Has anyone heard of the second not agreeing to release the borrower from the deficiency balnace?
Submitted by Elisa Uribe
from CA
- 12/08/2009 - 6:31pm
I'm in the middle of a short sale and getting closer to all parites agreeing to the sale. Today the second bank said they would not agree to release the borrower from the deficiency balnace.
Is this common? I had a short sale over a year ago and the bank said this but when the clients went do to their taxes, they later told me they never had to pay anything back. Is this true?
Can anyone point me in the right direction here? Of course, I have a seller who does not have the funds to pay the money back to the bank.
Comments
Yes it is common, California's one action rule applies. The rule allows lenders to choose between judicial and non-judicial foreclosure. If the first goes through the trustee sale process (non-judicial foreclosure,) the second can still pursue the debt owed to them judicially because they did not foreclose. They have not taken their one action. That gives them the power to control the short sale. Maybe you can get the first to offer more to the second and/or try to negotiate with the second to bring the amount of the deficiency down. The reality is that your clients will probably be facing a deficiency no matter what you do. The question then becomes; do they want a foreclosure and a deficiency judgement on their credit or do they want to try and work out a deal with the second and proceed with the short sale? Either way they are going to have to pay the second something. Let's face it lenders are all about making money. In a time when they are losing boat loads of money they are not going to take a loss when they have a means to avoid it. It is unlikely that they will just let it go. Good luck to you and your clients.
There are two issue:
1) Tax Consequences - If the home was primary residence and purchase money (ie the loan(s) used to purchase the home) then there will not be federal taxation on the loss (the IRS deems the loss as income) - Another way for taxes to be forgiven is if the homeowner has "insolvency" - A CPA should be consulted, yet, this is a good overview of the taxation issue.
2) Recourse - In CA, a purchase money, primary residence loan is non-recourse (ie nothing is owed to the banks if there is a loss). On the other hand, there is potential liability if non-owner, second home, or a refinance loan. The "one action rule" does typically apply for the first loan, yet, the second typically will want to keep their rights to recourse whether on foreclosure or short sale. At times, with particular banks, they will settle in full. Most of the time, they will not, yet, it does sometimes happen. An attorney should be consulted for these items.
BOB, MBA, CDPE, e-Pro
bob@inspiragroup.com
You will absolutely want to read the short payoff to look for full satisfaction language. Some lenders are not giving full releases and can take up to 4 years to seek a lien or a judgement. Bob did a great job of explaining the "one action rule" above. For additional information you will can take a look at the Foreclosure guides by going tohttp://www.foreclosureradar.com/foreclosure-guides/foreclosure-101.
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