Short Sale Blog

Here is an interesting case, of not being able to see the forest for the trees: the dispute between HUD and CitiMortgage regarding evaluating borrower eligibility for FHA’s Preforeclosure Sale Program (PFS). While HUD focuses on the details of borrower eligibility for the PFS program, CitiMortgage contends that the details of the plan are less important than the overall aim: cutting losses for both borrowers and lenders.

The HUD’s Office of Inspector General has released its new audit report of Citimortgage, Inc. According to the HUD audit report, CitiMortgage did not properly determine borrower eligibility for FHA’s PFS program. Included in the 103-page audit report is CitiMortgage’s response to the HUD claims.

Guidelines for the FHA PFS program are outlined in FHA Mortgagee Letter 2008-43, a letter to all lenders which outlines the aims of the PFS program.

FHA provides mortgage insurance for loans by borrowers who are considered to be “risky” - whose credit history is poor or moderate, or who can only come up with a small deposit.

The FHA PFS program is for borrowers who have an FHA-insured loan, and who find themselves unable to meet their mortgage payments, and unable to sell the home because it is worth less than the balance owing on the mortgage. The PFS program helps borrowers to avoid foreclosure by providing cash incentives to both borrowers and lenders, to encourage them to negotiate a pre-foreclosure sale, rather than let the mortgage proceed to foreclosure.

The dispute between HUD and CitiMortgage comes from different interpretations of eligibility criteria outlined in FHA Mortgage Letter 2008-43. HUD works with numerous lenders; they identified CitiMortgage for this audit because of “an issue identified
in a prior review and a review conducted by HUD’s quality assurance division.”

HUD reviewed 68 loans that CitiMortgage had submitted claims on. Claims paid out by HUD on these loans included mortgage insurance payments (on the deficiency balances) as well as incentive payments to both borrowers and lenders. According to HUD’s review, though, CitiMortgage did not properly determine borrower eligibility for the FHA PFS program for 63 of these loans. A total of nearly $5 million was paid out by HUD to CitiMortgage for those 63 loans. The auditors have recommended that CitiMortgage reimburse HUD for these claims.

The report details, case-by-case, examples where HUD contends that CitiMortgage did not determine borrower eligibility criteria. According to HUD, CitiMortgage did not follow eligibility guidelines detailed in Mortgage Letter 2008-43, including:

• borrowers’ reason for default is a result of an “adverse and unavoidable situation”
• expenses and income claimed by borrowers were not independently verified by CitiMortgage
• borrowers with assets were not required to repay the indebtedness through a repayment plan
• borrowers who were still current on their mortgages were accepted into the plan, and HUD disputes CitiMortgage’s determination of borrowers facing “imminent default”

CitiMortgage has responded to the audit (their response is included in the audit report as Appendix B), defending their practices, and indicating that only 7 of the 63 examples that HUD has presented have any merit.

Most significantly, though, CitiMortgage’s Director of Default Servicing, Brian McWhorter, wrote in his response to HUD:
“In our view, if the changes recommended in the draft report are implemented, the PFS process would slow down and negatively impact borrowers by now allwing them to qualify for a short sales treatment, possibly resulting in foreclosure and a higher loss.”

McWhorter goes on to explain that, in all of the sampled cases, the pre-foreclosure sale that was executed represented a lower loss to CitiMortgage than a foreclosure proceeding followed by an REO sale would have.

Avoiding foreclosure, through FHA’s Preforeclosure Sale Program and through numerous other short sale and foreclosure-prevention programs that exist, is in everyone’s best interest. The faster that short sales can be processed, the more foreclosures will be avoided - and the more quickly our housing market will turn towards recovery.

For more information, download The Homeowner's Guide to the U.S. Government Short Sale Programs, our free in-house guide to the FHA PFS program as well as to VA, HAFA, Freddie Mac, and Fannie Mae short sale programs.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

We’ve already presented you with recent numbers straight from the Federal Housing Finance Agency: more and more distressed homeowners nation-wide are taking advantage of short sales to relieve themselves of mortgages that they can no longer afford. http://seattleshortsales.com/_blog/Short_Sale_Blog/post/Short_Sales_Continue_to_Grow_in_Spite_of_Decline_in_Other_Foreclosure_Prevention_Actions/

Well, our own numbers at Seattle Short Sales, Inc., are now in for June. And they clearly show that short sales are growing here in the Seattle area. Comparing the number of short sale approval letters that we negotiated over the last six months of 2010 to those from the first six months of 2011, we found that:

• The number of new short sale approval letters that we were able to obtain from lenders grew by 43% over the six month period. In the last half of 2010 we negotiated 123 approval letters for our homeowners, and in the first half of this year that number was up to 176 new approvals.
• The average discount that the homeowner received on their balance owing also grew by 6% in the first half of this year, compared to the last half of 2010. In the second half of 2010, the average discount a homeowner received from their lender to pay out their mortgage was $96,480. But in the first six months of this year, that average discount had grown to $102,278.
• The total mortgage debt that we managed to get discounted for our homeowners grew by 52%. The total mortgage debt discounted for all the approval letters we negotiated in the second half of 2010 was $11,867,000. For the first half of 2011, that total debt discount was up to $18,000,001.

The majority of our short sale approval letters come with full deficiency waivers. This means that the homeowners, who were in a negative equity situation (owing more on their mortgage than the house was worth) are not responsible for paying back the debt discount - the shortfall on the discounted amount they paid back of their loan. They were able to rid themselves of the mortgage that they could no longer afford, and are free to get a new financial start in life.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Welcome to Part 3 of our series on deficiency language in short sale approval letters. Click on the following links if you missed Part 1: What you Need to Know about Deficiency Balances or Part 2:Tricky Deficiency Wording in Approval Letters.

This instalment provides real examples of deficiency language that we have encountered from various lenders (examples mainly taken from our comparison of short sale approvals for March 2010 with those from March 2011) that we have negotiated over the past year. While some lenders have standard language that they use on most approvals, others are very inconsistent, seeming to draft each new approval letter from scratch.

Bank of America: Very clear standard wording used on all approvals, deficiency not waived on the early 2010 approvals but waived on nearly all 2011 approvals.

The majority of our Bank of America approvals for 2011 waive the deficiency balance with the following wording:
“Upon receipt of the agreed amount, BAC Home Loans Servicing, LP, and/or its investors will waive the remaining balance due on the above referenced loan and release the borrower from further obligation therein, and waive all rights to pursue further judgment or deficiency. BAC Home Loans Servicing, LP will report the debt as "settled for less than the amount owed" and issue a 1099 for the remaining balance. The seller is encouraged to seek guidance from an independent tax advisor, and/or an attorney, before proceeding with the short sale.”

e.g. approvals: March 3 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=81374, March 31 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=83449, April 26 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=85958

Other Bank of America wording that waives the deficiency balance:
“... will release the lien and charge off the remaining debt as an uncollectable balance. Any deficiency balance will be waived and the appropriate 1099 form will be sent. Bank of America will report the account to the major credit reporting agencies as “Paid in Full for Less than the Full Balance,” and show no remaining balance owed to Bank of America.”
e.g. approval issued March 21 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=83035
“...will release you from any further responsibility for your outstanding mortgage balance.” plus notice about 1099 tax obligation”
e.g. approval issued March 10 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=82600
“...will release you from any further financial responsibility for the outstanding first lien mortgage loan” and also notes that difference will be reported to IRS as debt forgiveness.
e.g. approval issued March 22 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=84126

Bank of America wording that specifically does not release the deficiency:
“...may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law, if the short sale closes on the loan referenced above. In addition, if this loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller for the deficiency based on the terms of the mortgage insurance policy. Furthermore, there may be tax consequences associated with entering into a short sale. The seller is encouraged to seek guidance from an independent tax advisor, and/or an attorney, before proceeding with the short sale.”
e.g. approvals issued March 24 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=54222 and March 29 2010 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=54500, and March 16 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=84249

GMAC: For the most part, uses very clear wording to spell out whether the deficiency balance has been waived or is still owing

Many of our GMAC approvals explicitly waive the deficiency:
Accepts sales proceeds “as full and final satisfaction of the first mortgage indebtedness on the above-referenced property.”
e.g. approvals issued March 10 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=83007 and March 31 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=84736

Where the deficiency is not waived, the wording is very specific:
States that “the lien will be released” but it “reserves the right to collect the remaining balance on your note after application of the net proceeds from the sale.”
e.g. approval issued March 18 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=84545

But some wording is vague, mentioning only the lien and not the deficiency:
Accepts proceeds “in satisfaction of our lien on the property” without mentioning deficiency balance owing - so the interpretation is that it has not been released.
e.g. approval issued March 8 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=82998

Wells Fargo: Vague wording or deficiency not waived on March 2010 approvals, but clear wording or deficiency waived on many 2011 approvals.

Standard wording clearly waives the deficiency:
“As agreed, when we receive the sale proceeds and all required documentation, we will notify the credit bureau to reflect “agreed settlement short of full payment” which would appear on the credit report within 60-90 days from the sale date and within 60-90 days from the date of notification and waive any deficiency rights, if applicable.”
e.g. approval issued April 14 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=84542 and May 6 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=86091

Various non-standard wordings indicate that the deficiency has not been released:
Accepts sales proceeds “in order to release Wells Fargo Financial lien on real estate which secures this account. We have agreed to release the lien once the funds are received, but will not consider your account to be paid in full.” Then specifies the deficiency amount owing.
e.g. approval issued March 29, 2010 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=54755
“...the Bank’s final approval of the short sale of the Property is contingent upon receipt of these Additional Funds, as well as your agreement to pay any shortfall deficiency (outstanding loan balance including additional charges less net sale proceeds)…”
e.g. approval issued March 22 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=83271

But some wording is vague, and releases lien with no mention of the deficiency:
“Upon receipt of the finds stated above, Wells Fargo Financial agrees to release the lien on this property account number XXXXXXXX.”
e.g. approval issued March 3 2010 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=54629

Citi Mortgage: Our one March 2010 approval had very unclear language, but our two approvals for March 2011 very clearly waived the deficiency.

Standard language indicates that the deficiency is waived:
“Upon receipt of the NET PROCEEDS and a COPY OF THE SIGNED FINAL SETTLEMENT STATEMENT, CitiMortgage, Inc. will give a full release and reconveyance of their loan as agreed and no deficiency judgment will be instituted.”
e.g. approval issued March 21 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=83185 and March 31 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=83448

Vague wording makes it unclear what exactly the lender is releasing:
“Citi Financial will satisfy its lien on the above referenced account…” and “Only upon receipt of certified funds and final (or certified copy) HUD-1 Settlement will CitiFinancial release its mortgage on the property.”

The wording we want is to “satisfy the mortgage.” “Satisfying the lien” only refers to the security interest. “Releasing the mortgage” is not the same as satisfying the mortgage (see Part 2 of this article series). This wording is unclear, and it could probably be argued that it does not waive the deficiency balance.
e.g. approval issued March 16 2010 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=53070


Chase: Do not seem to have any standard wording - rather, each letter seems to have been written from scratch. The wording can be vague, or it can be very clear.

Examples of wording that indicates that the deficiency is released:
“The amount paid to Chase is for release of Chase’s security interest(s), and we will waive the remaining deficiency balance on the account...”
e.g. approval issued March 1 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=82595
“Upon receipt of the required funds, we will release our current lien on the Property and forgive any remaining deficiency balance on the account.”
e.g. approval issued March 22 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=82994

Vague wording releases the lien without mentioning the deficiency:
“...we will accept a minimum of $XXXX to settle your account and release the lien(s) on the above-referenced Property.”
e.g. approval issued March 15 2010 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=53365 and March 22 2010 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=53954
“Please be aware that should the sale on the Property proceed as outlined, our acceptance of this Short Sale will be reported to the various credit reporting agencies and may have an adverse effect on the Seller’s credit.”
Note that this one does not even mention releasing the lien. Although the reference to credit reporting agencies implies that the debt is being forgiven (i.e. that the deficiency has been released) but it does not exactly say this anywhere.
e.g. approval issued March 15 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=82621

Other lenders: More examples of deficiency language from real short sale approval letters.

SPS: Deficiency clearly waived
SPS “will release its lien” and “the mortgage will be discharged in its entirety with any deficiency rights waived and a release document will be forwarded to your county for recording. The release document is an indication that the loan debt is considered satisfied by SPS. It is not an indication that the loan is paid in full”
e.g. approvals issued March 7 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=82601 and March 28 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=84585

HSBC: Deficiency clearly waived
“...the remaining loan balance, if any, will be charged off and no additional payment will be required. Please note that a $0.00 balance will appear on the Customer’s file with the credit bureau as “Account legally paid in full for less than the full balance.”
e.g. approval issued March 3 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=83000

Selene: Deficiency clearly waived
“...the Note holder(s) will consider the Note paid in full, upon the successful closing and receipt of any subsequent claim paid by the Mortgage Insurer and will submit to release the lien(s).”
e.g. approval issued March 7 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=83001

BSI: Deficiency clearly waived
“...will release the lien” and “will seek no deficiency judgment against you in relation to this transaction. BSI will release the full lien and issue a reconveyance of the mortgage.”
e.g. approval issued March 16 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=82607

CMC: Deficiency clearly waived
“...we agree to issue a Satisfaction of Mortgage.”
e.g. approval issued March 24 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=83006

SLS: Deficiency clearly waived
“...release the lien secured by the Deed of Trust and release you from liability under your promissory note.”
e.g. approval issued March 24 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=84129

SunTrust: Deficiency clearly waived
“Upon settlement of the short sale proceeds, the mortgage loan will be reported to the appropriate credit reporting agencies as “Settled in Full for Amount Less than Owed.”… “To the extent there are amounts which remain due and owing on your SunTrust account after the sale of the property securing your mortgage loan which are not to be repaid under the terms of the short sale of by execution of the enclosed Note, if applicable, these amounts will be considered a part of the settlement and forgiven (i.e. taken as a charged off loss by SunTrust). There will be no further collection activities associated with any such ‘forgiven’ amount...” and goes on to explain tax implication.
e.g. approvals issued March 30 2011 (1st) http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=84658 and March 30 2011 (2nd) http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=84659

Litton: Deficiency clearly waived
“Litton will provide a Satisfaction of Debt within the statutory time limit governed by the property state.”
e.g. approvals issued May 1 2010 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=58876 and May 10 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=86276

ASC: Standard wording that is vague and seems misleading
“Upon satisfaction of all terms specified above, the mortgage will be discharged and a release document will be forwarded for recording. If a foreclosure action was commenced against this property, then upon satisfaction of all terms of this approval, the pending foreclosure action will be dismissed & appropriate instruments recorded.”
This is very confusing language. The several uses of the word “satisfaction” make it sound like a deficiency release - but all this wording does is promise to release or discharge the mortgage (the lien) without saying that it considers the mortgage to be satisfied. The meaning is unclear: nowhere does it specifically mention the deficiency balance, so it could be interpreted that the deficiency balance has not been waived.
e.g. approvals issued March 16 2010 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=53038 , August 13 2010 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=76557 and April 14 2011 http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=86164

At Seattle Short Sales, Inc., we have negotiated over 300 short sale approval letters for distressed homeowners in this past year. We pay attention to the details, to make sure that our clients get the very best result, including having their deficiency balances waived whenever possible.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

An article published this week in the Wall Street Journal, with the title “Second-Mortgage Misery,” makes it sounds like it’s all doom and gloom for underwater homeowners with second mortgages. The trick to dealing with second mortgages is knowing how to negotiate: showing the lender how it is in their best interest to approve the short sale, even if it means that they waive all rights to any deficiency balance owing.

In Washington State, if a home goes into foreclosure and is sold at a trustee sale, the first lender loses their right to pursue the deficiency - but the second lender may retain the deficiency right. For this reason, second lenders may be reluctant to waive deficiency rights in a short sale, believing that if they allow the home to go into foreclosure they will have a better chance of collecting more of their debt.

However, this is not always the case: it can be costly for a lender to try to sue a borrower for money they probably don’t have anyway.

Borrowers who have second mortgages are more likely to be underwater with their home (i.e. they owe more on their mortgages than the home is currently worth). According to the WSJ article, 38% of homeowners who have taken out second mortgages are underwater, compared to just 18% of homeowners who only have a first mortgage. And the average amount of that negative equity is also higher for homeowners with second mortgages: homeowners with second mortgages are underwater by $83,000, on average, whereas those with only first mortgages are underwater by $52,000.

With home prices down 34% nationwide since 2006, this problem is not likely to resolve itself quickly on its own. But the WSJ makes this sound like this is a real stumbling block for people with second mortgages.

While a second mortgage does mean that there is one more party to work with at the negotiating table, it is not necessarily a stumbling block to getting a short sale approved. This is where having experienced negotiators, who have worked on numerous short sale approvals and who know the ins and outs of how each lender proceeds, can make all the difference. Because if a home goes to foreclosure, the second lender gets nothing.

Working with all parties to come up with a deal where the second lender gets something (beyond only the right to pursue costly legal action that may not result in any payment anyway), and where they get it now, can often be enough incentive to get a second lender to approve a short sale. And that way all parties: seller, buyer, first lender, and second lender, can close their books on the case and move forward - a resolution that is of value to everyone.

If you’ve been following our blog posts this past month, you’ll see that we have been analyzing our record of achieving deficiency waivers for our clients. In March, (the month we did a thorough analysis of), 80% of our approval letters came with deficiency waivers - and many of those were for second mortgages.

Please take a look at our short sale approval letter database for examples of real approval letters from both major and small lenders. Some examples of our recent approval letters waiving deficiencies on second mortgages are:

Bank of America Short Sale Approval Letter: Homeowner approved to sell home and pay off 1st and 2nd mortgages with $198,000 total discount, waived of having to pay back deficiency. http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=85958

Litton Short Sale Approval Letter: Homeowner approved to sell home and pay off 2nd mortgage with $51,000 discount, waived of having to pay back deficiency. http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=86277

Real Time Resolutions Short Sale Approval Letter: Homeowner approved to sell home and pay off 2nd mortgage with $30,000 discount, waived of having to pay back deficiency.  http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=85849

GMAC Short Sale Approval Letter: Homeowner approved to sell home and pay off 2nd mortgage with $55,000 discount, waived of having to pay back deficiency. http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=87264

Chase Short Sale Approval Letter: Homeowner approved to sell home and pay off 2nd mortgage with $9,000 discount, waived of having to pay back deficiency. http://seattleshortsales.com/LiteratureRetrieve.aspx?ID=85890

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

As we noted in Deficiency Language Wording: Part 1, deficiency language in short sale approval letters can be tricky. The deficiency language may be absent altogether - but don’t take that as a good sign. No mention means no release.

If you need a reminder of what a deficiency balance is, or of the two parts of a mortgage (the lien and the promissory note) please refer to Part 1.

In order to approve a short sale, the lender must release their lien on the property. But that is only the security interest. In Washington State, the lender does not necessarily have to release or waive their rights to the deficiency balance (unless the short sale was processed through a program such as HAFA, FHA or VA). So, even though you have been approved to sell your property short, and pay back your lender less than the amount owing on the loan, this does not mean that you do not owe them the shortfall.

It is important to note here the difference in position between first lender or lien position, and the position of second (and other junior) liens. If the home moves into foreclosure, and it is sold via trustee sale for less than the balance owing on the mortgage, in Washington State the first lender loses their right to pursue the shortfall (the deficiency) while the junior lenders retain their rights to pursue the deficiency. For that reason, it is our expectation that for a short sale, the first lender will waive their deficiency balance rights (because they would have lost them via a trustee sale anyway) whereas that junior lenders might demand to retain deficiency rights.

However, in either case, if the deficiency balance (that shortfall) is not specifically waived in the lender's approval letter, in plain English, then there is the possibility of the lender (or another debt collector) pursuing you for it, possibly even many years down the road.

"Mortgage" or "lien"? To complicate things even further, the word “mortgage” can be vague. The “mortgage” may be interpreted as the “lien,” or security interest, or it may be interpreted as the whole mortgage loan - the lien plus the promissory note.

"Release" or "satisfy"? If your approval letter does not specifically address the deficiency balance owing from that promissory note, and only addresses the “mortgage,” then make sure that the lender states that the proceeds from the sale “satisfy” the mortgage (i.e. the whole terms of the mortgage loan, which includes the deficiency balance owing) and not merely “release” or “discharge” the mortgage (which can be interpreted as only releasing the lien, but not the deficiency balance).

Specific or vague? Different lenders address the deficiency very differently. Some lenders, such as Bank of America, have very standard language that appears in every letter, so it is extremely clear that the deficiency either is or is not waived. But many lenders use vague language, which either addresses the lien only (releasing the security so that the short sale may proceed) without even mentioning the outstanding debt or deficiency. A few lenders us very confusing language, which is difficult to interpret, and may sound like the deficiency has been released when really it has not been.

What to watch out for:

• Approval letter that releases the lien without mentioning the deficiency balance.
• Approval letter that refers to the mortgage rather than the deficiency balance; if it does, make sure that it states that the mortgage is “satisfied” and not merely “released” or “discharged.”
• Mixed up terms, e.g. “satisfying the lien” and “releasing the mortgage” rather than “satisfying the mortgage.” Read the letter slowly and carefully if it is not clear - and be sure to get qualified professional advice.

Our Seattle Short Sales, Inc. case managers don’t only push to close a deal. We review the terms, including the details of the deficiency language on all of the short sale approval letters that we negotiate for our homeowners. This March, a full 80% of the short sale approvals we negotiated came with clear language that waived homeowners of their obligation to pay back the deficiency balances on their mortgages.

In reviewing our short sale approval letters, we have seen in recent months that there are fewer problems with vague deficiency language; our lenders are using increasingly clear deficiency language, so that all parties know where they stand. We have also seen that more lenders are completely releasing homeowners from any obligation to pay back their deficiencies.

Part 3 of this article series will give specific examples of deficiency wording from real approval letters that we have negotiated in 2010 and 2011.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

A short sale can be a clean way for a distressed homeowner to exit from a a mortgage that they can no longer afford. Proactive homeowners can use a short sale to prevent foreclosure and avoid the black mark on their credit rating that foreclosure brings - all important moves here in Washington State, where the foreclosure rate is on the increase (as of the February, up 64% from a year before).

But a short sale alone may or may not give you a clean new financial start. Your financial future actually depends upon the fine print - literally! A short sale means that, with your lender’s permission, you sell the home and pay off the loan “short” of the full balance. This shortfall is called the “deficiency.” And it is the fine print on your approval letter that indicates whether you are, or are not, reponsible to pay back this deficiency.

This is where having experienced short sale specialists on your side can save you tens or even hundreds of thousands of dollars. If you review our list of short sale approval letters, you can see what kind of discounts (deficiencies) our clients have been receiving on their mortgages - many of them over $100,000. If the homeowner’s approval letter for the short sale does not specifically waive their responsibility to pay back the deficiency, there is the possibility that debt collectors may come to collect this balance, even many years down the road.

At Seattle Short Sales, Inc., we pride ourselves both in positioning ourselves at the leading edge of this quickly changing industry, and in sharing our knowledge with our industry colleagues and with homeowners. In the last year, we have doubled our success rate in having deficiency balances fully released. We push lenders to release sellers of deficiency obligations wherever possible, and for clarity in deficiency language so homeowners know exactly where they stand and what their future holds.

In this two-part series, we’d like to share with you some of our recent results, and our analysis of changing trends in how lenders approach deficiency language in approval letters:

Deficiency basics
In Washington state, a mortgage loan consists of two parts:

1. The mortgage or lien against the property is the lender’s security. You agree to pay back the loan - but if you default on your part of the agreement, they can come and take your security (i.e. foreclose on the property).
2. A promissory note, which is your promise to pay back the money that they have lent you.

If you receive an approval letter from your lender to undertake a short sale, the lender must release their lien on the property in order for the sale to go ahead. All short sales necessarily mean that Part 1 of the mortgage, the lien, will be released.

But a lender’s approval does not necessarily mean that they have relieved you of your obligation to pay back the amount you promised to pay in Part 2, the promissory note.

For example:
You owe $280,000 on your loan, but your home is now worth only $240,000. Your lender approves a short sale at this price. After closing costs and commissions, the lender will receive $200,000 on the loan (their “acceptable net proceeds” in the approval letter).

The shortfall on your loan repayment is $80,000 ($280,000 - $200,000). This is the deficiency balance.

By approving the short sale, the lender has agreed to release the lien on the property - their security.

If there is no specific language about the deficiency balance in the approval letter, then this deficiency balance has not been waived. Even though the lender has approved the short sale and you no longer have the house, you still owe $80,000 on the loan - but your loan is now unsecured. Your lender may or may not choose to pursue you for it. Often, lenders sell their unsecured loans to third-party debt collectors, who may try to collect the funds from you years later.

However, if the language in the approval letter indicates that this deficiency balance is waived, then the loan is finished: over, closed, done. The lender has agreed to swallow the loss, and you are free to go ahead with your life: start saving again, investing, thinking about purchasing a new home, without the fear that debt collectors could show up at your door at any time in the future.

Tricky language
Negotiating a short sale is an important first step to financial freedom. But the most important step to a clear future is having your deficiency balance waived. In March 2011, a full 80% of the short sale approvals we negotiated came with full release of the deficiency balance for our homeowners.

But deficiency language in approval letters can be tricky. The language may be vague, or it may be absent all together. The rule of thumb is that, if the language does not specifically waive the seller of the obligation to pay back the deficiency, or specifically state that the debt is satisfied, you may be liable to pay back the deficiency balance. A complication is that every lender uses different wording; there is no standard. It may be difficult - even for industry professionals - to understand whether the wording in an approval letter does or does not release the homeowner from their obligation to pay back the deficiency.

To the homeowner, though, whether or not they have been waived of having to pay back the deficiency balance is of utmost importance. Our next posts in this series will give specific examples of deficiency language, as used by major lenders such as Bank of America, Citi, and GMAC as well as by many of the smaller lenders - all examples taken from real short sale approval letters we have negotiated for our clients.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

We’ve been so busy at Seattle Short Sales, Inc., this spring that we’ve barely had time to stop and review the numbers. March was a record month for us in terms of the number of short sale approvals negotiated - and the numbers for April look to be nearly as high, too.

We have managed to sit down, though, and review that record number of approval letters. We wanted to compare them with the approval letters we obtained a year earlier. We always strive to negotiate a full deficiency release for homeowners whenever possible, and it seemed to us that our success rate had improved dramatically. Now that we’ve had a chance to look at the numbers, we see that we were right: the proportion of full deficiency waivers obtained has doubled from March 2010 to March 2011.

What this means is that:

• In March 2010, we negotiated 20 short sale approvals.
•    8 of those (40%) had the deficiency balance waived.
• In March 2011, we negotiated 42 short sale approvals from lenders (plus one from a Homeowners Association, for a total of 43)
•    34 of those (81%) had the deficiency balance waived.

Please see the Table, below, for the full break-down of figures.

This is big news for homeowners. A short sale is one of the best options for a homeowner who owes more on their mortgage than what their home is currently worth to get out of that mortgage. But a short sale can only be undertaken by first negotiating with the lender, and obtaining their permission to pay out the mortgage for less than the balance owing on it. The amount that the lender discounts the payout by is called the “deficiency balance.”

Negotiating a short sale will remove the lien that the lender has on the property (i.e. their claim to the property as security in exchange for providing the loan). But it is important for homeowners to know that a lender’s approval of a short sale does not necessarily relieve the homeowner of the responsibility to pay back that deficiency balance.

Deficiency balances typical run between $50,000 and $100,000, but some can be over $300,000. Take a look at our Approval Letter database to get an idea of what typical loan “discounts” or “deficiency balances” run: http://seattleshortsales.com/approvals.htm

If the deficiency balance is not waived, it means that even after short-selling their home, the sellers may still have to pay back the remainder owing on the mortgage. It can be hard to get motivated to start fresh, and to think of trying to get a better job, or accummulating any savings, or investing in property again, when you don’t know whether the debt collectors may some day appear at your door.

This is where the services of experienced short sale negotiators come in. At Seattle Short Sales, Inc., we have been specializing in working with all parties: lenders, homeowners, and agents, since 2005. We have negotiated hundreds of short sale approvals - over 300 in the last year alone. We make it our business to work out the best deal for all parties, and we know that, for homeowners, one of the key factors that makes a short sale a good deal is obtaining a deficiency balance waiver: where the lender explicitly releases the homeowner from ever having to pay back the amount that was discounted from the mortgage.

The language used in the documents can be very tricky, and each lender words things differently (keep an eye out for a future blog post that will explain more about deficiency language). Some lenders avoid using any clear language in their approval letters that addresses the deficiency; this is something to be very wary of. Unless the deficiency balance is explicitly waived, lenders (or debt collectors) probably will have pretty good grounds to pursue you for it, even years down the road.

We’ve worked hard to understand the nuances of deficiency language, and to make sure that we negotiate the best deals possible for our clients. So we are very pleased that, not only have we more than doubled the amount of approvals per month from a year ago - we have also doubled our success rate in obtaining those deficiency waivers.

Here are the breakdowns from 2010 to 2011:

In addition to doubling our rate of obtaining deficiency waivers, we are happy to report that the use of vague deficiency language (either by only explicitly releasing the lien on the property and not mentioning the deficiency balance, or by using unclear wording) has decreased from 40% of approval letters to only 12% using vague deficiency language. And the percentage of approvals that explicitly did not waive the deficiency - by stating specifically in the approval letter that the homeowner was still responsible for paying it back - dropped from 20% to just 7%.

Short sales are a great strategy for homeowners to exit from a mortgage where the balance owing is more than the value of the home. But if that exit is to be clean, it is important to have experienced negotiators working on your behalf, so that you truly can get off to a new start.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/