If you have a “recourse loan” on your mortgage the bank has the opportunity to pursue you for their loss after a foreclosure or short sale. The state your home is located will have a large influence on the type of options open to the bank. For instance, I practice real estate in the State of Nevada and we are known in the industry as a “deficiency” state. Banks, unless they waive their rights to a deficiency, can pursue borrowers. It doesn’t guarantee they will, just that they retain the right
Many banks will waive their deficiency rights; some require some strong negotiation to do so, but others are rarely, if ever, waiving. Bank of America is the chief culprit. Their servicing agreements with the banks they represent often prevent them from waiving deficiency. This has caused a huge problem with many sellers who are looking to sell on a short sale.
Real estate agents often times find themselves with deals that fail as a result of the borrower not wanting to move forward after the short sale approval letter has been received due to this issue. I keep my ear to the ground regarding Bank of America as 90% of my business consists as acting as a short sale listing agent. I have rarely heard of any situations where they are waiving. Despite big talk from attorneys being able to get deficiencies waived, they’re not having any luck either, unless you count they thousands of dollars the collect up front for not being able to get the deficiency waived. I have heard of a few cases here in Nevada but the resources (time and money) far outstrip the return the professionals can expect to receive for their effort and they do not pursue a waiver to the fullest. In addition most borrowers also do not possess the thousands of dollars necessary for attorneys to properly fight a deficiency removal; especially with no guarantee of success.
Even if your bank does not release the deficiency, a short sale may still be the best option depending on your circumstances. Homeowners with primary mortgages have not been popular targets for banks up to this point. Attorneys I have consulted have told me that if the bank takes the loss and issues a 1099C (cancellation of debt) then the bank cannot “double-dip” and also pursue for the deficiency. You must consult an attorney on this issue.
Agents need to inform their clients of this issues and borrowers looking at a short sale need to ask their real estate agent about it. Get informed and pick the right course for you. Ignorance could be an extremely costly mistake when it comes to short sales.
Paul Rowe is the managing agent for the short sale department with the Sena team at North American Realty of Nevada. You may contact him or Tony Sena at 702-376-0088.