Loan Mods/Short Sales
The buzz words of 2009: “I need a loan mod.” “How about this one?” “We guarantee we’ll cut your payment in half or we’ll give you your money back.” As in every event of major economic event, new businesses emerge in an effort to take advantage of the market conditions. After all, we do have a capitalist system designed to reward creativity with profit. Unfortunately, as is often the case, the floodgates of opportunity often give way to slipshod businesses practices where the dollar is chased by the unscrupulous in exchange for promises that cannot be fulfilled. Such has been the case with the proliferation of loan modification companies and debt settlement companies, which employ large national advertising budgets to create the impression of professionalism and competence, but practically speaking, offer at best, nothing more than exorbitant fees for non attentive and sloppy paper pushing and, at worst, businesses that charge high upfront fees and vanish overnight without providing any service or returning fees for unfulfilled services.
So is there anything legitimate about loan modifications, and how they are used as a tool in Financial Crisis Management? The answer is yes, a loan modification is often a valid undertaking and it plays an important role in solving financial problems. By definition, a loan modification is an agreement between the mortgage holder (normally the lender or mortgage company) and the property owner, wherein the repayment terms of the promissory note that is secure by the mortgage are modified in favor of the homeowner to make repayment less burdensome. There are several variables in play here. The most important factor for you to understand is what the range of possible outcomes is and the likelihood of attaining the desired outcome. Will the lender lower my interest rate? Will the lender forego the payments I have missed and add them onto the back end of the loan? Will the lender extend the mortgage term from the original term? These are all possible outcomes when you seek a loan modification. The key lies in understanding the probability of attaining the specific outcomes.
When you give a mortgage on your property, you are granting the lender a lien on the property that can be discharged or satisfied in only three ways. One way is to pay the lender the full amount that is due on the Note the mortgage secures. In a sale situation, a payoff letter is ordered by the title company handling the closing and from the proceeds paid by the Purchaser, the amount due to the lender is set aside and paid to it in exchange for the lender’s discharge of the mortgage. Other than paying the lender off in full, the only other way to obtain a discharge of the mortgage is to obtain the lender’s consent to discharge its mortgage without payment or with a payment less than the amount owed by the lender. The third way to obtain a discharge is to “lien strip” the lender’s mortgage in a Chapter 13 Bankruptcy case. Lien Stripping is a great tool we use in Chapter 13 Bankruptcies, but it only applies to junior mortgages where there is no equity attaching to the junior mortgage.
A Short Sale is the situation where a lender consents to discharge its mortgage without regard to the payment amount it receives. This means the property (typically a residential home) is sold for less than the outstanding balance owed on the mortgages of the property. A Short Sale can only occur with the consent of the mortgage company that is not receiving full payment of the balance it is owed. The lender’s consent allows the property to be sold and the lender releases its mortgage lien against the property.
There are a couple of issues in play here. First, the terms of the lender’s consent are controlled by the lender. The lender will issue a letter indicating the terms by which it will agree to release its lien for less than the amount owed. This letter typically spells out conditions that must be satisfied, including the amount of proceeds to be paid by the lender, warranties and representation from the owner of the property designed to prohibit any form of collusion between the Seller and Purchaser from the lender’s perspective. In order to gain the benefit of the short sale, there must be compliance with the specified terms.
A critical component in any Short Sale is whether the lender is agreeing to release its remaining claim against the mortgage holder. This is often assumed to be the case, but it is not something you can always assume. In any situation where a Short Sale is in play, the mortgage holder who is seeking to have the mortgage and debt discharged must be sure it is clearly spelled out in writing that the discharge of the mortgage is also a release of any claim by the lender on the debt. You cannot believe the real estate salesperson, the title company processor or the representative of the lender. You must verity this fact in writing! I repeat, you must verify this fact in writing. It is in making sure this happens and in negotiating with the lender that we play our major role. Keep in mind, the Broker is after his or her commission (as they should be) and is not as concerned about your release as they are about closing the deal. Our role is to gain your release and put pressure on the lender, the broker and the buyer to combine efforts to accomplish your goal- the release! A short sale without a release is a BAD thing and should be avoided at all costs.
For more information, or to setup a free case evaluation, call one of our attorneys today!