Walking away might not erase mortgage balance
Comparing the current recession to past ones, I have noted a dramatic switch in sentiment when it comes to people deciding what to do when they can no longer afford their mortgage, particularly if the property is worth less than what they owe.
Back in the early 1980s, the real estate markets crashed as much as 40-50 percent and millions of homeowners found they owed more on their homes than the properties were worth.
This was as big a problem then as now. Many people could not afford to wait it out for their property values to come back. Mortgage rates went as high as 18 percent and some of what is now the most valuable real estate in the Vail Valley went begging for a sale.
In those days, though, it was pretty much unheard of to have a short sale except in the direst of circumstances. I recall many closings where the seller might bring $50,000 or $100,000 to the table to pay off the loan when the sale price was less than what was owed. It was pretty unthinkable in that day to even consider asking the bank to take less than the amount owed.
Fast forward to today and it seems no seller wants to bring a nickel and the lenders are allowing short sales to happen – or are they?
This is definitely a huge societal change that has come over consumers in this day and age. Perhaps it can be attributed to the mindset that since the taxpayers have bailed out the banks, it’s time to strike back at the bunch of pirates running the banks.
Of course no homeowner I have ever closed a loan with thought that the lender who just approved them was anything but the most noble and nicest pirate they had ever met.
If one reads the terms of most mortgage loans, it is pretty clear that mortgages are not non-recourse loans, meaning that the lender has the right to go after the borrower for any deficiencies in loan payments even after the deed of trust has been released and the property sold. This is particularly true in a a foreclosure situation where the lender ends up with title to the house via a public trustee sale.
If you are selling your property for less than you owe, you need to be very vigilant in how you handle the situation. Just because the bank releases the deed of trust on your property for less than you owe may not mean you are totally off the hook. If the bank does not return the original promissory note marked “paid in full” you may someday (even years from now) get a most unpleasant phone call from a bill collector wanting the deficit amount you still owed when you sold the house.
If you lose your property to foreclosure it’s best to have an attorney deal with the lender to assure you get a full release from the debt once the house has sold via public trustee sale. One way to make this more likely is to communicate with your lender prior to the foreclosure sale and offer a deed in lieu of foreclosure and avoid the foreclosure. This will also be a lot less bloody on your credit report than having a foreclosure reported.
As more and more banks are liquidated and their assets are sold off like a garage sale, it is only a matter of time before some savvy investor decides to make a bid of maybe a penny or two on the dollar on a few thousand loans where a deficit payoff was accepted but the lender never formally sent the notes marked paid in full.
If this investor knows how to come after borrowers like the hounds from hell, they will likely collect a fair number of settlements on these old debts. It may take years but such an effort could be very profitable for such investors. Chances are they have a pretty binding legal claim, and in a few years many people will have recovered financially and be willing to just pay them to go away.
Look at it this way – an investor could buy notes that were originally worth $10 million and these notes have $1 million still owing (not to mention accrued default interest). If he pays $10,000 for them, chances are he will easily collect far more than he paid. The lender may even find it worthwhile to stash these notes away for a few years, knowing that if they push people too soon after the short sale, the borrower might be more likely to declare bankruptcy than if they wait. I think there are probably thousands of short sales that are being filed away for future collection efforts out there.
If you are involved in a short sale it is imperative that you paper-trail your negotiations in detail throughout the entire transaction. Be sure that you have it in writing that the payoff the bank accepts states that this will be payment in full. If you do not get your original note back marked “paid in full” within 30 to 60 days after the sale, you need to request it in writing and follow up. Doing so could spare you from months of harassment by a bill collector years down the road. Don’t make the mistake of thinking you can slip under the radar and hope they forget about the deficit.
Chris Neuswanger is a loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related inquiries from local readers.