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LENDER SHORT SALE ACCEPTANCE LETTER EXAMPLES - READ WITH CAUTION!

By Richard Zaretsky

Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

February 03, 2009 11:53 PM

What is a short sale? When giving lectures I like to use the definition as follows:

The sale of a real estate property for a price that is less than the total amount necessary to fully satisfy the actual present encumbrance (mortgage) indebtedness on the real estate property.

Often I see a different description, one that says, The sale of real estate when the lender accepts less than its mortgage amount and forgives borrower from paying the deficiency.

Which is correct? A look at the short sale acceptance letters lender's provide is going to tell us the real truth about short sales and forgiveness of deficiencies. This article will discuss examples of short sale acceptance letters. Read carefully, as you will probably be surprised!

Before going on, it is important that you have read and understood the concept of a promissory note and of a mortgage which secures the promissory note. See my article which explains it at A LAWYER'S EXPLANATION OF THE FORECLOSURE PROCESS.

Here is Example #1 of a short sale acceptance letter:

ASC Acceptance Letter

You will notice that the letter says this is an acceptance of a short sale. It says if all the things in 1 thru 5 are done the mortgage will be discharged and a release document will be provided to be recorded and the foreclosure dismissed. There is no mention of any cancellation of the promissory note. In this example there is no forgiveness of any deficiency.

See this next example from Bank of America the language is different.

BAnk Of America Letter

Here, the letter says the deficiency balance will be reported to credit bureaus as "charge off" and the liability for the deficiency balance is "to be determined". This is confusing but what it means is that (1) there is a deficiency and (2) the lender will later determine what to do about the deficiency.

Next, is a 2 page letter from Countrywide.

Countrywide Short Sale page 1

Countrywide Short Sale Letter page 2

This letter is the most definitive from the three presented. At paragraph 9 it clearly states that there is no promissory note required from the borrower. When taken with paragraph 13, it is clear that Countrywide will not pursue a deficiency judgment if the short sale closes. Thus in the example presented there is no deficiency that will be collected.

This last example from Chase was not as simple.

Chase Short Sale Letter

Here it says that Chase will release its security interest (the mortgage) and forgive any deficiency balance but then says that the payment of $1,000 is only for the release of the security interest only. This I would understand to mean the mortgage and not the promissory note. At the bottom of the page (but not part of the letter) is a notation "Short Sale No Def.doc". So I sent an email to Chase about this discrepancy and they confirmed - in writing - that it was a waiver of any deficiency.

Be very careful where you see language like "release and satisfaction" of the mortgage. What about the promissory note? That language almost always means that the lender is NOT giving a forgiveness of the financial obligation and has the option to pursue the deficiency for years to come. See FORECLOSURE DEFICIENCY JUDGMENT or SHORT SALE PROMISSORY NOTE or BANKRUPTCY - REVISITED.

In summary, it is most important that you read and question the short sale approval letter you get. A "release and satisfaction" of a mortgage is NOT necessarily a cancellation of the promissory note (forgiveness of deficiency). The letter from the lender should be clear and unequivocal and not subject to supposition or interpretation. If you are uncertain, don't be bashful - ask the lender for clarification and get it in writing!

NOTE: THIS ARTICLE HAS BEEN UPDATED AS TO BANK OF AMERICA SHORT SALE LETTERS at BANK OF AMERICA SHORT SALE APPROVAL LETTER CHANGES

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 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. See our easy to find articles at Need Short Sale Information? - These Articles Probably Answer Your Question

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Comments(14)

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William J. Archambault, Jr.

The Real Estate Investment Institute - Houston, TX

Richard,

Thank you. I'm printing this to read entirely, I think everyone should.

I may be back.

Bill

Feb 04, 2009 12:27 AM

Lynn Grimes

Keller Williams Realty - Garland, TX

ABR,SRES,GRI,IRES

I appreciate the insight into short sales. Would be intereseted to know if short sales vary from state to state or is this the same all across the board?

Feb 04, 2009 12:37 AM

Sidney Jimenez

Keller Williams - Miramar, FL

CDPE, Short Sale Expert, 954-665-9449,

RICHARD,

It's good to point out that many of those letter are "stock" letters and there needs to be negotiations to try andhave the wording protect the seller from later consequences. I have found that lenders are more amendable for primary residences but steadfast with the second or investment property.

Become a CDPE Today

Schedule Your Class

Feb 04, 2009 09:13 AM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

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

Richard - Those are great examples. What would you suggest when there is an open-ended potential to seek the deficiency, like BOFA example? Am I correct in thinking the seller should just accept, as their only alternative might be bankruptcy, especially in cases where deed-in-lieu in not possible? Thank you for any edification.

Feb 04, 2009 10:20 AM

Sergio Rebollo Jr.

Real Estate TeamMates - Miami, FL

Richard...thanks for sharing the different scenarios. I'll stick around for additional comments.

Feb 08, 2009 10:29 PM

Sidney Jimenez

Keller Williams - Miramar, FL

CDPE, Short Sale Expert, 954-665-9449,

PAUL,

A deficiency in a foreclosure is often greater than in a Short Sale because the lenders include all the expenses associated with the foreclosure and subsequent sale, including court costs, lawyer fees, real estate commissions, ect...ect.

Mar 02, 2009 06:48 AM

Sidney Jimenez

Keller Williams - Miramar, FL

CDPE, Short Sale Expert, 954-665-9449,

LAURA,

You can call me for the form.

Mar 26, 2009 09:57 AM

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Mina

You are in one of the few instances where a bankruptcy should be examined rather than a short sale or loan modification.

Here is the problem from your brief description: You cannot pay the deficiency, even over time (so you say) and you cannot pay the income tax (also over time since the IRS can make term payments available to you). IF you simply cannot deal with the forgiveness of debt (the 1099C) then you need to avoid it. There are only 2 ways to avoid the 1099C -- pay the deficiency or sign a promissory note or agree to continue paying on the existing note, or file bankruptcy BEFORE the short sale.

Timing is critical. You must consult with a tax or bankruptcy attorney or both immediately!

Jun 22, 2009 11:20 PM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

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

Richard - It is my understanding that bankruptcy will only delay foreclosures, not prevent them, unless there is a repayment plan-type bankrupcty like Chapter 13, and the borrower is able to make payments, correct? The bankrupcty court is not interesting in taking an asset with negative equity- is that right? Thank you for clarifying.

Jun 23, 2009 01:18 AM

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Wendy -

Bankruptcy in a chapter 7 liquidation will not permanently stop a foreclosure but it will delay it - for 30 or 60 days. If the borrower wants to keep the house out of foreclosure then the payments must be timely made.

A Chapter 13 bankruptcy could allow the 2nd mortgage to be reduced as to SECURED principal and the balance would become a general creditor debt. The mortgages must be kept current to prevent a foreclosure.

In both situations the borrower is relieved from personal obligation for any deficiency so the loans become non-recourse.

Jun 23, 2009 04:44 AM

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Arun

I am not familiar with the laws of Nevada - but you need to consider 2 laws, not just one.

The first law is the matter of the deficiency IN the foreclosure sale - that is the law you refer to.

The second law is the unpaid portion of the promissory note. That can be brought as a separate breach of contract action and a separate and longer right to sue (statute of limitations) is used for that right of action. The start point for that statute of limitation would likely be the date you were declared in default of the promissory note. You need to determine the time limit on that possible action as well.

Lastly, under both scenarios you will likely have a "second bite of the apple" - meaning you will have other opportunities to negotiate a settlement on the balance of that unpaid balance. Understand though that a judgment that carries a statory interest rate every year is far more valuable to a holder of that judgment than a non-interest bearing promissory note they are offering to you now. (Be sure it has no interest as that makes it far less valuable to the holder because of something called Net Present Value).

Oct 22, 2009 10:06 PM

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Anca -

You need to communicate with us confidentially - email me at RPZ99@FLORIDA-COUNSEL.COM

Apr 21, 2010 12:09 AM

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Richard - I see no email from you.

May 15, 2010 01:26 AM

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Mike Sylavan -

Your scanned letter only states discharge of a mortgage / home equity - nothing more. This should be interpreted by your title closing agent as a way to clear the title. However, the letter says nothing as to any of the issues that would surrond a forgiveness of the deficiency.

None of the telltail hints that it may be a deficiency release are present (no warning of tax consequences, no specific statement of liabiliity, no statement of satisfaction, etc.).

You must therefore consider this to be a reservation of liability on the note.

The letter is from a credit union. CU letters are notoriously vague perhaps because the lender is small and does not invest in the resources of an attorney when they are already experiencing a loss. In such cases we ususally just call up and ask for a definitive statement one way or the other what the final outcome is expected to be by the lender, and put it in writing - or negotiate what it will be.

Good Luck!

Jun 11, 2010 01:17 AM