Short Sale, Foreclosure and Strategic Default

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Saturday, June 16, 2007

Realtor Org - Helping Realtors practice law?

I read this in an article from Realtor.org.

Question

What financial or credit liabilities will a seller have as a result of a short sale?

"Many lenders ask sellers to sign a promissory note for all or part of the difference between the proceeds of the short sale and the debt obligation as a condition to a short sale. In such cases, the note gives lenders the right to sue a seller and attach other assets if the note is not paid when due.

It’s particularly important to understand this distinction if you work in states such as California that have a nonrecourse mortgage, says Churchill. In such states, the lender cannot pursue a deficiency judgment against a seller for any deficiencies after a property is foreclosed. Because of this distinction, sellers who are already in default on a mortgage and do not have the resources to pay off a separate promissory note after a short sale might be better off letting the lender foreclose, he says. If you are working in a state in which mortgage loans are nonrecourse, be sure and alert your seller-clients to this distinction."


Technically, in specific situations Churchill's advice could be sound and he brings up an important consideration. However, the article seems to neglect myraid exceptions to the rule which could be important; depending on the facts. A California attorney would have to consider whether the loan is a refinance or a purchase money loan, whether a sold out junior is involved. A California attorney then might weigh the possibility of a judicial foreclosure. Just by writing the above I almost feel compelled to include a disclaimer such as - All situations are different, laws vary in each jurisdiction. Before making any decisions you may wish to consult with an attorney licensed to practice in your state.

The above is just small concern. Mr. Churchill says he is an attorney so I suspect his advice was excerpted from his full material.

However, this brings up a major issue. Should Realtors be trained to advise their "clients" on the subjects of accepting foreclosures and signing promissory notes? Should Realtors or loss mitigation "specialists" be trained to request homeowners sign releases which are used to represent to the bank that the Realtor or "Specialist" represents the homeowner.

Should banks even honor those releases? Frankly, I see this whole area of law becoming full employment for Plaintiff's attorneys.

I have said before we all know Realtors practice law. Some Realtors do it very well. But, we are now in a down market. Mistakes no longer get covered up by higher resale values. Unhappy former homeowners and plaintiff's attorneys will be out looking for pockets of money.

After the last real estate downturn in California one of my first trials saw the wife of a Real Estate agent suing my client, a mortgage broker, for conspiring with an appraiser to inflate the worth of a property. My client the mortgage broker had already been sued a few times. He represented he had no assets left. The plaintiff was looking for a "fraud" judgment so she could make a claim against the state fund for victims of fraud. I am sure we all know what being sued for fraud does to a man looking to keep his license.

I am a Realtor and an Attorney. There is no substitute for smart, informed Realtors. In these illiquid markets, Realtors are a necessary and essential part of the pricing and marketing of short sale properties. I humbly suggest we protect the public and allow lawyers to practice law and Realtors to price market and sell Real Estate.

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