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Radio Show 18: 2009/09/24: Walk Away, Short Sell or Modify Loan?

Hello and welcome to the Foreclosure Freedom Network Show!  This is Connie Saunders.  I’ve been in the mortgage industry for 20 years and am a licensed California Realtor.  Today I thought I’d take some time to go over some questions and contribute my answers to the mix.  Many of you are in the middle of either loan modification negotiations or Short Sale negotiations and could use an independent professional opinion!

Before I begin with the questions and comments I would like to define three options that exist in today’s market on any home, which is in trouble:

One is to ‘walk away’ or just allow your property to Foreclose.  It’s possible that this may be the right handling for a few, but in most cases this will put a strain on your future and in some cases one may end up with a larger deficiency judgment against them and a much tougher group of players to have to deal with in the collections arena.  Here’s how that works.  When one walks away and allows the Foreclosure to take place this Foreclosure becomes an official act and is recorded on Public Records.   Other dings on ones Credit can be wiped out with a simple dispute process done well by a Credit Counselor to the Credit Bureaus.  The Foreclosure, however, cannot be taken away in this fashion and any time thereafter can be pulled up, indexed to your name when a Title Search is done.

Then there are what’s called ‘deficiency States’.  Here the law is on the side of the lender and allows the lender to both Foreclose on the property and to get a deficiency judgment against the owner.  This will carry over past the foreclosure sale of the property.  The judgment is a commodity and can be sold to a collection agency that can use their established lines to discover other property of value and bank account numbers to levy and lien and eventually obtain enough capital to satisfy the lien.  One is subject to a good deal of other harassment and collections tricks, which often get worse over time.

A Non-Recourse State is one where foreclosure is the only option in order to gain recovery of the ‘real property’ collateral backing a mortgage.  More specifically the lender can’t do a foreclosure and also take the person to Court for the deficiency once this property is sold.  Such States include:

Alaska   Arizona   California   Connecticut   Idaho   Minnesota
North Carolina   North Dakota   Texas   Utah   Washington

California’s non-recourse laws apply only to “purchase money” loans (i.e. original home loans that are used to purchase property). In a non-recourse mortgage state, borrowers are not held personally liable for more than the home’s value at the time that the loan is repaid. If the foreclosure sale does not generate enough money to satisfy the loan, the lender must accept the loss.

Almost all HELOCs and home equity loans are considered recourse loans and lenders for these loans may sue borrowers to recoup loss. (Except in some cases where the second mortgage lender forces the foreclosure.  So where one has a HELOC it’s best to negotiate a settlement while you have some collateral to play with.

One Action States

In some states, lenders are only permitted a single lawsuit to collect mortgage debt. This plays out differently depending on the state’s laws. In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt. The following states have some type of one action statute:

California   Idaho   Montana   Nevada   New York   Utah

Then there is Florida.  Allegedly Florida is a non-Recourse State but I don’t see how this is.  The law in Florida is brilliantly on the side of the lender. They first must seek and get a deficiency judgment and then they proceed to Foreclosure, therefore when in the foreclosure they don’t satisfy the debt they already have the judgment and can go after the person as soon as they reconcile the net still due.

So, my vote on just doing a ‘walk away’ is to do whatever you can to exercise your other options first.

Another option is to short sell your property.  Here your negotiator or Realtor will get an OK from the lender to allow this property to sell to a buyer and bypass the Foreclosure step, helping the seller/owners credit rating now and into the future and allow them to get out of the deal somewhat gracefully.  This ends up putting more money in the lender pocket (usually) because they save on the cost of Foreclosure.

Also with short sales one can get out of having negative dings on their Credit Report if a ‘temporary forbearance’ is gotten for the term of the short sale time frame.  This gives the property owner an official window of time where they can ‘not pay’ and not be negatively dinged for it - while they are working out the solution.  Of course, one can just continue to make these loan payments.  So long as payments are made on time there is no reason to negatively note anything and many people escape from the Short Sale without any Credit dings doing this.

Only two problems can occur on this.  First; Some lenders feel there can’t be a hardship if one isn’t in default.  Second; there is a serious hardship caused by making these payments.  Some spend all their reserves to continue payments or use Credit Cards or other loan sources, getting themselves into worse trouble.

One needs to consider all the consequences before being too arbitrary on what is paid when one cannot handle all the property bills.  To continue to pay the first mortgage holder only while not paying the COA fees or the second mortgage and both of these creditors are hurting so badly in the end that they absolutely insist and demand personal contribution before they will allow the Short Sale to occur.

Just be certain that when doing a Short Sale at the time of the sale a contingency is put into the purchase contract for lender approval of the Short Pay Off of the mortgage and forgiveness of the deficiency.  So long as something like this is put into the agreement and the lender does approve this short sale with no specific written objection to forgiveness of deficiency, the lender is establishing the agreement that concluding this short sale will ‘forgive deficiency’.

On credit bureau reports the notation after Short Sale is something like “Payment in Full, less than amount owed” or “Short Payment in Full” or “Paid as Agreed” or some such wording.  This wording, by the way, can be negotiated.  This wording does not later show up as a ‘short sale’ it just shows something was paid in full and was short of full note amount.

A foreclosure, however, will always show up when title is pulled on your name and takes much more cunning and expertise to get off of Credit Bureau reports.

The last option is to do a Loan Modification, or work to get the interest or principal reduced on the property to make it more affordable.  If this is your primary residence there are many aids out there to help get you into a more affordable loan modification.  Where this is income property these aids diminish and the tidal wave of pressure is on getting the property short sold or foreclosed, but if you’re a fighter you can still pull through with a loan modification, it just may take longer to accomplish and may not have all the bells and whistles connected with one’s primary residence.

Key things to think about for the loan modification is Do You Really Want this Home?  Many loan modifications later fail because they don’t reduce principal down to the current Market Value of the home, so the loan continues on in time being secured by a property that cannot sell and recover the amount of the lien, whether it be a normal sale or Short Sale or Foreclosure.  In fact most homes in California, Florida, Nevada and other trouble Hot Spots are valued at much less than the amount of the note.

What this ultimately means that most loan modifications are only temporary, only until one must move.  At that point the Short Sale will have to occur in order to get the price of the home back down to Current Market.

For those thinking in futures on their property, its best to move in the direction of getting the Hope 4 Homeowners program or other similar reduced principal loan modification or refinance.  As tough as these are to get, ultimately before the nation will have a chance to get out of the trenches, the market value of the homes will have to become stabilized, by sale or by modification or by other agreement or means.

Now we’ll take a short break and when I return I’ll go over some questions and their answers .

Welcome back to the Foreclosure Freedom Network Show.  I’ll be going into some Questions and Answers here regarding Short Sales.

“I just closed with a short sale on my home last week and I am looking for advice on what to do now.  We did have both walk away and short sale companies helping with this.”

“The home was in Delaware and I am currently living in Florida.

Lender #1 - agreed to the short sale with the language: “We agree to accept the proceeds generated by the $349,000.00 purchase as full and final satisfaction on the first mortgage indebtedness on the about referenced property”.

Lender #2 - agreed to release the lien, not the debt in exchange for 20% of the total owed “reserving the right to pursue collection remedies for the remaining balance due after the credit for short sale proceeds under the note.  This obligation will continue to be represented by the existing Note…”

Some other facts to note are that Lender #2 wrote off the debt according to my credit report in July or August for the full amount and turned it over to a collection agency from whom I got a bill.

We were advised that this was the best deal we would get and that it was much better than foreclosure.

We were also told that Lender #1 can only send us a 1099 and cannot collect any more on the debt.

So here are his questions:

1)       Is the statement above about lender #1 correct?

1.  Statement for lender #1 is correct so long as the language is written into the purchase contract that it was contingent upon lender acceptance of Short Sale amount and forgiveness of deficiency or some such clause or addendum or they are writing this in their approval letter - you’re good to go.  If not they would have to note this in their payoff demand letter, i.e. ‘this will not forgive deficiency’.  I would from your description that all here was done well.

2)       Regarding lender #2, is it possible to negotiate the amount still owed and re-payment plan?

2.  Regarding the second Lender.  (Let’s call him the HellOck).  Yes, it is possible to negotiate this and get a payment plan.  Unfortunately your Realtor didn’t try this or just didn’t persist and get this through at the time of the sale.  Often times 20 cents on the dollar is a workable figure.  These collections guys pay about 6 cents on the dollar for first round liens and resell them to other agents for more.  Once they sell this again the collections efforts repeat themselves, on and on ad infinitum until you work out a payment plan or come to terms with them or declare bankruptcy.

3)       What part does this collection agency play in all this?  Do we still owe them the full amount even though we reached a different agreement with the bank?

3.  It sounds like the ‘Collections Agency’ is trying to collect on the full debt rather than deducting the 20% paid to it by the Short Sale.  What’s possible here is the 20% just went towards arrearages, interest and penalties.  This is likely to be in writing somewhere and one could ask the title Agent or Lawyer you used to close this.  What exactly you owe them is detailed in the original note and this is all they have that’s determining what is owed.  These note terms were transferred over to them.

4) What should I do when the collection agency calls me?  Tell them that you would like to come to an agreement of payoff, such as 20 cents on the dollar and leave it at that.  Allow them to hem and haw and hang up on you and threaten life and limb and then repeat yourself, emphasizing any hardship points and if you cannot handle them, get a negotiator who can.

Yes, I can help you to negotiate with your new ‘Collections Agent’ and get a work out from them, if possible but this isn’t our main line of action.  It’s far better to catch this before actually concluding the Short Sale.  What we’ve done successfully with these scenarios is to get a firmed up agreement from the HELOC lender what it is that they will accept in settlement for this debt, to forgive it outright. Believe me the people who work in these departments are some of the best.  To listen to them nothing at all would ever satisfy them.  Eventually, however, one can come up with a dollar figure that they will accept.  Then if the buyer on your Short Sale can’t come out of pocket that amount to make the deal happen and the seller cannot, get this re-listed and get a new buyer with a firmed up price that’s pre approved.  Meanwhile whenever we are working with non purchase money second mortgages we notify our guys right up front that if they are renting this unit to save these rents up for this workout period, as it is at this point in time the fad to collect 10-30% at closing and continue perhaps not even forgive the debt thereafter.

5) I’ve heard from several people that some new law or something is going into effect on or around October 1st that may aid in the settlement or write-off of the remaining debt with lender #2, but I can’t seem to find any real information about it.  Is there such a thing?  If so, where can I learn more about it?

Regarding the new laws to help lenders assist in the settlement or ‘write off’ of the loss for the second mortgage holder, you can refer to the

American Recovery and Reinvestment Act of 2009 extends this benefits of the 2008 version including allowing for businesses to write off 250K in depreciation expenses and increased the period of time one could carry back losses to 5 years before the loss and forward in time 20 years

This seems to be up the right alley of the law you are seeking - hope this helps.

That’s it for today’s show.  Join us next week, Thursday at 2 on KCAA 1050, The Foreclosure Freedom Network Show!  And remember to work for blue skies in your future!!