Recently a family purchased a short sale home in San Bernadino, CA and to their surprise when they walked in, the toilets and sinks had been sabotaged. Over the weekend an unknown trespasser filled the toilets and sinks with concrete and it had “set”. Much to their surprise, on top of the stress of moving, they had a huge problem to deal with and they were stuck with the house and nowhere to relieve themselves.
If you are in the real estate business, I am certain that you may have a story similar to this to share. Please do so in the comment section.
If I Short Sale, You Can Come After Me… If I Foreclose You Can’t!
What is wrong with this picture? I have been asked this question a lot lately. In a non-recourse state, if I go through with a short sale, why does the lender have a right to pursue me for a deficiency judgment? That is a great question and I certainly thought to myself well, it’s not allowable by law, so the lender won’t be able to come after someone who did a short sale. I was wrong. Read below.
Sabrina, A California lawyer in our YouWalkAway.com attorney network says the law prohibits pursuing a deficiency only in a foreclosure, and does not apply to a short sale. It’s because a short sale is a voluntary action the homeowner chooses. A foreclosure is where the mortgage lender sells the property.
The law reads:
No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.
Borrowers have protection under the California Civil Code §580d, which bars deficiency judgments from the foreclosing lender (given the foreclosure was non-judicial). In California, a mortgage lender can only take one action against you: A non judicial foreclosure, or a judicial foreclosure. The result of non-judicial foreclosure; a lender can only sell the property and pay the loan. If the sale does not pay the mortgage, the foreclosing lender (the primary mortgage) cannot get the unpaid balance from you. However, the lender can get the balance from you in a judicial foreclosure.
Also in most short sale approval letters, there is a section in the approval that says this:
BAC Home Loans Servicing, LP and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law…
Now certainly, if you have a really good short sale negotiator, you may be able to get this language taken out of the approval, but I wouldn’t be surprised if the lender said no.
With that being said, it’s also part of the process of the short sale for a lender to look at your assets and bank accounts. If you don’t have much in your accounts, chances are that they won’t come after you anyway.
I find it interesting that homeowners trying to do the right thing by doing a short sale would end up exposed to further problems whereas a homeowner who just says, “I’m not even going to try to sell my home and work with the bank” gets protection. It doesn’t seem right. However, it’s the law.
There was an article on CNNMoney.com a while back that triggered panic in many of our customers. This article was titled “You lost your house – but you still have to pay”
It triggered hundreds of calls to our office and people were scared saying, “Is this true? Can the lender really come after me?” In this article, the important thing to point out is that the person getting a deficiency judgment was someone who did a short sale.
It can even happen to people who got their bank to approve them selling their home for less than it is worth.
Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.
“My understanding was that the deficiency was negotiated away,” she said. “Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it.”
A Short Sale May Be Worse In Recourse States As Well
Foreclosure tustee sales and short sales each have different lengths of time for which a lender must file suit or lose its right under a statute of limitations law.
NRS 40.455 governs Nevada homes sold at a foreclosure trustee sale:
Deficiency judgment: Award to judgment creditor or beneficiary of deed of trust.
1. Upon application of the judgment creditor or the beneficiary of the deed of trust within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively, and after the required hearing, the court shall award a deficiency judgment to the judgment creditor or the beneficiary of the deed of trust if it appears from the sheriff’s return or the recital of consideration in the trustee’s deed that there is a deficiency of the proceeds of the sale and a balance remaining due to the judgment creditor or the beneficiary of the deed of trust, respectively.
As such, the lender has six (6) MONTHS after the trustee sale date to file a lawsuit against the homeowner for the deficiency judgment. If six (6) months passes and no lawsuit is filed, the lender loses its right forever and always.
However, if the house is sold through a short sale, the lender has six (6) YEARS to file suit. NRS 1190 governs short sales:
NRS 11.190 Periods of limitation. Except as otherwise provided in NRS 125B.050 and 217.007, actions other than those for the recovery of real property, unless further limited by specific statute, may only be commenced as follows:
Banks Have NO Incentive To Do A Short Sale
Banks right now are trying to unload their REO inventory. It is in the lenders best financial interest to not approve short sales because these 2 reasons.
1. If the lenders don’t approve short sales, buyers will have to buy REO’s, thus reducing their inventory.
2. If the lenders don’t approve short sales, they don’t have to take the losses on their balance sheet for much longer since they are delaying the foreclosure process and postponing the auction date.
I know what you are thinking… why wouldn’t they approve short sales, so they don’t have to get more inventory? The answer is that most people trying to do a short sale are living in their home and paying their insurance, keeping the lawn green and keeping the home from being vandalized or trashed. They figure they can keep their expenses down if that homeowner stays in that home all the way till the foreclosure happens. We hear this all the time. Many of our clients trying to do a short sale have their home auctioned off during the short sale process and they don’t know why. They are doing everything they can to work with the bank and their home gets sold, when a vacant home one their street in foreclosure has an auction date that keeps getting postponed.
In any case, it may be in your best financial interest to not attempt a short sale, even if you think it’s the best thing to do, you could be shooting yourself in the foot. Consult an attorney before doing either, YouWalkAway.com can arrange a consult for you. The last thing you want is to get a judgment after losing your house and think to yourself, “Why on earth did I do a short sale?”
Here is a recent email I received that relates to this post:
I worked with Chase for over 8 months on getting a short sale completed. We had presented offers to the bank and after 8 months of work, they said I am not qualified for short sale. This was even after Chase sent me to a HUD approved financial counselor that said that I should be approved. They have now sent Foreclosure paperwork. I am sure they will probably sell the property to one of the individuals that already made an offer. My input to all is avoid short sale.
There are a few points that are missing from your article.
California is only a non-recourse state when it comes to purchase money loans. If you refinance, get a home equity line of credit, or take out a second mortgage after you have already purchased your home the lenders are very apt to come after you.
Secondly, lenders are now regularly including language in short sale approval letters in which they relinquish any right to pursue a deficiency judgment. The key is to ask for the language in the negotiation.
Third, the argument that banks won’t approve short sales because they want to sell their own inventory is simply wrong. Banks don’t want these properties back and when they go through the foreclosure process they have a lot of additional expenses that they have little hope of ever recovering. They also face a serious risk that the property that they take back will wind up becoming problematic – squatters moving in, vandalism, etc… In a short sale they avoid many of these issues.
Fourth, if the lender does have recourse against you – if you have refinanced or live in a state that allows for recourse – once the foreclosure goes through you need to be prepared to get hit with a judgment that includes a lot of additional fees – in the tens of thousands of dollars or even more.
Why in the world would anyone even do a short sell in the first place? Granted real estate people say it’s not as devestating to your personal credit as a forclosure but that’s not true. According to a close friend who is a real estate attorney, he says the ding your credit will take is just as significant as a forclosure and won’t get you anything special just because you choose a short sell over forclosure. There is really no incentive to short sell your property so why do it?
Lorrie,
You are correct. The president of FICO came out and said that the effects of a short sale damage to your credit are the same as a foreclosure.
Having just short sold my home (closed last week) it will be interesting to see what happens. I haven’t bothered to look at my credit yet, but I’m sure it is thoroughly trashed from the 8 month process. During the negotiations, my first lender was more than willing to do whatever it took to make the short sale happen. The second lender, however, was quite obstinate. Odd considering most of the money on the second went to purchase and improvement and I live in a non-recourse state.
My gut tells me the second will come after me. I’m not inclined to cooperate.
In Arizona what is the recourse if you refinaced the original mortgage?
In Idaho what is the recourse with B of A, if there has been multiple refi’s??
Mortgage work was done with Countrywide via California firm.
Jeffrey -
After the foreclosure, your primary lender sells the property. If there is money after the first mortgage is paid, the second mortgage will be paid as the secondary lender. If not, the second mortgage could either: write off the debt as a loss, seek a deficiency judgment, or continue to bill you (as it is now unsecured debt). In Arizona, the second lender has seven years to pursue a deficiency judgment. However, in Arizona, there are two anti-deficiency laws which protect homeowners commonly referred to as the Purchase Money Rule and the One Action Rule.
In Arizona, a lender who loaned you money to purchase a single family or single two-family home, located on 2.5 acres or less cannot do anything other than foreclose. This means if the foreclosure sale does not pay all “purchase money” loans, those lenders CANNOT sue you for the unpaid balance. Most importantly, this includes second mortgages used in many 80/20 – 100% financing deals. If you refinanced any of these loans, or paid down purchase money HELOC and drew down on it again, this rule does not apply.
In Arizona, a mortgage lender can only complete one action against you: A non judicial foreclosure, or a judicial foreclosure. The result of non-judicial foreclosure on a qualified property (a single family or single two-family residence being used as such that is located on 2.5 acres or less) a lender can only sell the property and pay the loan. If the sale does not pay the mortgage, the foreclosing lender (the primary mortgage) cannot get the unpaid balance from you. However, the lender can get the balance from you in a judicial foreclosure. The good news is judicial foreclosures are too uncertain and costly for lenders that they are almost non-existent. BUT, a junior lender (the secondary mortgage) can obtain a deficiency judgment (if it was not a purchase money loan) for their unpaid balance because they have not had their ONE ACTION against you.
Brad –
In Idaho, a deficiency judgment may be obtained when the property is sold at the foreclosure sale for less than the loan amount owed. In simple terms, this means that even after the foreclosure, the borrower may still owe the lender for the difference between what the property sold for at auction and the amount of the original loan. In order to obtain a deficiency in a non-judicial foreclosure, the lender must file a separate suit on the Note. Deficiency actions must be brought within 90 days after the foreclosure sale.(This is particularly important because in a short sale the lender may reserve the right for up to 6 years) A deficiency judgment cannot exceed the difference between the amount of the debt and the fair market value of the property. Costs and fees in filing the deficiency can also be recovered. In a judicial foreclosure, the deficiency judgment can be obtained in the same action as the foreclosure. If the court grants a deficiency judgment against you, you are then obligated to pay the amount of the judgment to the lender. Hope this helps!