The ABCs of the Release of Deficiency
When I checked my email the other day morning, I had an email from a Realtor® friend who had some questions about short sales and deficiency. They were good questions and questions that are fairly indicative of the kind that novice short sale agents may have when working short sales. So, I thought I would share them here:
How do I know that the bank gave full deficiency release on the loan?
The short sale approval letter (or letters) clearly states how the bank will be addressing the deficiency. In the state of California, these approval letters are generally signed and acknowledged by the sellers prior to close of escrow. It’s a good idea for sellers to carefully review the letters, and consult with an attorney or an accountant if they have any questions or concerns about the text in the approval letters.
Many states have anti-deficiency laws (for example, In California, we have SB 931). So, it’s important to become familiar with the anti-deficiency laws in your state.
What forms should I have in my files that assure the seller that their debt is fully satisfied?
First off, always keep a copy of the short sale approval letter with the sellers’ signature. Additionally, each state has its own short sale forms and own rules with regard to compliance. The California Association of Realtors® form called the Short Sale Information and Advisory that advises the seller that there may be legal, tax, and credit consequences to a short sale. This form also advises the short sale seller to seek advice from lawyers and accountants whenever necessary. This form and a copy of your lien holder approval letter should be in every file. See the short sale approval letters for clarification on how the bank will be addressing the unpaid mortgage debt.
Most recently, the Federal Trade Commission has new disclosure rules (MARS – Mortgage Assistance Relief Services). So, your state may have specific forms that address this new FTC ruling.
What do I do if the seller does not like the text in the approval letter?
If the seller has concerns or questions about a short sale approval letter, than s/he should seek the advice of a qualified attorney or an accountant. Additionally, the seller could put those concerns in writing and they can be forwarded to the mortgage lender, so that the mortgage lender could provide a further explanation. Just last week, I had a short sale seller with questions about a 1099 from Litton Loan Servicing. We forwarded her questions to Litton and they responded immediately with clarification.
This Realtor’s transaction recently closed and I wish that she had asked these questions prior to close of escrow. It’s definitely important to review the approval letter prior to closing. If the approval letter does not fit the bill for the seller, than the deal should not close. Not closing and losing a little bit of commission is far better than closing and being plagued with any long term problems that could be associated with that closed short sale transaction.
Photo: flickr creative commons by SMJJP
Travis Foote
June 28, 2011 at 7:01 am
If the property being sold is the seller's primary residence, then does this really matter? Or does the law signed by Bush in 2007 only apply to the IRS taxing the seller on the forgiven debt?
Melissa Zavala
June 28, 2011 at 9:01 am
Aaah. Good question. The tax issues and the liability issues are separate concerns.
Ben Fisher
June 28, 2011 at 9:50 am
Good info thank you!
north Kingstown short sale agents
July 5, 2011 at 8:27 am
Melissa, as the short sale guru in your area you are always sharing important information for a homeowner contemplating a short sale. That short sale approval letter with the waiver of deficiency is like gold and it is surprising that realtors or clients might think about that after the fact. At least you put homeowners on notice to have that at the forefront now…thanks
Kris van Gool
July 6, 2011 at 2:12 pm
Great information. Thanks for keep us in the loop