The following information is not intended to constitute legal advice. The following information contains helpful hints and suggestions based on our experience in negotiating short sales.

What is a Short Sale?
A short sale is a sale in which the purchase price is not enough to fully pay all existing mortgages. The existing lender (i.e., the seller’s lender) agrees to accept less then the full payoff.

Why do lenders do it?
Because in many cases it makes business sense. If the seller is behind on his mortgage payments then the lender may be considering foreclosure. A foreclosure is time consuming and expensive, and ultimately the lender ends up as the owner of the property. In today’s market, this is not a good result for the lender for a variety of reasons, not the least of which is that the lender then has to sell the property at the current market value (and sometimes at a discounted price because the property is considered “distressed”). In most cases, a short sale will net more proceeds for the lender than a foreclosure.

What does a short sale mean for the seller?
First and foremost it means that the sale can be completed, which relieves the seller of the burden and stress of owning the property. It also allows the seller to avoid a foreclosure.

In many cases, the lender will accept the short sale in complete satisfaction of the debt, which means that the seller walks away from any deficiency. Note, however, that this is completely within the lender’s discretion. The lender has every right to demand that the seller repay the deficiency unless the lender, in its sole and absolute discretion, expressly agrees to waive the deficiency. In our experience, most first position lenders do waive the deficiency.

Forgiven debt is generally considered income for tax purposes. However, temporary legislation waives income taxes on debt forgiven in connection with a short sale until December 31, 2012, in some cases. The property has to be the seller’s primary residence and there are purchase price limitations.

Note that the seller, in most cases, can’t walk away from the settlement with any money. Typically the lender will want all net proceeds.

A short sale only resolves the mortgage being negotiated. It does not resolve any other mortgages or other liens on the property. Therefore, if the seller has a first mortgage, a second mortgage (or home equity line of credit), and a judgment against him by his credit card company, then the short sale negotiations have to be coordinated among all three creditors. First mortgage holders will typically only allow a very small percentage of the sale proceeds to be used to pay junior liens.

How to do a Short Sale
What is HAFA?
The Obama Administration’s guidelines on foreclosure alternatives went into effect on April 5, 2010. The guidelines, known as the Home Affordable Foreclosure Alternatives (“HAFA”), have the goals of promoting short sales and deeds-in-lieu of foreclosure when mortgage modification is not appropriate. HAFA attempts to achieve its goals by standardizing and simplifying the short sale process and providing financial incentives for mortgage servicers and  homeowners to complete a short sale as opposed to a foreclosure. For more information go to www.HMPadmin.com.

HAFA requires mortgage loan servicers to adopt a written HAFA policy consistent with their investors’ guidelines.  The policy will describe what the servicer will accept concerning short sales proceeds, acceptable closing costs and other financial matters. These terms are determined by the servicer, but once the policy is adopted by the servicer then the servicer must adhere to the policy consistently.

To be eligible for HAFA, a borrower must meet the basic criteria for the Home Affordable Modification Program (“HAMP”). The basic criteria are:

• The property must be the borrower’s primary residence,
  
• The monthly mortgage payment must be at least 31% of the borrower’s gross monthly income,
  
• The principal balance of the mortgage must be less than $729,000, and
  
• The mortgage must have originated prior to January 1, 2009.

HAFA also states that in order to participate in HAFA the homeowner must not qualify for a loan modification under HAMP, have failed to successfully complete a HAMP modification trial period, or be delinquent on a HAMP modification.  However, it appears that a servicer has the ability to offer a short sale to a homeowner who has not gone through the modification process if permitted by the servicer’s HAFA policy.

In order to begin the short sale process under HAFA, the homeowner must request a short sale. Therefore, prior to listing the property, the listing agent or the seller should speak with the lender to request a short sale under HAFA Once the homeowner requests a HAFA short sale the servicer must consider the short sale request within 30 days.  As part of the servicer’s consideration of the short sale, the servicer must  confirm the homeowner’s HAFA eligibility, determine whether the loan meets the servicer’s short sale criteria under the servicer’s HAFA policy, and determine the minimum acceptable net proceeds.  If the servicer concludes that a short sale is appropriate, the servicer must send a Short Sale Agreement (SSA) to the homeowner. The SSA is a straight-forward standardized form that outlines the terms under which the lender will accept a short sale. A copy of the SSA form can be found at www.HMPadmin.com.

The homeowner has 14 days to sign and return the SSA to the servicer, after which the homeowner must list the property with a realtor.  When a buyer is found, a contract is signed and a Request for Approval of Short Sale is sent to the servicer within three days. The servicer must then respond to the request within 10 days of receipt. Settlement can then occur.
Junior lien holders (second mortgages, etc.) still have to be considered. Under HAFA, junior lien holders will be paid 3% of their debt (up to $3,000 maximum for all junior lien holders.). Servicers may pay more than 3%, but will not receive reimbursement under HAFA.  In order to receive the funds the junior lien holder must agree to release the homeowner from all liability. Junior lien holders are not required to consent to a short sale.

Investors will receive $1,000 from HAFA, but must agree to release the homeowner from all liability. Servicers will receive $1,000 under HAFA for administrative and processing costs. Homeowners will receive $1,500 for relocation costs.
If the homeowner is not eligible for a short sale under HAFA, the servicer can still agree to a short sale but the transaction will not be eligible for the HAFA financial incentives.

If HAFA is not available, then a short sale is still possible as an unregulated negotiation between the seller and the lender. Communication and a lot of patience are key.

Start with the listing
Identify the sale as a short sale on the MLS and marketing materials. This is a material disclosure because (i) the contract has to be contingent on the lender’s approval, and (ii) many buyers do not have the time necessary to participate in a short sale.
Specify in the listing that commissions may be reduced by the lender.

Price the house aggressively, but not significantly under market. As part of the review process the lender will get an independent evaluation of the property. If the purchase price is significantly under market the lender will reject the short sale.

Contract
Use a short sale addendum or third-party approval addendum. The obligations of both parties should be contingent upon the lender’s approval of the short sale.

Be realistic with approval dates and the settlement date. A short sale can take months to negotiate. Although some lenders are getting more sophisticated with the short sale approval process, it can still take 2 to 6 months to get an approval (or a rejection). A 30 day settlement, in most cases, is not realistic.

Minimize contract contingencies if possible. The cleaner the offer the more likely it is to be considered by the lender. Although a standard financing contingency and a home inspection contingency might be acceptable, don’t even bother with a home sale contingency – the lender won’t consider it.

Negotiate
Most lenders will not negotiate a short sale until you have a purchase contract in place. And no, they normally will not tell you in advance how much they’d be willing to accept (unless it is a HAFA short sale – see above). Once you have a contract in place, then it’s time to negotiate with the lender. Submit a complete package to the lender.
Listing Agreement
Sales Contract
Authorization Letter
Proposed HUD-1
Hardship Letter
Financials on seller
Bank Statements
Paystubs or P&L
Buyer’s pre-approval
Speak with lender’s Loss Mitigation Department (not the standard customer service department).
Be prepared to send updated information from time to time.
The lender will get an independent evaluation of the property (either a full appraisal or a Broker’s Price Opinion (“BPO”)). This is where you want the house to look its worst. Your hope is that the value comes in low.
Negotiate for a full satisfaction of the debt, not just release of the lien

Foreclosure
If the lender has commenced foreclosure proceedings, then make sure you communicate with the attorney who is conducting the foreclosure. Don’t assume that the lender has instructed the attorney to delay the foreclosure proceedings just because you have submitted a contract for short sale consideration. If the lender approves the short sale, make sure you have written confirmation from the attorney that the foreclosure proceedings have been stopped. Note that if you are marketing your property under a HAFA Short Sale Agreement, then the lender is required to delay any foreclosure proceedings during the term of the Short Sale Agreement (usually 6 months).

QUESTIONS?
Feel free to call The Kirsh Law Firm with any questions you may have about short sales in Maryland or Delaware. The Kirsh Law Firm does offer short sale negotiation services.

© Copyright Kirsh Legal Services, P.C., 2010