I recently had a client who was in to process of being relocated. He was upside down on his mortgage and had to do a short sale. I told him it would be wise to contact his lenders to inform them of the situation. When he did this, the lien holder on his second mortgage asked him if he would prefer to work out a settlement instead. Not knowing exactly what this meant, he thought why not.
Long story short, the bank came back and told him they would take 33 cents on the dollar and remove their interest in the home. so he had to come up with the funds, but it allowed him to sell his home without a short sale and actually put a small amount of money in his pocket when it's all said and done.
I thought this can't be possible. When does the bank agree to work with someone when they aren't already showing financial distress? So having a second mortgage of my own, I thought it can't hurt to call. I contacted my lender and told them I was requesting a 'Settlement' on my mortgage. After a few brief questions, they sent out a 4 page packet and said they would see what they could do. Two weeks later, they agreed to take 20 cents on the dollar!
Imagine my surprise. I thought I had just hit the lottery. I had a number of professionals look at the settlement agreement they had sent me. they all agreed that this was a legitimate proposal and they I would be a fool to pass it by. So I went ahead and wired the money and now have equity in the home. I am still waiting to receive my satisfaction letter, but should be receiving this in the next week.
So is there a catch. Maybe. First off, I've had people warn that the bank may 1099 me and count it as income. This may be true, though the 'Debt Forgiveness Act of 2007' passed by Bush explains why this may also be forgiven in a number of situations. I won't go into too much detail, but if this is a route you or your client takes, make sure to read up on it. It could be very valuable. Secondly, you obviously have to have some available funds. they put a deadline on when they will accept this agreement and it's typically very short. Lastly, while it may not damage your credit score as long as you are current on your payments, it will create a mark on your credit record that may need explanation down the road. But that should be pretty simple. "I asked the bank to take less, they said yes!"
Now this is seemingly new ground that's been broken. Until 2 months ago, I had never heard of such cooperation. Since then I've mentioned this to 2 other clients and they received a similar response and are in the process of working something out. So depending on the situation, you may have the ability to fore go the short sale process, sell your home quickly, and maybe even put a little money in your pocket when it's all said and done.
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