A recent Wall Street Journal article – A Short Sale May Not Mean You’re Home Free, describes how homeowners are being sued by their banks after a short sale or foreclosure.
For homeowners who have been unsuccessful in negotiating a loan modification on their own, the two other options are generally a short sale or foreclosure.
Because a short sale involves negotiating with your bank to accept a payoff in an amount less than the current principal owed, some banks are requiring homeowners to sign a promissory note which gives the lender legal recourse to recover the difference in the unpaid amount.
According to Economy.com, the number of homes that will be lost in 2009 and 2010 due to borrowers not being able to make their mortgage payments is anticipated to rise to 3.8 million.
And more recently, the Congressional Oversight Committee announced that there could be upwards of 10-12 million foreclosures in the next 24 months.
One-Year Moratorium
HSBC Finance, part of the North America unit of HSBC Holdings PLC, has implemented a one-year moratorium on the collection of deficiency balances for short sales and foreclosures that occur after April 1, “given the current economic environment,” a company spokeswoman says.
Other mortgage servicers say their actions are often dictated by their contracts with investors or mortgage insurers. Bank of America Corp., for example, will “attempt to seek a promissory note whenever it is feasible” in a short sale “in the interest of protecting investors and shareholders from the losses,” a spokeswoman says. In the case of a foreclosure, the investor or insurer “is generally the one who pursues the deficiency, but we do ourselves on some-bank-owned assets,” she says.
Not every troubled borrower is hit with such a claim. Often, mortgage companies don’t go after borrowers for unpaid amounts either because state laws prohibit or limit such actions or the cost outweighs the potential return. Borrowers subject to a deficiency may also elect to file for bankruptcy in an effort to have the debt discharged.
How a borrower is treated can depend on mortgage company policy, the size of the unpaid debt, whether the borrower has a job or other assets, or whether the home was bought as an investment. “If there isn’t a financial hardship … that’s where the investor or mortgage insurer will go after the homeowner for more,” says David Knight, a senior vice president at Wells Fargo & Co.’s home-mortgage unit.
A PMI Group Inc. spokesman says the mortgage insurer “primarily target[s] borrowers who are not experiencing hardship — but those who simply elected to walk away from the property due to its decline in value.”
The Importance of a Hardship Letter
Based on the above comments from a few national lenders, it is obvious how important it is to clearly present a real hardship to your bank during the negotiation of your loan modification or short sale.
With real estate values continuing to decrease, more mortgage companies are starting to pursue former homeowners for unpaid mortgage debt.
Simply walking away out of frustration and letting your home go into foreclosure may not be the smartest move.
Make sure you read all documents carefully, and be very cautious what you say over the phone when contacting your bank directly. Keep in mind, banks are acting on behalf of their best interest and are recording every conversation, just like all debt collectors do.
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