THE FINE PRINT - September 2012 Issue
HAFA SHORT SALE PREAPPROVAL LETTERS (Read The Fine Print!)
Question:
My home is underwater. I have both a first position loan and a second position
loan. The current property value is less than the amount owing on the first
position loan, and the balance owed on the second position loan is
$100,000. I just received a HAFA short
sale preapproval letter from the servicer of my first position loan. It appears
to be a great deal, what with a preapproved sales price, the agreement to
allocate up to $6,000 to payment on the second position loan and the promise to
pay me $3,000 at closing for relocation expenses. Should I be concerned at all
about accepting the proposed terms?
Answer: Absolutely. You bet you should be concerned
after you read the fine print and understand what rights you are giving up,
what obligations you are taking on, and how illusory the promises of the
servicer are in the letter.
Following the end of the
answer is a sample form of HAFA (Home Affordable Foreclosure Alternative) short
sale preapproval letter (this one happens to come from Bank of America), which
I have marked up with numbered circles, which correspond to the following
comments:
1. Who and how is fair
market value of your home determined? Later on in the letter there is a
preapproved listing price of $325,000. Where did this figure come from? Did it
come from a broker price opinion done for the servicer at a cost of $50 or
less? Is the preapproved listing price supported by appropriate comps of other
recent closings? Check with your broker before even considering whether to
accept the terms in order to know whether the preapproved listing price has any
basis in reality.
2. There is no assurance
that a short sale will take less time to close than would a foreclosure, and
indeed, in many cases, particularly depending on the proposed sales price, and
the number of loans against the property, a short sale could take considerably
longer.
3. It is critical that
you understand your rights as an Oregon
homeowner regarding deficiency claims.
If you occupy the property as your primary dwelling, then the first
position lender has no ability to seek a deficiency judgment against you,
whether the lender proceeds with a judicial or nonjudicial foreclosure.
Therefore, any approval of a short sale should always include a waiver of the
deficiency claim, or the short sale approval terms should be rejected.
4. Note the conditional
language relating to the promised $3,000 of relocation expenses. Illusory promise.
5. The required listing
price is $325,000. As noted above, there is no discussion of how the price was
determined. It is important to work with your broker on determining whether
this is a realistic price. Also, there is no identification of the actual
required net amount to be paid to the first position lender. So, you do not
know whether, even if an offer is accepted at $325,000, that it will net the
first position lender an amount sufficient to enable the transaction to close.
6. The term provides for
the marketing of the property for 120 days. However, many short sale
transactions take substantially longer than 120 days. In addition, as discussed
under Point 14 below, the actual time permitted for the marketing and closing
of the short sale is only 118 days, and then only if you run it from the date
of the preapproval letter itself. Note that several programs (notably the
Fannie Mae HAFA program and the Freddie Mac HAFA program), mandate a minimum of
120 days on the market before a deed in lieu will be permitted.
7. While it provides for
approval within 10 business days, there is no remedy to you if this does not
occur.
8. Note the reference to
having to secure the release of any other liens against the property. This
burden is put on you, and there is no discussion of how this is to occur, or
what happens, as will be addressed later in more detail.
9. Many junior lenders
won’t consider a proposal for a discounted payoff until a purchase offer is in
hand and a tentative HUD closing statement is provided to the junior lender.
So, the suggestion to start this process immediately does not accord with the
realities of the short sale process.
10. If you don’t comply
with the preapproved short sale terms, you are required (this is mandatory, not
optional), to execute a deed in lieu of foreclosure and convey the property to
your first position lender. As discussed below, this may create potential legal
liabilities to you, particularly given you have a second position loan to deal
with. Such a mandatory provision
actually appears to be contradictory to the government's HAFA guidelines.
11. Again, the right to
be paid the $3,000 for relocation expenses is not promised as certain - all
that is said is that you will be eligible for the payment.
12. Again, the language
is structured so that it will be up to the lender as to whether it will require
that you execute a deed in lieu of foreclosure. There is no assurance that the
lender will permit you to do so, and there is no assurance that you will be
able to satisfy the requirements to clear title, as discussed in more detail
below.
13. Just note the
typographical errors in the letter - repeating the same terms.
14. Remember the earlier
representation about having 120 days to market your property. Now, with the
identified deadline, you only have 118 days in which to close, assuming you put
your property on the market the same day as the date of the preapproval letter,
which is highly unlikely.
15. The preapproval is
conditioned upon your being able to clear all junior liens from your property,
so in your case, that means getting the second position lender who is owed
$100,000 to agree to accept $6,000, in full satisfaction of the second position
loan, and with a complete waiver of any deficiency rights. You have no right to
even make other payment arrangements with the second position lender, and there
is no assurance that you will get the second position lender’s consent. If you
fail to do so, you will be in breach of the preapproval letter.
16. Again the preapproval
letter emphasizes it is your obligation to obtain the release of the second
position lender’s lien on approved terms.
17. It is well documented
that servicers have lost paperwork, misplaced paperwork, requested duplicate
paperwork multiple times, and there is no assurance this will not happen in
your case. Just be forewarned.
18. There is no agreement
that a postponement will be extended out any longer than until the deadline for
closing, which is December 20, 2012. This means you could have a foreclosure
sale set for the same date as the deadline for closing.
19. There is a
requirement that your short sale buyer agree that it cannot resell the property
for 90 days after closing. Aside from the question of whether such a
requirement is even enforceable, you reduce the potential market for your
property by imposing such a condition, which does nothing for the value of your
property.
20. The requirement that
you have to consent to share personal financial information with your broker and
others is absurd. That would not happen in connection with a traditional sale
or a non-HAFA short sale.
21. The definition of a
deficiency is not correct. A deficiency is the difference between the amount
owed on the loan and the amount netted to the lender from either a short sale
or a foreclosure sale. The amount netted to the lender may be more or less than
the current market value of your property.
22. This is just a repeat
of the paragraph addressed in Point 21 above, and is inconsistent, including
different references to different parties agreeing to waive the deficiency
claim. Why?
23. This language,
dealing with the deed in lieu of foreclosure, is at odds with the earlier
mandatory language, and appears to establish a permissive standard, and would
seem to only require that you execute a deed in lieu of foreclosure if you want
to. Which provision is the lender going to follow? It’s unclear to this writer.
24. This paragraph is
highly problematic for you, given that you have a junior position loan with a
substantial unpaid balance. This paragraph mandates that if you are unable to
complete the short sale, you will be required to provide clear and marketable
title, meaning you will need to get rid of the junior position trust deed, and
all without even the $6,000 which would have been available through the short
sale. How do you know you will be able to accomplish this? What happens if you
fail to do so? Have you just exposed yourself to a claim by Bank of America for
a breach of the agreement? Also, what unpaid real property taxes or HOA dues or
other assessments which may have priority over the first position trust deed?
Do you have to pay all of those in order to comply with your obligations? There
are no clear answers to any of these questions, and in my opinion, create
liability where none previously existed.
25. What do these
provisions really mean, and who determines whether they are satisfied or
not? What is "damage"? Again, these are obligations which don’t
exist in the absence of this preapproval short sale letter agreement, or at
least, are ones which may be in the trust deed, but your obligation ends with
the foreclosure of your property.
26. The first part of
this paragraph is redundant and inconsistent with earlier terms. What is controlling?
27. This again focuses on
the requirement that you obtain the release of the second position trust deed,
and that the second position lender waive any deficiency claim, and again,
leaves it open to question as to what happens if you can’t get this done.
28. If there was any
question about whether it is mandatory that you execute a deed in lieu of
foreclosure if the short sale fails, this seems to definitively answer yes.
29. What are the actual
approved sales costs (as the final approved sales price has not been
identified), and how do you know if the net sales proceeds are sufficient?
30. This is a critical
paragraph. You have to list the property for short sale in "as is"
condition, but if you can’t sell, you have to make sure the property is in
better condition than "as is" for purposes of the deed in lieu
requirement. Now, on to the truly illusory aspect of this entire preapproval
short sale letter. Note the last sentence: "We may require you to adjust
the list price or other offer terms."
What does this mean? It would seem to provide unfettered discretion to
increase the list price (decreasing it would not be likely), or to change any
of the offer terms to the benefit of the first position lender. Generally, such
a term would render a contract unenforceable, as the promise of performance on
the part of the first position lender is unknown and solely within the control
of the first position lender. Why would you want to go through the entire
process only to have the first position lender change terms to its advantage at
the last minute?
31. This could be viewed
as the "screw the broker" clause. No matter how hard the broker
works, or how close a successful short sale closing is, this would permit the
servicer to not have to pay any commission to your broker if you just execute a
deed in lieu of foreclosure.
32. What could be more
objectionable and establish with certainty the illusory nature of the first
position lender’s obligations than the paragraph identified in Point 30 above?
That would be the very next paragraph, and the paragraph discussed below under
Point 39, which very clearly negate any binding effect on the "deal",
by stating that the obligation to proceed is subject to the approval of the
mortgage insurer (if any) (so, the lesson to be learned here - find out in
advance if there is a mortgage insurer). To add insult to injury, however, this
particular paragraph says it is also subject to the approval of the
"mortgage holder.” Wasn’t that the
entire purpose of this preapproval short sale letter?
33. Note that there is no
identification of the actual amount of the so-called approved closing costs.
34. Redundant of earlier
provisions.
35. Redundant of earlier
provisions.
36. Does this refer to
receipt of a bona fide purchase offer? Also, what about acceptance by you? What
if you don’t accept the terms? Is the
first position lender requiring that you submit all received purchase offers to
it?
37. What if closing can’t
occur within 45 calendar days? Once again, we see the creation of terms which
don’t jive with the realities of a short sale transaction. First, many, if not
most, short sale transactions will take far longer to close than 45 days after
the execution of the purchase and sale documents. Second, many contingencies in
a short sale transaction won’t even start to run until there is a notification
to the buyer of the acceptance of the proposed short sale terms by the
lenders(s) - note this means acceptance by, in this case, both the first and
second position lenders, and while the first position lender has agreed to
respond within a fixed period of time (as illusory as this may be), the second
position lender has no such constraints and can easily take a month or two
before even responding to a short sale proposal. This particular term is simply
fantasy.
38. Exactly who
determines whether a party is performing "in good faith,” in order to get
a foreclosure sale postponed?
39. The mortgage insurer
or the guarantor of the loan (usually Fannie Mae or Freddie Mac), get to veto
the deal. What exactly, in light of this provision, did the first position
lender just agree to?
40. Have we used the term
"illusory" yet? I believe so. Just add the terms covered by this
Point 40 to emphasize the point. Good faith in marketing? Change occurs to the
property or value? Who gets to answer these questions?
Conclusion: This is an
assessment of just one form of HAFA short sale preapproval letter, and terms
will vary from servicer to servicer, and also dependent upon who owns the loan.
The analysis will also be somewhat different if there is only one loan against
your property. However, hopefully this
gives you some idea of what to look for when reviewing such a letter, and to
exercise caution before proceeding (as the saying goes: Beware Greeks (i.e.,
lenders/servicers) bearing gifts).
David R.
Ambrose, CEO
Ambrose Law Group LLC
200 Buddha
Building
312 NW 10th Avenue
Portland, OR 97209
Direct Dial: 503.467.7237
Direct Fax: 503.467.7238
drambrose@ambroselaw.com
Disclaimer: this column does not constitute the
giving of legal advice, and your reading this column does not create an
attorney/client relationship. You are encouraged to consult a lawyer or
accountant should you have questions about how this information may be
applicable to your particular situation.
