Second still trying to collect after short sale
Structural Contractor · Coral Springs, FL · Member since 2008 · 29 posts · 8 votes
Second still trying to collect after short sale
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Dion DePaoliPro Member
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
This seems to have gotten a bit confusing for frankly a simple concept.
A "Short Sale" is the sale of real property from one party to another. The 'Short' refers to the Mortgagee taking less than the total balance due to satisfy the lien. If there were two leins, both leins would have to release their lien position on the real property otherwise the Buyer would not get clear title.
In the event, the Second lien did not agree to satisfy their interest in the real property, then the transaction would be considered a Subject To transaction, since the Buyer's interests would be Subject To the existing lien. This would mean the second lien is still attached to the property. In the OP, this does not sound like the case. Therefore, no foreclosure action could be further pursed, since there is no longer an interest in the real property to foreclose on.
Deficiency waiver in a first lien is common and usually found within the paperwork. Deficiency waiver in the second lien is somewhat common however it is also not uncommon for the second lien holder to not waiver deficiency. This is what sounds like took place. It is possible, that a waiver of deficiency was accepted by the second and they are simply trying to collect on something they no longer can, however that is not all that common of a mistake.
As such, the suggestion above relating to the issuance of a letter to the second lien holder regarding collection attempts is the best response. Fact of the matter, if the Borrower did not get a waiver of deficiency from the second lien, the amount due is still due. It is just not attached to real property any longer.
Usually the agent(s) involved help negotiate a waiver of deficiency for the borrower. In addition, the Seller usually reads the paperwork which will also state exactly, as Wayne mentions, what is happening with the outstanding debt.
IMO, you don't need a lawyer to read you your paperwork. Pull it out and read what the second lien holder put. I am pretty sure you will find, you agreed to reaffirm the debt which they agreed to release on the Subject Property but not release you personally. The debt is now unsecured. Collections on all debt must follow the law and the Fair Debt Collection Practices (rule can be read HERE) will dictate further correspondence between the creditor and debtor.
25 Replies
It depends on if the deficiency was waived with 2nd's short sale approval. Either way, if they are bugging the owner, just send them a drop dead letter.
You can Google as they are all over the internet, but you must send it via fax or whatever communication median that the debt collector requests. (Usually never verbal )
"Please cease immediately all future correspondence or communication directed to __Name of Debtor__. You of course have the right, If you wish, to pursue a legal action attempt proving this debt. Otherwise under the regulations of the Fair Debt Collection Practices Act, I respectfully request that you cease all communication with me"
Or something of that nature :) They by law must stop all collection calls at that point or face hefty fines.- Dallas, TX · Member since 2013 · 4k+ posts · 744 votes12y
If 1st did a short sale, your realtor should have done a short pay for the second. Andy I disagree the second must give a release in order to get a clear deed, and the title company cannot record the deed without the release, unless they show the second on the deed as lien holder.
Joe Gore
- Structural Contractor · Coral Springs, FL · Member since 2008 · 29 posts · 8 votes12y
Thanks guys. One more thing. Can the second do a partial release of lien, justifying the continued collection efforts? Considering NY is a one action state.
- Dallas, TX · Member since 2013 · 4k+ posts · 744 votes12y
No such thing must release the lien in whole. How much is the second lien?
Joe Gore
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes12y
In a short sale, the lien holder whether 1st or 2nd has to execute a release of the lien(mortgage) to accomplish the sale. However, the actual approval letter from the lien holder will say whether the remaining debt is being waived, or not. There is no law, or other regulation regarding this....it's all in the language of the approval letter, and whether a full release and waiver was negotiated at the time, or simply a release of the lien in which case it is still an owed debt, only unsecured and could likely be satisfied for less than 10%.. You must read the approval letter.
- Structural Contractor · Coral Springs, FL · Member since 2008 · 29 posts · 8 votes12y
about $48k
- Dallas, TX · Member since 2013 · 4k+ posts · 744 votes12y
If it is $48K make a offer of $25K.
Joe Gore
- Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes12y
We have bought 3 short sales off the mls. All liens have always been cleared off the house. Usually the second only gets $2-3,000 from the first for clearing.
@Account Closed If the 2nd is not cleared, then they will not give a reconveyance on their loan, the title will be clear and the property cannot close. What you are assuming is that they clear their lien but do not waive their rights to deficiency. Either way, I don't think offering them money makes any sense. Read up on your state statutes to see how long they have to go a loan. I still say send them that drop dead letter.
- Dallas, TX · Member since 2013 · 4k+ posts · 744 votes12y
The 1st lien holder cannot tell the second lien holder how much to discount their note. Andy if the 1st short sell their note and release the lien, and I was the second lien holder and the buyer of the property told me to drop dead I would force a foreclosure unless you paid me in full. It is best to ask for a discount and get a release then think you can screw the second of their note.
Joe Gore - Real Estate Broker · TEMECULA, CA · Member since 2011 · 18 posts · 2 votes12y
I am in Calif and this can not happen here.
I believe what you're facing is that the 2nd did release their lien on the property so that the sale could close.But it sounds like they reserved the right to go after the seller's. Pull out the short sale approval letter and read it again to check what the release instructions were.
- Dallas, TX · Member since 2013 · 4k+ posts · 744 votes12yAll you need to do is ask the title company that did the closing and see if the lien was released.
Joe Gore - Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes12y
I live in NY (the other NY, not NYC) and I am somewhat familiar with NY Real Estate Law, but I am not an attorney. I know enough to give the following advice - you should contact the attorney that represented YOU on the purchase immediately to answer your questions. Do not delay.
Many questions can be answered with great advice on this forum. This is not one of them. Your situation is very specific and getting bad advice could cost you severely.
When you speak with your attorney, ONE of the questions you will want to ask is if the 2nd was discharged. If it was not, then what used to be the 2nd may now be the 1st. Not good.
Good luck.
- 12yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
This seems to have gotten a bit confusing for frankly a simple concept.
A "Short Sale" is the sale of real property from one party to another. The 'Short' refers to the Mortgagee taking less than the total balance due to satisfy the lien. If there were two leins, both leins would have to release their lien position on the real property otherwise the Buyer would not get clear title.
In the event, the Second lien did not agree to satisfy their interest in the real property, then the transaction would be considered a Subject To transaction, since the Buyer's interests would be Subject To the existing lien. This would mean the second lien is still attached to the property. In the OP, this does not sound like the case. Therefore, no foreclosure action could be further pursed, since there is no longer an interest in the real property to foreclose on.
Deficiency waiver in a first lien is common and usually found within the paperwork. Deficiency waiver in the second lien is somewhat common however it is also not uncommon for the second lien holder to not waiver deficiency. This is what sounds like took place. It is possible, that a waiver of deficiency was accepted by the second and they are simply trying to collect on something they no longer can, however that is not all that common of a mistake.
As such, the suggestion above relating to the issuance of a letter to the second lien holder regarding collection attempts is the best response. Fact of the matter, if the Borrower did not get a waiver of deficiency from the second lien, the amount due is still due. It is just not attached to real property any longer.
Usually the agent(s) involved help negotiate a waiver of deficiency for the borrower. In addition, the Seller usually reads the paperwork which will also state exactly, as Wayne mentions, what is happening with the outstanding debt.
IMO, you don't need a lawyer to read you your paperwork. Pull it out and read what the second lien holder put. I am pretty sure you will find, you agreed to reaffirm the debt which they agreed to release on the Subject Property but not release you personally. The debt is now unsecured. Collections on all debt must follow the law and the Fair Debt Collection Practices (rule can be read HERE) will dictate further correspondence between the creditor and debtor. - Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes12y
@Dion DePaoli - while I don't disagree with any of the points you have made, I still stand by my original response because if @Dyrol Harding doesn't know where to look or what to look for, there could be problems. Just because an agent SHOULD have done something doesn't mean that it was done.
Contacting the attorney SHOULD be a free call. I call my real estate attorney with questions on transactions on a very regular basis and the only bill I get is the flat fee I paid for the closing. Since this is likely a FREE call, recommending against making the call is poor advice, respectfully. In his situation, I would say even if the call wasn't free, it would be worth it.
We both live in NY. Our state is very popular among lawyers, it is tough to accomplish a lot here without having one involved. I wouldn't perform brain surgery on myself and I wouldn't handle this situation without the appropriate professional supporting me either.
With all due respect, I disagree with your advice to disregard my advice that he contact his attorney. A possible $ 48,000 hit on one hand versus a free call to clear the unknown on the other hand should be a no-brainer. I would want to know without question, which is why I gave the advice.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Edited as Adam posted before me.
Adam, I don't think Dion was saying so much that your advice to seeing an attorney be avoided so much as saying you don't generally need to go to an attorney to review a short sale contract, at least seasoned investor types shouldn't need an attorney. Even in NY I doubt I'd be running to an attorney to have them explain a short sale to me. I do realize that in NY an attorney is more often required to get anything moving along, but I doubt I'd need them to advise me on the contractual matters, I can read them. :)
Dion hit it, you could do a Sub-2, however a bank isn't going to sit there and take a hit on their 1st and watch a second hang on at full price. The second could do a partial release, forgiving part of the existing debt. And, unless the sale was in cash, the second would need to subordinate the lien if they left it in place.
All of this is not usual either, there would be some unusual circumstances to do such a convoluted short sale, but I don't live in NY or Cali....... :)
A buyer who did not understand what they were signing when they purchased the property will unlikely understand the letter of the law--and most certainly the nuanced implications--of a short sale.
There's no shame in consulting with an experienced attorney or tax advisor to get documents interpreted and explained in layman's terms. Preferable before docs are signed, but better late than never.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes12y
New York has it's own thing going. Some states have quirky laws regarding secondary debt.
Where I am at the seconds take a bath on payment for a few percent of the balance all day long. They are lucky if they get 10%. Here in Georgia foreclosure is a quick 30 day non-judicial process.
In other states where a legal proceeding occurs the second might have more leverage in negotiations. Here a seconds option would be to try to foreclose and hope an idiot bids on it for cash not asking if the second is being bid. Usually what happens is the second cancels the foreclosure when nobody bids.
The second would have to make the first whole and the property might be underwater say 50k or more after covering the first. This is why a second would take a 5k payoff on being owed 60k. In GA if they want to seek a deficiency versus a 1099 there are certain steps to follow. The key in the short sale paperwork in the lien release letter is the full discharge of the debt being settled in full.
It sounds like somewhere someone dropped the ball.
No legal advice
- 12yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
I am in no way saying don't consult attorneys on matters of legality. However, I am saying the OP can simply read the paperwork which is where the answer is located. A presumption that an attorney will offer service for free seems like a bit of a stretch to me. When engaging a professional to do something, I would not expect that service to be free. Frankly, I would even expect an attorney first tell the OP to do what I just said, pull the paperwork out and read it.
This thread is much, much, much simpler than the evolving conversation. Too much speculation and frankly poor assumptions. Fact of the matter, the second didn't waive deficiency as such, they are trying to collect since that is what debt collectors do. Why does that seem so clear, because even as Bill mentions, that idea not being the case would mean this transaction is super complicated, which I would say has about a 0.0001% chance of being true. Let's not forget that a Seller would be taking title subject to the lien being attached.
If the OP can read English and the paperwork is in English, then it is not too far of a stretch to assume the OP can read the paperwork and understand. Further, the lack of knowledge right now seems to suggest the paperwork was not read prior to execution, it's about time he read it then since he agree to something that he doesn't seem to know what he agreed to.
The best place to start is with what is available, the paperwork, read it. Do not jump to the extraordinary when the ordinary is slapping you in the face. You didn't get a deficiency waiver, they are trying to collect. To stay collection attempts, write the letter. You will still owe the debt, they just will slow the correspondance in accordance with the collection law. - Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
what if the contract is full of stuff like "the party of the second part, his/her or their heirs, assigns, or any party acting in their stead, shall indemnify the party of the first part for any loss, cost, damage or expense, including but not limited to reasonable attorney fees together with costs of court, arising from or out of any subrogated security interest assumed as set forth hereinabove specifically or by referenced, to include those recitals, agreements and obligations created under that specific promissory note mentioned....." . While that's probably not in a standard purchase agreement, some second lender might dream up stuff.
So, you're suggesting the OP get the contract out and attempt to read it and then if not understood call an attorney......and expect to pay them too? :)
- 12yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
Originally posted by Bill Gulley:
@Dion DePaoli
what if the contract is full of stuff like "the party of the second part, his/her or their heirs, assigns, or any party acting in their stead, shall indemnify the party of the first part for any loss, cost, damage or expense, including but not limited to reasonable attorney fees together with costs of court, arising from or out of any subrogated security interest assumed as set forth hereinabove specifically or by referenced, to include those recitals, agreements and obligations created under that specific promissory note mentioned....." . While that's probably not in a standard purchase agreement, some second lender might dream up stuff.
So, you're suggesting the OP get the contract out and attempt to read it and then if not understood call an attorney......and expect to pay them too? :)
Blaspheme, I know.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes12y
Okay guys, we don't care about any purchase contracts here.
It's only about the approval letter from the 2nd for the short sale.
The OP needs to read the approval letter/release from the 2nd on the short sale. Look for phrases like lender "shall forgive the deficiency/balance" "shall not pursue the balance of the debt" "shall waive the deficiency /balance" "shall consider the $ received as full satisfaction of..." etc.
NOT "lender shall lender release the mortgage for the $ received, but retain the right to puruse...."
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y@Wayne Brooks
For and in consideration of the party of the first part setting aside that partial principal amount hereinabove mentioned, the party of the second part, his/her or their heirs, assigns, or any party acting in their stead, shall indemnify the party of the first part for any loss, cost, damage or expense, including but not limited to reasonable attorney fees together with costs of court, arising from or out of any default of that certain promissory note and deed of trust as subordinated, such being fully assumed as set forth hereinabove specifically and, or by reference, to include those recitals, agreements and obligations created under that specific promissory note mentioned as originally made.........."
That certain Letter of Approval For the short Sale of Real Property, dated xx, Xuly, 20xx shall be conditioned upon the satisfactory execution of this "Agreement" prior to settlement of the contemplated sale transaction.....
Wayne, what if this is part of the second mortgage holder's requirement for the partial forgiveness of debt? Who might be that second party? :)
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes12y
Bill, the borrower who just got screwed!
Releasing a lien is not the same as Waiving the right to collect a Deficiency. You can have a short sale approved with all liens released, but the lender still able to collect on the loan afterwards. They just released their lien on the security instrument. If the approval letter did not include a Waiver of Deficiency, then the 'negotiator' made a huge booboo.
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