Texas Short Sales

What is a Deficiency Judgment?

A deficiency judgment is a judgment lien against a debtor, defendant or borrower whose Texas foreclosure sale did not produce sufficient funds to pay the mortgage in full. This option may or may not be available to the lender, depending on whether they have made a recourse or non recourse loan.

The fuller, statutory definition is: "the whole residue, or so much thereof as the court may determine to be just and equitable, of the debt remaining unsatisfied, after a sale of the mortgaged property and the application of the proceeds, pursuant to the directions contained in such judgment, the amount thereof to be determined by the court as herein provided.

The plaintiff's attorney (in other words, the bank's lawyer) must make a motion to receive such a deficiency judgment. Otherwise, the amount gained from the sale shall be deemed the full amount owed, and the plaintiff has no right to collect the additional debt. However, if the parties (mortgagor and mortgagee) have already agreed in their mortgage or promissory note, then the debtor could be liable for the full amount.

A debtor who has a deficiency judgment should see an attorney for possible remedies, including bankruptcy, an exemption from creditors,an appeal, or a motion. As with all legal research sources on-line, Internet users should take caution before applying such advice to your own case, and perhaps should consult an attorney.

Example: Upon Default by the Mortgagor a lender Forecloses on the mortgage. The unpaid balance of the loan is $102,000. The property is sold at public Auction and brings $80,000. The lender then seeks a deficiency judgment against the mortgagor to recover the $22,000 shortage, plus foreclosure expenses.

Deficiency States

Legislation enacted during the Depression still restricts the availability of deficiency judgments in several states. In some jurisdictions, deficiency judgments are prescribed in certain situations, while in other states, they are limited to the amount by which the debt exceeds the fair market value of the property. Waiver, the intentional relinquishment of a known right, of the benefits conferred by anti deficiency legislation contravenes public policy and is ineffective.

In non-deficiency states like Arizona a lender is unable to pursue any type of a deficiency judgment. Concerning foreclosures non-deficiency states are advantageous to owners in foreclosure because the lender is unable to pursue the deficiency judgment.

The good news is many lenders do not pursue deficiency judgments because someone that has lost a house to foreclosure is a poor candidate to collections on a deficiency judgment.

Communicating with the Loss Mitigation Negotiator

The stronger your relationship with the loss mitigator the better your chance of getting a short sale accepted. This is a people business and you will earn more paydays by increasing your communication skills.

The loss mitigator has an interesting job. They may be working 200-300 files at any given time so time is a very limited commodity.

Next, ask yourself what type of personality is likely to be a loss mitigator? Somebody that loves to talk and is very chatty? Somebody that is very empathetic and understanding? Not likely!

Most often a loss mitigator will be direct and to the point. But don't mistake the loss mitigator for somebody that's revealing all of their cards. Many are paid on commissions so they will play hardball in the negotiations as long as possible.

In the initial call with the loss mitigator I will be very pleasant and easy going. My goal is to establish rapport and find out their preferred way to communicate. I'll ask "Do you prefer to communicate by phone, fax or email?" All have their advantages and disadvantages.

Phone: Get their direct number and that of their supervisor in case they are out for any reason. The phone is very efficient if you can get through to the person directly without going through a prolonged messaging service and pushing 100 buttons.

FAX: Hands down the best way to communicate with loss mitigators. Lenders keep a log of faxes so be sure to log the number and time of your call. If faxing to a department fax expect 24-48 hours for a response. Always ask if the loss mitigator has a direct fax number. If so you are golden.

eMail: Personally this is my favorite way to communicate in the modern day world. Fast. Decisive. Available anytime. Some loss mitigators like to communicate through email and it can be very efficient. Always ask if the loss mitigator has an email address. However, do not rely on emails for short sale communications. 1) the email may not go through. 2) If the loss mitigator changes positions in the company the address could be terminated and you'll be left wondering what happened. Email are great... but if you use them be sure to also use the phone and fax so there are records of your communication.

Beware of Texas Foreclosure Rescue Scams

• Beware of anyone who asks you to pay a fee in exchange for a counseling service or modification of a delinquent loan.
• Scam artists often target homeowners who are struggling to meet their mortgage commitment or anxious to sell their homes. Recognize and avoid common scams.     
• Assistance from a HUD-approved housing counselor is FREE.
• Beware of people who pressure you to sign papers immediately, or who try to convince you that they can “save” your home if you sign or transfer over the deed to your house.
• Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
• Never make a mortgage payment to anyone other than your mortgage company without their approval.

Private Mortgage Insurance (PMI) and the Texas Short Sale

PMI is known as the acronym for private mortgage insurance.  Private Mortgage Insurance is used when a borrower has less than 20% for a down payment. Private mortgage insurance protects mortgage lenders against potential losses in the event of borrower default.  The insurance company, collects a monthly premium from the borrower (based on risk analysis) and agrees to pay the lender a certain amount of money if the loan defaults (usually 17-25% of the loan amount).  It's model was based on FHA loans and their mortgage insurance premium (called MIP, probably to confuse you).  FHA and VA offer guarantees to the lender equal to as much as 25% of the mortgage balance.

If a borrower defaults on his conventional mortgage (goes 90 days late on a payment), the lender files the state-specific foreclosure notice and sends in a claim to the insurance company to recover as much as 20% of the mortgage balance.  This, in turn, gives the lender a smaller risk when the lender sells the property to recover their losses.

Let's assume we have a $300,000 loan for a property that was purchased last year for $317,000.  It may be selling for as little as $260,000 today. Assume it costs about 9% to sell the property.   You should know two things:

How much will the lender receive from the insurance company if the borrower defaults? 

$300,000 times .20= $60,000

What price must the lender sell for to not have a loss?  

Well, the lender's exposure has been limited to $240,000 now that they received $60,000 from the mortgage insurance company.  We take $240,000 divided by 91% (remember that it costs 9% to sell so the 91% represents the net proceeds).       $240,000/.91= $263,736.

Why is this so important to Dallas Realtors?  When negotiating an offer for a property that would result in a short payoff to a lender, you need to remember this fact:  PMI claims will mitigate some of that loss.  If you know that a seller has PMI on their mortgage, you have that much more wiggle room when negotiating a short sale with the lender.  Lenders have been known to attack Realtor's commissions as much as 50% when a short sale exists.

Knowing your numbers and how PMI affects a lender will help you defend your commission. If you understand the net effect the sale will have on a lender, your short sales will go much more smoothly.

HAFA | Home Affordable Foreclosure Alternatives with Freddie Mac

As a component of the Making Home Affordable Program (MHA), the Home Affordable Foreclosure Alternatives (HAFA) initiative offers eligible borrowers who did not qualify for or complete a permanent modification under the Home Affordable Modification program (HAMP) or another home retention option to avoid foreclosure. HAFA solutions help stabilize communities by limiting foreclosures in surrounding neighborhoods and allow affected borrowers to transition into more affordable housing.

Program Eligibility

• The initiative strives to help borrowers who do not qualify for or complete a HAMP permanent modification, or other Freddie Mac foreclosure alternatives, transition into more affordable housing and avoid foreclosure.

• Servicers must proactively offer a HAFA Short Sale to eligible borrowers and use standard documents and tools.

• All potentially eligible borrowers must be considered for HAFA before the mortgage is referred to foreclosure or a pending foreclosure sale is conducted.

• Borrowers cannot make cash contributions or promissory note obligations to satisfy either the first lien or subordinate liens, and upon completion of the HAFA Short Sale or HAFA Deed-in-Lieu all mortgage debts are extinguished.

• Borrowers and Servicers may receive incentives for successfully closing a HAFA Short Sale or HAFA Deed-in-Lieu, subject to certain requirements.

• The initiative is mandatory August 1, 2010, for first-lien mortgages owned, guaranteed, or securitized by Freddie Mac that were originated on or before January 1, 2009, and it will expire December 31, 2012.

• Eligible properties are single-family 1-4 unit primary residences, including condos, Single-Family Seller/Servicer Guide (Guide)-eligible manufactured homes, and negotiated conforming jumbos.

• Servicers must verify that the borrower is occupying the property as a primary residence, and it is not abandoned, condemned, or vacant (without an applicable exception).

• Borrowers must meet the basic eligibility criteria for HAMP, but not qualify for or complete a HAMP modification or other Freddie Mac home retention solutions.

• Borrowers must be more than 60 days delinquent and have cash reserves less than the greater of $5,000 or three times their current monthly mortgage payment.

• Borrowers who may be in foreclosure, in pending litigation involving the mortgage, or who are in active bankruptcy may be eligible for this initiative.

• Borrowers must be able to convey a clear, marketable title to the mortgaged property.

Key Features

• The initiative strives to help borrowers who do not qualify for or complete a HAMP permanent modification, or other Freddie Mac foreclosure alternatives, transition into more affordable housing and avoid foreclosure.

• Servicers must proactively offer a HAFA Short Sale to eligible borrowers and use standard documents and tools.

• All potentially eligible borrowers must be considered for HAFA before the mortgage is referred to foreclosure or a pending foreclosure sale is conducted.

• Borrowers cannot make cash contributions or promissory note obligations to satisfy either the first lien or subordinate liens, and upon completion of the HAFA Short Sale or HAFA Deed-in-Lieu all mortgage debts are extinguished.

HAFA | Freddie Mac Mortgage and Borrower Eligibility

The following mortgages are eligible for HAFA:

• First-lien mortgages, owned, guaranteed, or securitized by Freddie Mac that were originated on or before January 1, 2009.
• Eligible properties are single-family 1-4 unit primary residences, including condos, Guide-eligible manufactured homes, and negotiated conforming jumbos.
• Mortgaged property is not abandoned, condemned, or vacant (without an applicable exception).

Borrowers may be eligible for this initiative if they meet the following requirements:

• Borrowers must be more than 60 days delinquent and have cash reserves less than the greater of $5,000 or three times their current monthly mortgage payment.
• Borrowers must have first been considered for a HAMP modification and then for other Freddie Mac home retention options under Guide Chapter B65, but was either ineligible, did not complete, or declined the modification.
• Borrowers may be in foreclosure, in pending litigation involving the mortgage, or in active bankruptcy.
• Borrowers must be able to convey a clear, marketable title to the mortgaged property.

Texas Short Sale Fraud | Are You Committing It?

Given increased defaults and declining property values in certain locations, the mortgage industry is experiencing an increase in short payoffs, sometimes called short sales. In fact, over the last two years, short payoff volume at Freddie Mac has grown more than 1,000 percent (2007-2009). This upward trend in volume leaves the market ripe for incidences of short sale fraud.

What is a short sale?

A short sale occurs when a borrower cannot pay the mortgage on his or her property and is permitted to sell the property for less than the total amount due, at a loss to the lender, investor and/or insurer. All parties consent to the mortgage being paid "short," primarily because the property does not need to go through foreclosure. Please note that many legitimate short payoffs take place in the real estate market.

What is short sale fraud?

According to a member of Freddie Mac's Fraud Investigation Unit, a slight variation of our general definition of mortgage fraud also defines short payoff fraud – "Any misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approve had all facts been known." Misrepresentations in these schemes may include the buyer of the short payoff property, a subsequent transaction at a higher price, and/or the selling borrower’s hardship reason used to qualify for the short payoff. In many instances, the short payoff fraud will involve a "facilitator," engaged by either the listing agent or the selling borrower, to assist with negotiating the transaction.

How is short salefraud committed?

There are many variations of short payoff fraud. The example below is just one way this type of mortgage fraud can occur.

• A seller (delinquent borrower) owes $100,000 on a property that is worth $80,000.
• The short payoff facilitator negotiates with the bank to accept a $70,000 offer to purchase the property. In several instances, Freddie Mac has seen that this offer will be made directly by the facilitator or through an entity under his/her control.
• The lender/investor accepts the offer for $70,000.
• The facilitator neglects to disclose to the lender/investor that there is an outstanding offer between the facilitator and a second end-buyer for $95,000.
• Both transactions close on the same day with the net difference being pocketed by the facilitator and increasing the lender/investor’s net losses.

At first glance, this may look like a legitimate short payoff. However, in this example, the fraud is the failure to disclose the second, higher offer. The facilitator is willfully withholding important information the same way a scam artist would, and the lender does not realize they are walking into a premeditated short payoff fraud scheme. Because the facilitator is deliberately withholding the higher offer, Freddie Mac also experiences a larger than necessary loss on this sale.

Short Sale Fraud Prevention Red Flags

Remain alert to the following flags, which may suggest short payoff fraud:

• Sudden borrower default, with no prior delinquency history, and the borrower cannot adequately explain the sudden default.
• The borrower is current on all other obligations.
• The borrower’s financial information indicates conflicting spending, saving, and credit patterns that do not fit a delinquency profile.
• The buyer of the property is an entity.
• The purchase contract has an option clause to resell the property.

Short Sale Fraud Prevention

The following protective measures are recommended in order to detect and mitigate the severity of short payoff fraud:

• Review all short payoff documentation carefully, including the sale contract. This helps determine if there is an option clause to resell the property at a higher price without notifying the lender.
• Draft a short payoff arm’s-length affidavit/disclosure notice for all parties involved in the short payoff to help avoid any hidden contracts, or side agreements. The parties involved should be, but are not limited to: the buyer, seller, listing agent, selling agent, short payoff negotiator(s)/facilitator(s), and closing agent.
• Solicit information from your borrower.
• Inquire if the borrower is aware of any other parties involved with the short sale other than real estate professionals.
• Is there a short sae negotiator/facilitator involved?
• Is the borrower aware of any other purchase contracts on the property?
• Require an executed and signed IRS Form 4506-T, Request for Transcript of Tax Return,from each borrower and process the form to determine if the borrower’s qualifying income is accurate.
• Order an interior Broker Price Opinion (BPO) and review all other BPOs that have been ordered on the property (drive-bys and full interiors) to establish a high/low value variance. The BPOs should include a past and present Multiple Listing Service (MLS) listing history, as this will determine if the property was relisted in MLS while the short payoff is being processed.
• Review the Freddie Mac Exclusionary List to see if the parties to the short payoff are on the list. Seller/Servicers can access the Exclusionary List via the selling system, MIDANET®, MultiSuite®, and Loan Prospector®.
• Immediately notify Freddie Mac if you are aware of a second purchase contract for a higher price.

10 Frequently Asked Texas Short Sale Questions

Here are 10 frequently asked short sale questions that are very helpful especially if you are just getting started or considering short sales as a means to acquiring pre-foreclosures.

1. What happens to the seller's credit rating when they allow an investor to short sell their property?

What typically happens is the loan will show up as "paid" on their credit report; however there will be a notation that says "settled for less than originally owed" or something along these lines. It is more favorable for a homeowner to short sell than to have a foreclosure on their credit report.

2. Where do you find investors for short sales?

Depending on where you live, you may see investors who advertise with bandit signs or in your local newspaper. Call the investors directly and ask them if they are experienced in doing short sales and if they would be interested in working with you. Another good place is your local real estate investors club meeting.

3. Define a short sale?

A short sale is really a form of pre-foreclosure sale and occurs when the mortgagee agrees to accept less than the loan amount to avoid foreclosure. A negotiated short sale results in a discounted purchase price for the buyer. The buyer would finance the acquisition much the same as in any conventional realty acquisition... but without the luxury of time.

4. Can an owner profit from a short sale?

The seller cannot profit (monetarily) from a pre-foreclosure short sale.. But there are always exceptions to the rule.

5. How does bankruptcy affect the possibility of doing a short sale?

Most mortgagees won't consider a short sale if the homeowner is in bankruptcy...why? Because negotiating a short sale payoff is considered a collection activity. Collection activities are prohibited in bankruptcy.

6. Can somebody tell me what documents do I have to include in a short sale package?

Documents depend on the lender. Each lender has different requirements. It is typical to require hardship letter, purchase and sales contract, ECOR, settlement statement (HUD 1), net sheet, pay stubs, bank statements, personal financial sheet (monthly budget), amongst other things.

7. What percentage of mortgage companies send someone out for an appraisal on a possible short sale?

All lenders order a BPO or full appraisal of the property before making their decision to accept or reject the short sale offer. This is there only way of assessing the value of the property.

8. How late in the pre-foreclosure process can you start a short sale?

Try to allow a window of at least 90 days to effectuate a mortgagee approved, pre-foreclosure Short Sale.

9. What is a Due on Sale clause?

"Due on Sale" Clause (DOS) Provision in a mortgage or deed of trust calling for the total payoff of the loan balance in the event of a sale or transfer of title to the secured real property. A contract provision which authorizes the lender, at its option, to declare immediately due and payable sums secured by the lender's security instrument upon a sale of all or any part of the real property securing the loan without the lender's prior written consent.

For purposes of this definition, a sale or transfer means the conveyance of real property of any right, title or interest therein, whether legal or equitable, whether voluntary or involuntary, by for deed, leasehold interest with a term greater than three years, lease-option contract or any other method of conveyance of real property interests. Standard language which states that the loan must be paid when a house is sold.

10. Will banks allow a short sale when the owner has some or a good amount of equity?

If a property has what the lender would consider a substantial amount of equity, chances are they would consider allowing the property to foreclose and then reselling it closer to the retail value. Focus on homes that do not have much equity. Your job will be to create the equity in the home by negotiating a successful short sale.

FHA 90 Day Rule

For those of you who have not heard, the FHA has suspended the 90-day anti-flipping rule for 1 year, effective February 1, 2010. So for at least the next dozen months, FHA buyers can obtain loans on properties that have been recently purchased by investors.

This is great news for investors trying to flip properties to FHA Buyers! For the next year at least, you wont’ have to sit on your laurels waiting for 90 days on title before you can even GO TO CONTRACT with a buyer.

• Here’s the first article I read about it: “HOUSING: Feds suspend anti-flipping rule”

• And here’s the actual PDF from HUD that makes it official and takes you through the grueling details…if you like that sort of thing.

So with this, maybe the FHA just got a little less sucky.  For now.  And just a little.

Apparently there are a few details to be aware of, such as if the resale is 20% higher than the investor’s purchase, you’ll have to pony up some proof to an independent appraiser that renovations and repairs justify the higher price. But that’s just good standard practice to have handy as a flipper these days anyway.

What is a Deficiency Judgment?

A deficiency judgment is a judgment lien against a debtor, defendant or borrower whose foreclosure sale did not produce sufficient funds to pay the mortgage in full. This option may or may not be available to the lender, depending on whether they have made a recourse or non recourse loan.

The fuller, statutory definition as defined by New York is: "the whole residue, or so much thereof as the court may determine to be just and equitable, of the debt remaining unsatisfied, after a sale of the mortgaged property and the application of the proceeds, pursuant to the directions contained in such judgment, the amount thereof to be determined by the court as herein provided.

The plaintiff's attorney (in other words, the bank's lawyer) must make a motion to receive such a deficiency judgment. Otherwise, the amount gained from the sale shall be deemed the full amount owed, and the plaintiff has no right to collect the additional debt. However, if the parties (mortgagor and mortgagee) have already agreed in their mortgage or promissory note, then the debtor could be liable for the full amount.

A debtor who has a deficiency judgment should see an attorney for possible remedies, including bankruptcy, an exemption from creditors,an appeal, or a motion. As with all legal research sources on-line, Internet users should take caution before applying such advice to your own case, and perhaps should consult an attorney.

Example: Upon Default by the Mortgagor a lender Forecloses on the mortgage. The unpaid balance of the loan is $102,000. The property is sold at public Auction and brings $80,000. The lender then seeks a deficiency judgment against the mortgagor to recover the $22,000 shortage, plus foreclosure expenses.

The good news is many lenders do not pursue deficiency judgments because someone that has lost a house to foreclosure is a poor candidate to collections on a deficiency judgment.

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