Two methods of dealing with a distressed mortgage, after you and your attorney have analyzed your financial data together, are a “short sale” and a “deed in lieu of execution”.
A short sale is the sale of a home for less than the balance remaining due on the mortgage. A homeowner with a mortgage in default and the bank holding the mortgage agree to sell the house on the open market. The bank agrees to accept the proceeds of that sale as full payment of the mortgage, “short” of satisfying the mortgage note in full.
An alternative to a short sale is for the homeowner to give the bank a deed in lieu of execution, which saves the cost of bringing or continuing a foreclosure action or of conducting a sheriff’s sale. Using a deed in lieu, the mortgagor (the borrower) transfers title in the property to the mortgagee (bank, credit union, or other mortgage lender). In exchange for this transfer of title and interest, the mortgage lender agrees to drop or not start foreclosure proceedings.
Short Sale Process
A short sale is a fairly complex transaction that absolutely requires a competent attorney and a competent real estate broker who work together well and have the experience to represent you in a short sale. Not all realtors are brokers, and not all lawyers know how to represent you in a short sale.
Surprisingly, the first step in starting a short sale is applying for a loan modification even though you know you will have to reject it because it will not lower your payments enough to make the new payment feasible. Some banks operate this way – they would prefer that you keep paying your mortgage, even if you cannot afford it, rather than going through with a short sale where they will have to take less than the mortgage balance. Your advantage is that the bank would rather do a short sale than foreclose or take a deed in lieu of execution, because it would then have to take possession of the house and pay all the utilities, taxes, and other upkeep costs while marketing the house.
One of several pitfalls facing an unrepresented homeowner with a distressed mortgage is what happens after the sale. An experienced short sale attorney will negotiate an essential element of the agreement – the bank must agree to not take a deficiency judgment against the former homeowners. If the bank refused to agree to this provision, the bank would be free to pursue the former homeowners for the money owed on the mortgage not covered by the proceeds of sale.
Once the bank agrees to allow you to apply for a short sale, you will be required to submit financial documentation of your income and expenses as well as three years of tax return transcripts obtained from the IRS. These documents (other than the tax return transcripts) cannot be more than 30 days old when the bank makes the decision to agree to the short sale. In the case of government-insured mortgages in which you are paying mortgage insurance premiums, this is actually a government regulation. Typical bank behavior is to notify you, on the 31st or 32nd day after you submit your documents, that the documents are now “stale” and you must resubmit new current documents, even if nothing has changed. An experienced foreclosure defense lawyer will not allow this to happen.
At Williamson and Williams, we contact the bank every several days to ask if the short sale has been approved, and if not, why not. After approval, we work closely with our Realtor and the bank to make sure the sale takes place within the time limit set by the bank and that you get any relocation allowance promised by the bank. In many cases, we have telephone numbers and email addresses for supervisors and executives within the bank to expedite the process and prevent the endless cycle of submitting new documents that only drives the homeowner deeper in debt.
Deed in Lieu of Execution
An alternative to a short sale is for the homeowner to give the bank a deed in lieu of execution. As noted above, a deed in lieu saves the cost of bringing or continuing a foreclosure action or of conducting a sheriff’s sale. In the absence of an agreement to the contrary, the bank has the right to add any costs it incurs to the outstanding mortgage balance. There are advantages and disadvantages to this approach.
The advantages are that it is simpler, quicker, and maybe cheaper than a short sale. A deed in lieu may also make sense if you have overwhelming credit card debt and qualify to file for bankruptcy relief. Filing for bankruptcy will relieve you from both the outstanding mortgage debt and the credit card debt. You should choose this option only after full consultation and financial analysis with a competent attorney.
The main disadvantage is that the bank has to take possession of the house and assume expenses for real estate taxes, utilities and upkeep. Therefore, the bank is much less likely to agree to forgive the difference between the mortgage balance and the price it gets when it sells the house. The outstanding balance on a mortgage in default for a year or two is almost always far more than the original balance. In addition, real estate taxes and homeowners insurance paid by the bank and late fees and interest added by the bank during the period of default increase the bank’s expenditures. You are also less likely to get a relocation allowance than you are with a short sale.
To avoid these and other pitfalls, contact short sale attorney Robert G. Williamson.