First off, my apologies for the racy title, but it quite true. A deficiency balance, depending upon where you live, can come back to bite you in the butt; it could haunt you years later. So… you had better watch out!
What Is a Deficiency Balance?
In short sales, the short sale lender often approves the short sale. What this means is that they approve the sale of the home at a specific amount, which is less than the amount owed on the mortgage. The difference between the amount owed on the mortgage and the amount approved the in the short sale is called ‘the deficiency.’
One of the chief concerns of short sale sellers and distressed borrowers considering listing their homes as a short sale is whether the lender will come back after the property has been sold and “go after” or sue the short sale seller for the remaining balance or the deficiency.
Will a Short Sale Lender Pursue Deficiency?
At Short Sale Expeditor® we do not have a crystal ball (although we do have a Magic 8 Ball®). Also, we are not attorneys, so it is a good idea for distressed borrowers to always confirm everything with a good real estate attorney. Unfortunately, we cannot predict what may happen in the future with respect to the short sale lender and the deficiency balance.
However, there are three very important things that can assure that the lender will not pursue deficiency after the closing. So, please read this!
Anti-Deficiency Statutes. In California, we have an anti-deficiency statute that protects most short sale sellers from any liability for the deficiency balance after the closing of a short sale. The Bill became a law on July 15, 2011, so any short sale sellers with closings on or after that date may be protected from deficiency by this statute. Click here to read more.
The HAFA Program. The Home Affordable Foreclosure Alternatives Program (HAFA) is the U.S. Treasury program for distressed borrowers that want to participate in a short sale or deed-in-lieu of foreclosure. One of the best benefits (aside from the $3000 in relocation assistance) is that the lenders right to pursue deficiency is waived for all short sales approved through this program.
Language in the Short Sale Approval Letter. Prior to July 15, 2011, lots of short sale lenders in California would provide short sale approval letters that stated their permission to conduct the short sale. In those letters, there may have been a sentence that stated something to the effect of “We reserve the right to pursue deficiency.”This is dangerous language, and the Short Sale Expeditor® staff spent many hundreds of hours prior to July 15, 2011 renegotiating approval letters so that the language would read, “We waive the right to pursue deficiency.” Agents in states without anti-deficiency statutes would be well advised to negotiate those terms into the approval letter.
Deficiency Lawsuits
I recently was a lurker on a Facebook conversation in which one individual was saying that a past client of his received information that the bank was now trying to pursue the deficiency. This situation related to a state without an anti-deficiency statute, and the agent stated that this was the first time he had seen a bank attempt to “go after” a short sale seller.
Since you never know what may happen in the future, it’s always best to cross all your ‘t’s and dot all your ‘i’s. Agents from states that do not have anti-deficiency statutes need to carefully read the short sale approval letter when it arrives, share it with the sellers, and have the sellers hire an attorney to review it. Don’t get so excited about a potential closing that you lose site of the fact that the seller could be sued! Make sure that the language adequately protects all parties or the deficiency may come back to bite you (not just the seller) in the butt!
by Melissa Zavala
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