"What chance is there that the bank is going to make me pay the difference (or deficiency) when we are through?" This is the most often asked question I get as an attorney that specializes in residential mortgage loan workouts and (avoiding foreclosure through short sales or modification). If you need basic information to understand the short sale and deficiency issue, see Back to Basics - a Review on Short Sales.
Our Basic Answer
Basically from what we see in our daily practice, if we could give a measure of chance that the bank will seek to have a borrower in a short sale or deed in lieu of foreclosure situation pay all or a portion of the unpaid portion, we would say it was only 30%. Don't confuse the short sale deficiency - with a foreclosure "deficiency judgment" - see: Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios for a detailed explanation).
But it is not that simple and frankly, you would think given a set of circumstances so obvious your 4 year old would have the correct analysis, there are often results that make no sense. My best to date analysis deals with an analogy with which we are familiar - driving on the Interstate.
The Interstate Highway Analogy to Short Sale Deficiency Demands
I live close to Interstate 95, and my clients in Florida use either I-95 or I-75 to get up and down the beautiful Florida peninsula, but it works for any Interstate where it has 5 lanes. If you local Interstate has fewer lanes, just sit back and think of the free flow of traffic a wider highway would give you - and the additional zillion neighbors you would have.
The Middle Lanes
In any event, the Interstate by West Palm Beach has 5 lanes. The middle 5 carry the bulk of the traffic and you can pretty much predict that everyone there is doing the speed limit or 5 or so miles over it. This is where the bulk of short sales occur, the three middle lanes. The 30% demand / 70% release result is pretty much predicable. If you have a lot of liquidity with reachable funds, there is a 30% chance you are going to be asked to make either a reduced financial contribution or a payout over time for all or a portion of the deficiency. And if you don't have financial resources there is a 70% chance you are going to just get a release. For a better understanding to the process, see TOO RICH TO DO A SHORT SALE? - ECONOMIC LOGIC APPLIES and ECONOMICS 101 - SHORT SALES - WILL THE LENDER SHARE THE LOSS).
The Right Lane
Let's now look at the results of the two outer lanes. The right lane is reserved for "slower traffic". Here we find the most conservative drivers, and the speed they travel is a slower rate - the speed limit or usually lower. Everything in this lane is predicable and cautious. The short sale client in this lane is usually on a limited fixed income, perhaps social security, no real savings, may be disabled or cannot work anymore because of a terminal illness. The bank will (should?) analyze the finances of the borrower and see that there is no way that the borrower could either come up with any funds or repay any portion of the debt without winning the lottery. So it makes overwhelming sense that the bank for this right lane is going to give 100% of all travelers a free pass and thus a complete release from the deficiency debt.
The Right Lane Exception
Let me give you a real life case from last week. Client is a female with colon and liver cancer. She has been receiving radiation and chemotherapy for 6 months and the results are so horrific that she cannot work at all. Her prognosis is poor and she is being cared for by her mother in her mother's home, as she was unable to continue living by herself. She has no savings and is getting some social security benefits but because of her too young age it is insufficient except for food or drugs. There are two loans on the house. The first lender is still making up its mind, but the second lender, having full disclosure of her medical and financial situation, demanded a $10,000 payment at closing and $89,000 unsecured after closing at the same pay rate as the existing second mortgage. Now I could not have predicted this demand (which we outright rejected) in a million years - but this is a typical exception that we get all the time. Different yet similar problems and every once in a while this "Twilight Zone" demand from the lender.
The Left Lane and its Exception - Pop the Cork on the Cristal!
Another real life case from late this summer make the point for the "passing lane" or far left lane on the Interstate. Here we have the BMW's, Mercedes, Jaguars, and the inevitable "29 year olds driving Maseratis". Here we have still fat $250,000 and over incomes, $500,000 or more in cash or other liquidity in the bank and a free flowing checking account. My prediction to these clients is the obvious - be ready to write a check to cover the deficiency or maybe we can get a no or low interest unsecured workout amount to be paid post closing. Then we get the short sale approval documentation and low and behold, it has a complete release! The client puts away their checkbook and buys themselves another case of Cristal champagne.
Coming Up With the Average
This leads us back to the 70 / 30 percent prediction. The point is, you cannot make a prediction that is accurate. These exceptions of the right and left lane give too large a "margin of error" to be able to make any prediction reliable. So at my office and with my clients we use it as a "guideline". Your clients (if you are a Realtor) are asking the same questions. Your answers are important to them, so don't guess and hopefully our experiences in my office will help guide you.
Copyright 2008 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 email: RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.
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