifically, how doe the Bank hand the collection of the deficiency afterwards. Does it sell the debt to a third party collection agency? Is the debt listed on the credit report?

Jul 02, 2009 02:45 PM

#16

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Terrin- Thank you much for sharing legal options for the readers. Appreciate it. If they seek a "deficiency", then they would not be sending a 1099-C for forgiven debt, correct?

John - IRS website says you may not be liable for taxes if you are "insolvent" at the time of the debt cancellation - advise client to seek tax professional.

Jul 03, 2009 12:47 AM

David Dee

RMX REALTY - Alhambra, CA

Real Estate - San Gabriel Valley (L.A.) & N. Orang

Wendy,

what is the possibility of signing the letter and then crossing off some of the verbage ...since BofA does not allow it to be taken off? Wouldn't doing this solve the solution for the seller as they are agreeing to the approval but NOT agreeing to the deficiency portion by striking it out?

Sep 12, 2009 09:03 PM