Issues that Could Cost You and Your Client Money
By guest bloggers Neil Thomson & Don Doerr
Everyone involved with short sale transactions has run into issues trying to get them closed. Problems with lenders are an everyday occurrence. But the following examples are beyond the normal and expected issues. These are the kind of events that could result in a borrower having to file a lawsuit against the lender. REALTORS® need to be aware of these potential problems to avoid fallout in their direction. We hope that this information helps REALTORS® avoid these traps.
A note from AAR: You’ve heard it before, but we’ll say it again. REALTORS® working with clients on a short sale should always strongly advise their clients in writing to seek legal, tax and credit advice from those qualified to deliver it. The Short Sale Seller Advisory is a great resource to begin this conversation. Be the source of the source, not the source itself!
- Most people know that the fine print in the account agreement signed when opening a new bank account provides the bank the ability to sweep funds in an account to pay other delinquent accounts. We recommend that our clients close all accounts they may have at any bank that services their mortgage(s). But in one case, the bank took it far beyond simply sweeping an account. A borrower had a nearly empty checking account with $1000 of overdraft protection. The bank, without the consent or permission of the borrower, increased that overdraft amount to $10,000 so that the bank could process a mortgage payment through this account (even before the borrower was late). This action changed this amount from a potentially non-recourse obligation to a recourse obligation, and since there is now an unpaid balance on this checking account, the borrower could not close the account until this negative balance was corrected.
- Homeowner arrives home to find out the locks on the house have been changed and several boxes of their personal belongings were taken. The trustee’s sale had not been completed, and the lender admitted to having the locks changed. In one case, after settling with the lender, the lender did the same thing a second time.
- Pursuant to RESPA, when a lender accepts a Qualified Written Request (QWR), it cannot report that borrower to any credit agencies until the issue has been resolved. RESPA also specifies that the lender has 60 days to resolve the disputed issue. In the past, lenders generally adhered to these requirements. However, early in 2009, lenders started to ignore this requirement and started reporting on borrowers in violation of RESPA regulations. Because the reward to the borrower from the lender who violates this regulation is maxed at $1,500, borrowers are unlikely to take this to court. Many lenders have apparently made the decision to disregard the requirements and continue to report borrowers to credit agencies.
- The second lien holder refuses to allow a short sale to close unless money is paid by the borrower outside of escrow. This is referred to as “greenmail.” In many of these cases, the borrower would have no obligation to this lender if they let the home go to foreclosure, so there would be no legal reason to submit to these demands. This is where the borrower should definitely get legal advice before paying any funds to a lender.
- Lender makes promises for a modification or extension of trustee sale only to later deny or retract the offer. We have seen this in the case of both verbal and written offers from some lenders.
- Temporary modifications can be used against the homeowner if payments are missed. Because the temporary modification involves a payment less than the original loan terms, the lender can interpret this as missed payments, therefore placing the borrower in a default position. The lender may file for trustee sale, even if the borrower was current before accepting a temporary modification. This removes the borrower’s leverage of not making payments to force the lender to re-evaluate the borrower’s loan modification request and minimizes the chances of a successful short sale.
- Lender attempts to retain homeowner’s payout on the sale of a property to offset loss on another delinquent property serviced by that lender (no language in loan documents to support the lender’s claim to these funds).
- The lender’s mortgage insurance company demands a note from the homeowner before a short sale closing. This usually occurs at the eleventh hour and comes as a complete surprise to the borrower. In most cases, the borrower was unaware that the lender had purchased mortgage insurance on their loan. Again this is an example where the borrower needs legal counsel prior to any payments being made.
- A borrower vacates their home in preparation of a foreclosure. The home is vandalized while empty. The borrower is responsible for this damage as long as they still own the home. The borrower’s homeowners insurance covers the damages, but the lender directs the homeowner to sign the check over to the lender for disbursement to the contractor after close of escrow (COE). After COE, the lender refuses to pay the contractor and sends funds to the note holder for missed payments, leaving the homeowner with an unpaid bill from the contractor.
- Second lien holder gives amount in a short sale for release of lien. This is not a full release from deficiency. This is just the amount they require to allow the short sale to close. From a borrower’s point of view, it makes no financial sense to agree to pay this if there is not a full release, as the lender could still pursue a deficiency suit against the borrower. If the second lien holder persists and the first lien holder will not provide the funds to the second lien holder, it is generally better to let the home go to foreclosure.
Neil Thomson was admitted to the State Bar of Arizona, United States District Court, District of Arizona in 1986. A native of Rockland, Maine, he received his Bachelor of Science in political science from Ohio State University and his Juris Doctor from Capital University Law School. Thomson’s practice focuses on corporate and business transactions, including corporate governance matters, mergers/acquisitions and commercial transactions. During his 20-year legal career, Thomson has had extensive involvement with all aspects of residential real estate, including residential mortgage lending.
Don Doerr is the Director of Business Development for Thomson Law, PLC and the Mortgage Mediation Group. This practice group was developed in 2008 to help homeowners with their distressed residential mortgages and real-estate-related legal issues. Previously, he worked as Chief Information Officer for two mortgage banks, improving workflow processes and maintaining regulatory compliance policies. Doerr has also worked as a consumer advocate, has published more than 100 articles and several books and was the host of his own radio talk show.