HAFA SHORT SALE PREAPPROVAL LETTERS (Read The Fine Print!)
Question: My home is underwater. I have both a first position loan and a second position loan. The current property value is less than the amount owing on the first position loan, and the balance owed on the second position loan is $100,000. I just received a HAFA short sale preapproval letter from the servicer of my first position loan. It appears to be a great deal, what with a preapproved sales price, the agreement to allocate up to $6,000 to payment on the second position loan and the promise to pay me $3,000 at closing for relocation expenses. Should I be concerned at all about accepting the proposed terms?
Answer: Absolutely. You bet you should be concerned after you read the fine print and understand what rights you are giving up, what obligations you are taking on, and how illusory the promises of the servicer are in the letter.
Following the end of the answer is a sample form of HAFA (Home Affordable Foreclosure Alternative) short sale preapproval letter (this one happens to come from Bank of America), which I have marked up with numbered circles, which correspond to the following comments:
1. Who and how is fair market value of your home determined? Later on in the letter there is a preapproved listing price of $325,000. Where did this figure come from? Did it come from a broker price opinion done for the servicer at a cost of $50 or less? Is the preapproved listing price supported by appropriate comps of other recent closings? Check with your broker before even considering whether to accept the terms in order to know whether the preapproved listing price has any basis in reality.
2. There is no assurance that a short sale will take less time to close than would a foreclosure, and indeed, in many cases, particularly depending on the proposed sales price, and the number of loans against the property, a short sale could take considerably longer.
3. It is critical that you understand your rights as an Oregon homeowner regarding deficiency claims. If you occupy the property as your primary dwelling, then the first position lender has no ability to seek a deficiency judgment against you, whether the lender proceeds with a judicial or nonjudicial foreclosure. Therefore, any approval of a short sale should always include a waiver of the deficiency claim, or the short sale approval terms should be rejected.
4. Note the conditional language relating to the promised $3,000 of relocation expenses. Illusory promise.
5. The required listing price is $325,000. As noted above, there is no discussion of how the price was determined. It is important to work with your broker on determining whether this is a realistic price. Also, there is no identification of the actual required net amount to be paid to the first position lender. So, you do not know whether, even if an offer is accepted at $325,000, that it will net the first position lender an amount sufficient to enable the transaction to close.
6. The term provides for the marketing of the property for 120 days. However, many short sale transactions take substantially longer than 120 days. In addition, as discussed under Point 14 below, the actual time permitted for the marketing and closing of the short sale is only 118 days, and then only if you run it from the date of the preapproval letter itself. Note that several programs (notably the Fannie Mae HAFA program and the Freddie Mac HAFA program), mandate a minimum of 120 days on the market before a deed in lieu will be permitted.
7. While it provides for approval within 10 business days, there is no remedy to you if this does not occur.
8. Note the reference to having to secure the release of any other liens against the property. This burden is put on you, and there is no discussion of how this is to occur, or what happens, as will be addressed later in more detail.
9. Many junior lenders won’t consider a proposal for a discounted payoff until a purchase offer is in hand and a tentative HUD closing statement is provided to the junior lender. So, the suggestion to start this process immediately does not accord with the realities of the short sale process.
10. If you don’t comply with the preapproved short sale terms, you are required (this is mandatory, not optional), to execute a deed in lieu of foreclosure and convey the property to your first position lender. As discussed below, this may create potential legal liabilities to you, particularly given you have a second position loan to deal with. Such a mandatory provision actually appears to be contradictory to the government’s HAFA guidelines.
11. Again, the right to be paid the $3,000 for relocation expenses is not promised as certain – all that is said is that you will be eligible for the payment.
12. Again, the language is structured so that it will be up to the lender as to whether it will require that you execute a deed in lieu of foreclosure. There is no assurance that the lender will permit you to do so, and there is no assurance that you will be able to satisfy the requirements to clear title, as discussed in more detail below.
13. Just note the typographical errors in the letter – repeating the same terms.
14. Remember the earlier representation about having 120 days to market your property. Now, with the identified deadline, you only have 118 days in which to close, assuming you put your property on the market the same day as the date of the preapproval letter, which is highly unlikely.
15. The preapproval is conditioned upon your being able to clear all junior liens from your property, so in your case, that means getting the second position lender who is owed $100,000 to agree to accept $6,000, in full satisfaction of the second position loan, and with a complete waiver of any deficiency rights. You have no right to even make other payment arrangements with the second position lender, and there is no assurance that you will get the second position lender’s consent. If you fail to do so, you will be in breach of the preapproval letter.
16. Again the preapproval letter emphasizes it is your obligation to obtain the release of the second position lender’s lien on approved terms.
17. It is well documented that servicers have lost paperwork, misplaced paperwork, requested duplicate paperwork multiple times, and there is no assurance this will not happen in your case. Just be forewarned.
18. There is no agreement that a postponement will be extended out any longer than until the deadline for closing, which is December 20, 2012. This means you could have a foreclosure sale set for the same date as the deadline for closing.
19. There is a requirement that your short sale buyer agree that it cannot resell the property for 90 days after closing. Aside from the question of whether such a requirement is even enforceable, you reduce the potential market for your property by imposing such a condition, which does nothing for the value of your property.
20. The requirement that you have to consent to share personal financial information with your broker and others is absurd. That would not happen in connection with a traditional sale or a non-HAFA short sale.
21. The definition of a deficiency is not correct. A deficiency is the difference between the amount owed on the loan and the amount netted to the lender from either a short sale or a foreclosure sale. The amount netted to the lender may be more or less than the current market value of your property.
22. This is just a repeat of the paragraph addressed in Point 21 above, and is inconsistent, including different references to different parties agreeing to waive the deficiency claim. Why?
23. This language, dealing with the deed in lieu of foreclosure, is at odds with the earlier mandatory language, and appears to establish a permissive standard, and would seem to only require that you execute a deed in lieu of foreclosure if you want to. Which provision is the lender going to follow? It’s unclear to this writer.
24. This paragraph is highly problematic for you, given that you have a junior position loan with a substantial unpaid balance. This paragraph mandates that if you are unable to complete the short sale, you will be required to provide clear and marketable title, meaning you will need to get rid of the junior position trust deed, and all without even the $6,000 which would have been available through the short sale. How do you know you will be able to accomplish this? What happens if you fail to do so? Have you just exposed yourself to a claim by Bank of America for a breach of the agreement? Also, what unpaid real property taxes or HOA dues or other assessments which may have priority over the first position trust deed? Do you have to pay all of those in order to comply with your obligations? There are no clear answers to any of these questions, and in my opinion, create liability where none previously existed.
25. What do these provisions really mean, and who determines whether they are satisfied or not? What is “damage”? Again, these are obligations which don’t exist in the absence of this preapproval short sale letter agreement, or at least, are ones which may be in the trust deed, but your obligation ends with the foreclosure of your property.
26. The first part of this paragraph is redundant and inconsistent with earlier terms. What is controlling?
27. This again focuses on the requirement that you obtain the release of the second position trust deed, and that the second position lender waive any deficiency claim, and again, leaves it open to question as to what happens if you can’t get this done.
28. If there was any question about whether it is mandatory that you execute a deed in lieu of foreclosure if the short sale fails, this seems to definitively answer yes.
29. What are the actual approved sales costs (as the final approved sales price has not been identified), and how do you know if the net sales proceeds are sufficient?
30. This is a critical paragraph. You have to list the property for short sale in “as is” condition, but if you can’t sell, you have to make sure the property is in better condition than “as is” for purposes of the deed in lieu requirement. Now, on to the truly illusory aspect of this entire preapproval short sale letter. Note the last sentence: “We may require you to adjust the list price or other offer terms.” What does this mean? It would seem to provide unfettered discretion to increase the list price (decreasing it would not be likely), or to change any of the offer terms to the benefit of the first position lender. Generally, such a term would render a contract unenforceable, as the promise of performance on the part of the first position lender is unknown and solely within the control of the first position lender. Why would you want to go through the entire process only to have the first position lender change terms to its advantage at the last minute?
31. This could be viewed as the “screw the broker” clause. No matter how hard the broker works, or how close a successful short sale closing is, this would permit the servicer to not have to pay any commission to your broker if you just execute a deed in lieu of foreclosure.
32. What could be more objectionable and establish with certainty the illusory nature of the first position lender’s obligations than the paragraph identified in Point 30 above? That would be the very next paragraph, and the paragraph discussed below under Point 39, which very clearly negate any binding effect on the “deal”, by stating that the obligation to proceed is subject to the approval of the mortgage insurer (if any) (so, the lesson to be learned here – find out in advance if there is a mortgage insurer). To add insult to injury, however, this particular paragraph says it is also subject to the approval of the “mortgage holder.” Wasn’t that the entire purpose of this preapproval short sale letter?
33. Note that there is no identification of the actual amount of the so-called approved closing costs.
34. Redundant of earlier provisions.
35. Redundant of earlier provisions.
36. Does this refer to receipt of a bona fide purchase offer? Also, what about acceptance by you? What if you don’t accept the terms? Is the first position lender requiring that you submit all received purchase offers to it?
37. What if closing can’t occur within 45 calendar days? Once again, we see the creation of terms which don’t jive with the realities of a short sale transaction. First, many, if not most, short sale transactions will take far longer to close than 45 days after the execution of the purchase and sale documents. Second, many contingencies in a short sale transaction won’t even start to run until there is a notification to the buyer of the acceptance of the proposed short sale terms by the lenders(s) – note this means acceptance by, in this case, both the first and second position lenders, and while the first position lender has agreed to respond within a fixed period of time (as illusory as this may be), the second position lender has no such constraints and can easily take a month or two before even responding to a short sale proposal. This particular term is simply fantasy.
38. Exactly who determines whether a party is performing “in good faith,” in order to get a foreclosure sale postponed?
39. The mortgage insurer or the guarantor of the loan (usually Fannie Mae or Freddie Mac), get to veto the deal. What exactly, in light of this provision, did the first position lender just agree to?
40. Have we used the term “illusory” yet? I believe so. Just add the terms covered by this Point 40 to emphasize the point. Good faith in marketing? Change occurs to the property or value? Who gets to answer these questions?
Conclusion: This is an assessment of just one form of HAFA short sale preapproval letter, and terms will vary from servicer to servicer, and also dependent upon who owns the loan. The analysis will also be somewhat different if there is only one loan against your property. However, hopefully this gives you some idea of what to look for when reviewing such a letter, and to exercise caution before proceeding (as the saying goes: Beware Greeks (i.e., lenders/servicers) bearing gifts).