Beware Short Sale Approval Letter Language

It is getting dicey-
Banks are playing hardball with short sale approval letter language
and it is happening an alarming rate.  You need to be informed as to
what is happening if you are assisting homeowners with short sales. 
 
There seemed to be a time when you could successfully argue for
full satisfaction of the mortgage with short sale lenders.  We are
beginning to see more approvals using the word "discharge", or
"lien release".  You may remember from my course or by studying
this industry that a lien release is nothing more than removing the
encumbrance from the property so that the property can be sold with
free and clear title.  That does not release the homeowner from
responsibility for the shortfall.  The Mortgage Debt Forgiveness Act
does not apply here.
 
To clear up some confusion regarding the Mortgage Debt Forgiveness Act
(extended to 2012), some verbiage from the IRS website is below.
This legislation only allows the remaining debt or shortfall to be forgiven
as it relates to taxable income, meaning that the shortfall on a debt cannot
be taxed as it has in the past.
 
From the IRS.gov Website...
If you owe a debt to someone else and they cancel or forgive that debt,
the canceled amount may be taxable.  The Mortgage Debt Relief Act of
2007 generally allows taxpayers to exclude income from the discharge of
debt on their principal residence. Debt reduced through mortgage restructuring,
as well as mortgage debt forgiven in connection with a foreclosure,
qualifies for the relief.
 
This provision applies to debt forgiven in calendar years 2007 through 2012.
Up to $2 million of forgiven debt is eligible for this exclusion
($1 million if married filing separately). The exclusion does not apply if the
discharge is due to services performed for the lender or any other reason not
directly related to a decline in the home's value or the taxpayer's financial condition.
 
So, what this means is that a homeowner is covered by the debt relief act by
not having to pay income on the forgiven debt, but that DOES NOT mean that
banks aren't going after some version of recovery of the debt.
 
There are several ways they are doing this now.  Sometimes it is in the form
of a promissory note, only to be requested at the end of a of a long, laborious
short sale process.  If you are an investor, or are a realtor working with an
investor, getting the investor to increase the offer slightly-if there is enough
margin, can make the lender back off on the promissory note.  Investors who
can and will do this are a HUGE help to the homeowner here.
 
Lenders are also going after the homeowner by putting them into collections
for the shortfall.  It is a pretty rotten thing to do after the short sale process,
but it is happening.
 
So, how do you protect yourself and your homeowner.....
DISCLOSURE!!! AND REFERRAL!!
 
What we know at this point is that it is still better to conduct a short sale
than to let a homeowner go to foreclosure--otherwise, they may be responsible
for the entire debt, vs. just the short.  However, if you don't fully disclose to
the homeowner what the ramifications are of conducting this transaction,
you really risk litigation yourself.
 
Make sure your "Seller's Understanding, Waiver and Disclosure Form" is up
to date with the potential risks of a short sale.
 
Also make sure you have a good R.E. attorney, bankruptcy attorney and
accountant on your team for REFERRAL should you/your homeowner be
faced with these issues.  Many homeowners who conduct a short sale, and
still have outstanding debt, do file bankruptcy after a short sale is completed. 
This is something you may be asked about, but do make sure to refer and
not offer legal advice.
 
To learn more about protecting yourself and the homeowner, along with
insider tips, tricks and opportunities conducting short sales, visit:
www.ShortSaleGalaxy.com
 
Patty Burgess
www.ShortSaleGalaxy.com