let’s talk about DEFICIENCIES

Each home owners conditions can be individual and it can be a complex issue but let’s talk about DEFICIENCIES since it seems to be our most popular question these days. What is a deficiency: It is the difference between what is owed and what the lender nets on a short sale or I believe foreclosure (but I am far less familiar with anything to do with foreclosures as we tend to be in the business of preventing that mark to go on your record). Each lender/ investor may react differently but overall first lien holders are increasingly waiving, or issuing a 1099C as forgiveness of debt.

If all goes well the bank will issue a approval letter. The language on this letter is basically a contract, and that can determine the sellers liability. This letter is reviewed with the seller and it does not have to be agreed to the other side of not moving forward with it could be the continuing with the foreclosure as short sales are really pre foreclosures in my book. You should seek competent legal council to review this approval letter with your especially if you do not understand it as I find it not good practice for me as a real estate agent to attempt to explain it to you, its just outside of our licenses (ie: attorney/ Accountant’s would do a better job.

However in a  perfect scenario, the waiver of deficiency is clearly spelled out on the approval letter. Since viewing my fist approval letter a few years ago I am sad to report they appear to be becoming much more vague. Banks I am told are worried if they seek deficiency they might not be able to get it with some of their first approval letters. In some cases we can get the bank to clarify the letter and detail the issuance of the 1099C in lieu of deficiency which is our goal.

1099’s
Hmmm….
Government tax  stuff…. (See accountant)
We know the deficiency is what you owe the lender and tax liability is what you owe the IRS. Generally, I am told, if a lender issues you a 10099c it waives the right to collect the deficiency so they can write off the loss against their revenue. They cannot double dip.

The Mortgage Debt Relief Act of 2007
(which should be interpreted by an attorney not me) states that, in most cases, that the seller of a primary residence is protected against tax liability. (The Feds use the criteria for primary home as home owner must have lived in the home  two of the last five years to be protected by this) . So let’s say you live in the home 2 years and then rent it just shy of  3 years, you would meet the criteria. Again check with an attorney or tax accountant for the safest course of action.

We see more and more that the first lien holders are waiving deficiency and it is safe that in a ‘one lien situation the deficiency will be released or that a 1099C will be issued, unless certain investors are involved. Credit union’s can be an exception to this.

Now, home Equity Lines of credit (HELOC’S) almost never do. HELOC’S  although secured by property are more like consumer debt and is not extinguished in a foreclosure. In a foreclosure I am told the lien position of the second is wiped out but not the debt and they will likely pursue collection activity. An option might be a settlement during the negotiation of the short sale or after. Personally I’d rather have the “chance” of them coming after me then if I do not have the money trying to figure a way to pay them at the time, while upside down on my mortgage which is making me go further into debt, but that’s just me. I’d also rather pay tax to the government then the full loan if I am in hardship but again that’s is just me.. it’s a personal decision of course and each individual can be different.

Deficiency Settlement Techniques
The seller should be willing to understand the possibility of deficiencies and be willing to accept them.

There can be no guarantee that a deficiency can be waived for a short sale.

Cash settlement
Most common with PMI/MI and HELOC’s. We will attempt to get the buyer to contribute to this shortage as we know the seller would rarely have any funds. Most HELOc’s are willing to take 5% to 20% of the outstanding balance. I had one MI company demand $5,000 cash or $12,000 promissory note. W4 settled at $1,200 – 10% of the note.

Promissory Note
This is a written note to pay and should be reviewed y an attorney. It is usually 0% interest and terms are from 60- 120 month. If short on cash as most are this might be the way to go.