1. This presentation is for information purposes
only and is not legal nor specific advice to any
one person or reader
2. What happens when you default?
• The note involved in a foreclosure or repossession is a
contract. It is an "I Owe You": a promise and an obligation
for you to pay the debt owed to the lender that financed
• The mortgage on the property, is the security for that debt.
It is a lien.
3. Default Consequences
• Default - Failure to pay a debt when it is due.
• Acceleration - Allows a lender to demand payment of the
total outstanding balance upon default.
• Foreclosure - Lawsuit calling the entire note due and
requesting a court ordered sale of the property to satisfy
4. Mortgage Foreclosure
Four Step Process
2. Final Judgment
4. Deficiency Judgment
5. Step 1 Complaint - Lender sues on non-payment of Note.
• Complaint Includes 3 Documents.
1. Summons - directs you to answer the Complaint.
2. Complaint - describes why the bank is entitled to
payment on the Promissory Note.
3. Lis Pendens – (means "pending litigation”) filed in
the public records of county where property is located
to give notice to anyone dealing with the property that
a claim has been made against the property.
6. Step 2
Final Judgment – (not a money judgment)
1. Orders clerk of court to sell to highest bidder within 30
days if borrower does not redeem, (pay the full amount
the bank proved is due).
2. If the highest bidder bids less than the amount due to
the bank, the bank can come back to court and request
a Deficiency Judgment (a money judgment).
7. Step 3
• May occur "on the courthouse steps", in a courtroom, in a
meeting hall, in a large hallway and more recently, on the
• Bidding starts at $100 and goes up from there.
• Lender has a credit up to amount owed on mortgage.
• Bank bids for the property to "protect" the collateral up to
the amount (and usually beyond) the bank has
determined the property is worth.
• Usually gets sold to the bank for a mere $100 if no other
bidders at the foreclosure sale.
• Buyer pays DOC stamps based upon sales amount.
8. Step 4
• Deficiency Judgment –
• demands that, if the lender does not receive all
amounts due from foreclosure sale, the remaining
balance be paid by the borrower.
• “appraisal value” - “judgment amount” + (costs, penalties, late
fees) = DJ
• FMV on the date of the sale is LESS than the total
indebtedness of the mortgage = deficiency.
• FMV on the date of the sale is MORE than the total
indebtedness of the mortgage = NO DEFICIENCY.
9. How Acquired (not automatic)
• File motion in foreclosure action for DJ – must
have evidentiary hearing to prove sales
amount was less than judgment amount.
• Must be done within one year from date of
• May also be obtained in separate breach of
contract action on promissory note (5 years to
bring such action).
10. When Does Lender Seek a DJ?
• Is this Primary Residence or Investment property?
• What are the lender’s assets?
• Strategic Default?
• Is there Private Mortgage Insurance?
11. What is PMI
A down payment of less than 20% of the purchase price means
your lender may require you to buy private mortgage insurance
(PMI), which partially protects the lender against the risk of
protects lender for an amount equal to that 20 % difference
between loan amount and value.
Example: Value = $100,000
Financed = $100,000
PMI covers 20 % of amount financed = $20,000
Acts like a $20,000 lien on the property.
12. RESULT OF PMI
Once the Lender approves the Short Sale, it gets sent to PMI for their
Adds 2-3 weeks to the process.
From buyer’s or seller’s perspective, PMI does nothing to improve the Short
13. HOW IS A DEFICIENCY JUDGMENT TREATED FOR TAX PURPOSES?
If the lender gets a deficiency judgment, the lender is not forgiving the loan.
The homeowner incurs income tax liability for debt forgiveness if:
• the lender does not seek a deficiency judgment or
• the lender pursues the judgment but is unsuccessful
15. What is Cancellation of Debt?
If you borrow money from a commercial lender
that later cancels or forgives the debt, you may
have to treat the cancelled amount as income for
loan proceeds are not treated as income because of the obligation to repay.
When obligation is forgiven, the amount discharged is normally reportable
as income because you no longer have an obligation to repay.
The lender is usually required to report the amount of the canceled debt to
you and the IRS on a Form 1099-C, Cancellation of Debt.
17. Very simplified example.
You borrow $10,000 and default on the loan after paying back $2,000.
If the lender is unable to collect the remaining debt from you, there is a
CANCELLATION OF DEBT of $8,000, which generally is taxable income to you.
19. What is Recourse Debt?
1. Recourse debt is debt for which the taxpayer is personally liable. In the event of
default, "the lender can look beyond the collateral pledged for the loan and hold
the borrower accountable for the unpaid balance."
2. When a lender takes over a property as part of a foreclosure, deed in lieu or as
part of a short sale in satisfaction of a recourse note "the deemed sale price will be
the LESSER of the FMV of the property at the time of foreclosure OR the amount of
3. If the taxpayers debt exceeds the FMV, (i.e. Short Sale) the difference is treated
as debt discharge income if it is forgiven.
20. What Is Non-Recourse Debt?
1. Nonrecourse debt is debt where the lender can only look to the loan
collateral (i.e. the property) in the event the taxpayers default's on the loan.
2. In a foreclosure, deed in lieu, the sale proceeds from the deemed sale is equal
to the balance of the non-recourse debt.
There is no debt forgiveness (thus no tax
consequence) when the note is a nonrecourse note.
The importance of understanding the distinction between a non recourse debt and
a recourse debt is that a foreclosure on property involving recourse debt could
result in both a gain or loss from the sale of property, and debt discharge income
21. Is there a second mortgage?
Another name for a second mortgage -- Gift
Second mortgage lenders and private lenders are more likely than first
mortgage holders to go after the borrowers by suing for default on the
underlying promissory note.
22. Remember the Note
• Contract between lender and borrower that gives
lender the right to sue in the event of default.
• Liability under the note does not always get released
upon a short sale.
• In separate action brought under note – 5 years to
23. What Does the Future Hold?
• As of January 2012 an estimated 368,000 foreclosure
cases are pending in Florida courts.
• The backlog of cases is expected to grow by another
380,000 cases by 2016.
24. Short Sale -Property sold for less than what’s owed
• Seller lists the property with a Realtor.
• Buyer must be found and contract executed.
• Sale and purchase agreement along with the seller's financial
information is sent to the lender for review (this is called the
short sale package.)
• Lender orders a Broker's Price Opinion on the property.
• Once conducted, received, and reviewed, the file is assigned to
Loss Mitigation Specialist. (LMS)
• LMS accepts, rejects, or counters the Buyer's offer on the
• Negotiation continues until deal approved or its falls apart.
• Upon agreement, closing date is set for about three weeks
25. BEST CASES FOR SHORT SALE
• Start the process as soon as payments are stopped.
• Nice homes in nice neighborhoods are more likely to stick – Buyers seem
more willing to negotiate
• Homes with only one mortgage easiest to get approved
• 2 loans with only one lender still have a chance of getting approved.
• 2 loans with different lenders very challenging to get approved.
• Easier if pay-off is not too short, less than 70% payoff are hard to get
26. Documentation to get out of a loan is similar to what’s need for
getting a loan.
• Hardship letter
• Financials -NEVER ENGAGE IN MISSTATING INCOME AND
ASSETS – THIS IS BANK FRAUD – FBI WILL PROSECUTE
28. Home Affordable Foreclosure Alternatives (HAFA) Program
HAFA offers benefits that make the transition as favorable as possible:
• Get free advice from HUD-approved housing counselors and licensed real
• Unlike conventional short sales, a HAFA short sale completely releases
mortgage debt after selling the property. The deficiency is guaranteed to be
waived by the servicer.
• HAFA has a less negative effect on your credit score than foreclosure or
conventional short sales.
• HAFA provides $3,000 in relocation assistance
30. • MUST BE “ARM’S LENGTH” TRANSACTION - A
transaction in which the buyers and sellers act independently
and have no relationship to each other.
A willing buyer and a willing seller, each acting in his
own self-interest ensures that pricing on transactions
are the basis of fair market valuations.
The buyers and sellers nor their Agents have any
agreements written or implied (spoken or hinted) that
will allow the Seller to remain in the property or regain
ownership of property.
33. Fannie and Freddie DO NOT ALLOW servicers to negotiate commissions
on short sales below the amount negotiated by the listing agent, unless the
commission exceeds 6 percent.
35. AS IS PURCHASE AGREEMENT
• 5 days to inspect
Starts when bank approves sale to buyer at agreed upon price.
• Seller is obligated to provide utilities during the inspection period.
Listing agent needs to ensure owner turns on power.
If power is turned off and buyer chooses not to inspect, get
waiver of that contingency in writing.
AS IS CONTRACT DOES NOT ELIMINATE JOHNSON V. DAVIS
36. Closing the Transaction
• Track buyer’s loan to ensure timely closing – 30 days very challenging
Buyers need to get pre-approved for loan amount.
• Track all typical inspections, disclosures for timeliness.
• If loan appraisal comes in low – must renegotiate – can cause
problems if there are extension limits.
• Final HUD 1 approval – REQUIRED 24-48 hours prior to close – NO
MAJOR CHANGES ALLOWED.
37. In Short Sales…Need 2 Releases to
• What does the Approval Letter say?
• Does it say both the Mortgage AND the Note are being released?
• Does the approval letter say the mortgage is being
SATISFIED or simply released.
• If mortgage is being satisfied, it should contain language
that the underlying obligation under the note is paid in full.
• Look for language in Approval Letter that “mortgage and
note are being satisfied.”
• “a transaction in which a borrower, after
default, conveys to its lender by absolute
deed, title to real property pledged as
security for the indebtedness.
40. DIL Prerequisites
• Can’t sell the property
• Clean title
• No second mortgages or liens against property
• No judgments against borrower
REMEMBER THE NOTE – Seller wants to be
RELEASED from the note as part of
consideration for the DIL.
41. Title Insurance Issues
• Lenders and title companies share the same concerns
about deeds-in-lieu: They are subject to judicial attack by:
1. re-characterization as an equitable mortgage:
• Deed must be an absolute conveyance
• Grantors cannot remain in possession
2. violation of the “clogging the equity” doctrine (i.e., use
of DIL to prevent borrower from exercising its rights to
redeem the property from a foreclosure sale):
• Deed must be given freely without duress or coercion
3. setting aside of the DIL as a fraudulent conveyance or
preferential transfer under federal bankruptcy or state
fraudulent transfer laws.
When a mortgage on lands and the equity of redemption in the
same lands become united in the same person, ordinarily the
mortgage is merged,-in other words, ceases to be an incumbrance.
Should it be determined subsequent to the acceptance of a deed in
lieu of foreclosure that inferior lienholders are claiming an interest in
the subject property, a merger of the mortgage estate into the fee
estate could arguably eliminate the lender's ability to foreclose such
The mortgage released by the DIL may lose its superiority.
43. This Warranty Deed is given as an absolute conveyance of title,
in consideration of the full cancellation by Grantee of Grantor’s
liability for all debts, obligations, costs, and charges secured by
that certain Mortgage encumbering the above described property
recorded on November 7, 2007, in Official Records Book 6156,
pages 2181-2190, of the public records of Volusia County,
Florida, securing $40,000.00, including, without limitation, the
indebtedness secured by said Mortgage; provided however, it is
the intent of the Grantee by acceptance of this Warranty Deed,
that the lien of said Mortgage shall not merge with fee simple title
to the above described property, but rather shall continue in full
force and effect notwithstanding that the Grantee shall be both
the holder of said Mortgage and owner of fee simple title.
44. Tips for Realtors
Things you can do to help minimize this lengthy process time:
• Advise clients to contact their servicer as early as possible.
• Ensure all customer financials are in PDF format.
• Help clients complete all documentation accurately and as soon as possible.
• Make sure the purchase offer is a legitimate offer and fully executed.
• Submit the best possible purchase offer at fair market value.
• Provide listing information and comparables to support the price.
Frequent causes of delay to be aware of:
• A change of buyer or agent at any time may require process to revert to an earlier
step; notify client’s servicer immediately if there is any change.
• Investor/mortgage insurance approval is needed if the servicer is not fully
delegated to approve the short sale.
• Release on a second lien must be received prior to issuing an approval letter.
• If customer has filed bankruptcy, the trustee must provide a court document that
approves the sale of the property.