After a Home Short Sale, Lender May Still Seek the Difference
In a growing number of cases, holders of mortgagesor home-equity loans are requiring borrowers in short sales to sign apromissory note, which is a written promise to pay back a loan or debt.Real-estate agents and attorneys say they have seen an increase in requests forpromissory notes as mortgage companies look to short sales as an alternative toforeclosure.
In many states, lenders have always had the rightto pursue former homeowners for unpaid mortgage debt. Yet until recently, mostborrowers who ran into trouble were able to refinance or sell their homes andpay off their loans. Now, falling home prices are widening the gap between homevalues and mortgage balances, and the number of homeowners who can’t make theirmortgage payments is rising as the economy has weakened. More than 3.8 millionhomes will be lost in 2009 and 2010 because borrowers can’t make their mortgagepayments, according to forecasts from Moody’s Economy.com.
Some borrowers are surprised to find themselves onthe hook. Jodie Byrd sold her home in the Los Angeles area in a short sale lastsummer after her husband lost his job and the couple realized they wouldn’t beable to make their mortgage payments. The sale price covered the $685,000mortgage, but their lender, Washington Mutual Co., then began pursuing them forthe $21,600 balance on their second mortgage.
Ms. Byrd says a clause in their contract gaveWashington Mutual the right to pursue the debt, but adds that her real-estateagent said that wasn’t likely to happen. The couple eventually settled theclaim for $4,000.
A spokesman for J.P. MorganChase & Co., which acquired Washington Mutual last year, saysit’s the company’s policy not to comment on individual cases. Speakinggenerally, he says, “a short sale may resolve the first mortgage, but thesecond mortgage … would be a separate negotiation with the lender or servicer.”
Some experts say that mortgage companies may pursueleftover debt, or “deficiencies,” in greater numbers as the housingmarket settles. Lenders are “doing everything possible to work with theirborrowers and trying to bring stability back to the lending and real-estatemarket,” says Marc Ben-Ezra, an attorney in Ft. Lauderdale, Fla., whorepresents mortgage companies in foreclosures. “However, the ability toget a deficiency judgment is a valuable right that I think lenders will pursueaggressively in the future as the market stabilizes.”
What, then, is the incentive for the borrower to opt for a short sale instead of foreclosure? It seems that, if the borrower’s counsel can’t get the bank to consider the loan paid in full, the better option for the borrower is to allow the house to go into foreclosure. Why would anyone counsel the borrower to opt for a short sale if the borrower has to sign a promissory note for the difference? As I understand it, either option is bad for a borrower’s credit.
[Meredith R. Miller]