What's the point of the new "Arms Length" addendum in Short Sales?

Real Estate Agent with Re/Max Alliance

I have a client with whom I have been working for nearly a year to short sell her home.  She has two loans in place, and is approximately $120,000 upside down on a house that is worth about $99,000 right now.  The first lender took about six months to approve the short sale, but finally did.  The second lender, Chase, has approved the sale, but is requiring an "Arms-Length" addendum to the Purchase Contract prior to authorizing the release of the lien and waiver of the right to pursue the deficiency.  As a lawyer and Realtor, I spent some time with my client to go over the addendum to make sure there were no issues.

As I reviewed the addendum, some items made perfect sense ... while others seemed somewhat odd and irrelevant to the lender.  For example, I can understand completely why the bank would not want there to be a less than arms-length arrangement going on here.  But the reason for the concern, I would think, should be rooted in the possibility of the Buyer getting a better than market price.  Rather, for the most part, the restrictions appear to be more focused on making sure that the borrower suffers ... period.

Take, for instance, the restriction against a leaseback.  The addendum requires the Seller and Buyer to testify that there is no agreement, whether oral, written or implied, whereby the Buyer agrees to lease the property back to the Seller.  Assuming the Purchase Price is a fair market price (which is theoretically determined by the Bank's own non-monetary), what difference should it make to the bank that the Seller/Borrower have an opportunity to lease the property back from the Buyer?  Is that any different, from the bank's perspective, than having the Buyer lease the property to some other party who may very well have just short sold their house?  To illustrate the point, imagine that two neighbors have identical loans with identical banks.  They each short sell their homes, and the banks require them to execute arms-length addenda.  They do ... then, at closing, each party enters a lease with the buyer of the other party's house.  They move into each others' homes and go on their merry way.  How is the bank any better off in that scenario, than if the bank just let the Sellers/Borrowers lease back their own houses from the Buyers ... answer ... the bank is no better off, except to the extent that the bank receives some non-monetary gratification at knowing that they taught their borrowers a lesson by forcing them out of their homes.  

From a purely economic standpoint, it seems to me that we would all benefit from banks not imposing these irrelevant restrictions on their borrowers who are, in most cases, desperately trying to get out from under these incredible burdens, without completely disrupting their lives.

Comments (1)

Jeff Getman
Realty Executives of Ravalli County - Hamilton, MT
Realty Executives

The only thing I can say is that along with all the money that flowed from Washington to the banks, a lot of stupidity came along for the ride!

Mar 10, 2011 07:50 AM