In my September 10, 2009 Short Sale discussion I spoke of 7 hot topics on short sales. Number three (3) was the “Loans – Foreclosure Debt Recovery”. I reminded you to know if there is a First – Second – Third Deed of Trust encumbering the home? Also to know the terms of debt forgiveness. Have the seller ask the lender, “what are the terms of the forgiveness of the debt?” Charge Off? Waived? 1099? Advise the seller to seek legal counsel. Nevada is a deficiency judgment state, which means a seller can be sued after they have been foreclosed upon. A second can pursue a foreclosed owner for six years. By performing a short sale, instead of foreclosure, the one-action rule and the deficiency protections are no longer applicable. The Seller in a short sale will have a tax consequence. Sellers in a short sale may also be sued by the lender for breach of non payment of a contractual obligation. The statute of limitations in Nevada for breach of contract is six (6) years.
The following are some examples of language used by the lenders to deal with debt. Some are good, some not so good, some BAD. If you have examples, redact the confidential information, and send them to me at darrenw@americanagrp.com
Example 1 – Not GOOD
In this one, the lender states, “may pursue a deficiency…” The seller may be sued for up to six (6) years.
BAC Home Loans Servicing, LP and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law, if the short sale closes on the loan referenced above. In addition, if this loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller for the deiciency based on the terms of the mortgage insurance policy.
What can you do?
Write a letter to the lender.
Please remove that paragraph and insert language to the effect that all parties agree to release each other for any and all claims”
Recently the Stout Law Firm, James R. Stout, Esq., 4560 S. Decatur Blvd., Suite 201 Las Vegas, Nevada 89103, 702-794-4411 was retained by a client of Prudential®, Americana Group, REALTORS® and such a letter worked to amend to this language on a Bank of America lender short sale.
Example 2 – GOOD
In this one, the lender states, “settle your account…”
This letter is to inform you that Chase Home Finance LLC has agreed to your request for a Short Sale, and will accept a minimum of $$$$$ to settle your account and release the lien(s) on the above-referenced Property.
Example 3 – GOOD
In this one, the lender states, “will be charged off and no additional payment will be required…”
Our Customer(s) agrees that upon the posting of the agreed upon Short Sale amount, the remaining loan balance, if any, will be charged off and no additional payment will be required. Please note a $0.00 balance will appear on the Customer’s file with the credit bureau as “Account legally paid in full for less than the full balance.”
Example 4 – GOOD
In this one, the lender states, “full and final satisfaction on the first mortgage …”
This letter will confirm our acceptance of the short payoff on the above referenced property. We agree to accept the proceeds generated by the $$$$ “as is condition” purchase as full and final satisfaction on the first mortgage indebtedness on the above referenced property.
SEE my OTHER blogs on short sales:
NV Mediation Program and How it Affects Shortsale
Short sales When Seller Files BK
Click the following for:
IRS publication on how 1099 taxes are calculated, exempt, etc.
IRS explanation as to taxes resulting from Foreclosure and Debt Cancellation.
Taxes EXPLANATION Personal Residence
Nevada Residential Real Property Law 
October 16, 2009 at 11:47 am
Ok. I am reading an approval I just got on this Short Sale, and it has the same language as in Example # 1. Any ideas as for ways to handle it? with the Bank? …. Before I send they to consult with a Tax advisor etc.
October 16, 2009 at 1:44 pm
Contact the lender, inquire if they will allow the release of the debt and waive their right to pursue the Seller. If not, the Seller must elect to move forward and risk being pursued by the lender for a breach of the contractual obligation to pay the remaining loan amount.
October 23, 2009 at 3:32 pm
love it when you use the word REDACT…so grown up…
October 23, 2009 at 3:35 pm
my best short sale letter was an email from a seattle based bank…when asked for a letter via email, they replied…”we sent you an email saying we would accept the net, what more do you want”. In reply I copied a release letter from one of my other approved shorts and sent it to them. They signed and sent back…go figure?
October 27, 2009 at 2:48 pm
Hey Darren,
If the lender will NOT “release of the debt and waive their right to pursue the Seller”, would it be better to just have the lender foreclose on you versus risking them coming for a deficiency judgments?
My understanding the lender has 6 years to pursue a breach of contract, but only 6 months to come after you for a foreclosure.
October 28, 2009 at 5:00 pm
[…] homeowner for the difference between the loan balance and the sale price. A great article in the Nevada Residential Real Property Blog discusses Bank of America’s opposition to giving up its right to sue the […]
October 29, 2009 at 11:09 pm
I like it when a letter/ document speaks maturely and not harrassing.
November 13, 2009 at 11:26 am
[…] For example the lender refused to ‘release’ the seller from future liability. See my blog on Short Sale Release Language. To protect your seller, make the agreement contingent upon your selling client receiving a full […]
November 22, 2009 at 9:02 pm
I’ve been engaged in taxations for lengthier then I care to acknowledge, both on the individual side (all my working life story!!) and from a legal stand since satisfying the bar and following up on tax law. I’ve offered a lot of advice and corrected a lot of wrongs, and I must say that what you’ve posted makes perfect sense. Please carry on the good work – the more people know the better they’ll be armed to deal with the tax man, and that’s what it’s all about.
December 4, 2009 at 3:07 pm
[…] Darren Welsh, corporate attorney for Prudential Americana Group Realtors, recently posted on his Nevada Residential Real Property Law blog advice on the specific language regarding release and full satisfaction of the forgiven debt in a […]
February 1, 2010 at 11:10 am
Going through divorce and sold house in a short sale. Had first and second and thought that debt was forgiven but the 2nd came afer us through a collection company. The Title Company and the Rep. through the bank both told us verbally that this would be the last we would hear now we see the words Charged Off on my credit report. Not sure what we can do as it took a lot of work to obtain short sale and money etc. We just gave two realtors $25,000 that we could have put against paying back or should we have foreclosed as we did not know our rights before signing documents and I feel frustrated at not having all the information and realtor says he knows nothing of banks coming after clients after short sale. Do we file bankrupcy or take legal advice and if so any suggestions in Las Vegas.
February 1, 2010 at 12:56 pm
The non-payment of debt would normally appear as a charge off. I am unable to determine if they are suing you for the 2nd, if that is the case, bankruptcy is a good option. All 2nd turn into unsecured debt, therefore they can be pursued as a breach of contract for up to 6 years.
February 3, 2010 at 5:52 pm
Hi Darren,
I was wondering if you have any tip for us. We had completed a short sale a couple of months ago. The contract has the same clause as your example# 1. The only exception is that it included the promissory note ( with a 5 years payment plan.) Again, the lender added ” may reserve the right to pursue the seller for the deficiency judgment from as needed.” We had started paying the promissory note for a couple of months now. Assuming the that our lender will not go after us for any additional judgment. Do you have any tips for us?
March 5, 2010 at 9:18 am
[…] Seller Being Released From Liability Language in Shortsale […]
June 24, 2010 at 1:44 pm
Does the deficiency statute apply equally to mortgages and home equity lines of credit?
We took out a second with Wells Fargo at the time of purchase that was done as an equity line. Our primary mortgage is a 7 year fixed ARM with WF due up in 2012.
Been trying to get refi to 30 yr fixed rate but only option they will provide is short sale. WF Mortage dept sent letter stating we’d be liable for deficiency balance if we pursue short sale option. WF also owns the equity/second and their agents are saying Nevada is a “debt forgiveness” state!?
June 24, 2010 at 4:03 pm
Nevada law allows Lenders to pursue both the First and Second deficiency for up to six years, in a short sale scenario, unless the Lender specifically waives that right in writing.
June 24, 2010 at 5:10 pm
Thanks, Darren. That was what I thought. The misinformation and conflicting messages coming from the banks is one of the most frustrating parts of the process
June 25, 2010 at 12:39 pm
It is true. If the lenders sell these notes and allow law suits over the next 5-6 years, it will cause havoc. I understand they are owed the money…but it will cause great hardship. The fact that they have really not bent on their collective positions is alarming. It has more or less destroyed the real estate market in the Las Vegas Valley. Each foreclosure puts more pressure on prices. I think they should speed up the process. I mean, if they want it destroyed, lets get to rock bottom. Most homes are worth exactly 50% of what they owe. When they foreclose they retain the property at approx. 40% of what they were owed, then they commence the debt service of utilities, repairs, CIC etc. I am certain that in 10 years there will be an excellent expose on this matter, that the Lenders really had no idea what to do, that there was minimal communication between the investors of the mortgages and the lenders. And each time the investor saw their ‘fund value’ drop, they assumed it was just a company somewhere with issues and NOT a loan they owned. If an average person was owed $250,000 on an asset worth $100,000 and the borrower said, “I will keep paying if you can just lower my payment to either interest free or 2%,” the avg. person would say, “yes.” That is not what is happening. The Lender is saying, “let me see your finances” oh, “well even though you should not have qualified for this loan in the first place, you don’t quality now, OR, they say, no, you make too much money, so we will hold your feet to the fire on a $400,000 loan on a home worth $190,000 knowing full well you will default on purpose.”
It is not rational, not economically sustainable, and clearly indicates that the Lenders do not own the notes, they service them, and ultimately the investor/and/or the govt will be paying. Once they realize what the Lenders have done of late, it will be too late and there will be a new president and we will just scratch our heads like we do on all National Emergencies, when we get over it and laugh about it. There is an answer, but it requires flexibility. The fraud that started all this is not the bank’s fault, but they did give away loans to straw buyers. Their standards clearly were breached.
But alas, no one that can solve this will listen, there is just too much money involved. Ultimately New York is in charge of all us, and Washington, to a certain extent, and they really don’t understand what is going on here, and in Miami, and Phoenix, etc. But with all due respect, [insert any major eastern city suburb] does not care about boom towns, we are second class citizens. It will not likely ever change. So we just slog through. We were excited to take the money, we have to be excited to solve this.
June 28, 2010 at 11:29 am
RE: your comment above that “you don’t quality now, OR, they say, no, you make too much money, so we will hold your feet to the fire on a $400,000 loan on a home worth $190,000 knowing full well you will default on purpose.”
BINGO. We were AA++ buyers who are getting it from all sides. First because we qualified for good paper so are not eligible for Fannie/Freddie cram-downs,second because we took out a “conservative” loan that didn’t adjust for 7-10 years and third because we have too much assets so walking away and being liable for deficiency is not an option.
By the banks formula we don’t “qualify” for an adjustment b/c my husband is unemployed and yet we have been “affording” the payments for 10+ months.
It just makes me furious that we did everything right, and yet it’s tens of thousands of my tax dollars that are bailing out the disingenous and irresponsible lenders/borrowers. Do you know that if a BORROWER for a sweetheart refi or principal reduction under HAMP they actually get $1000/yr for 5 years just for making their payments? How is that a good use of tax $$? Isn’t the refi incentive enough?
June 30, 2010 at 12:13 am
Can someone please clarify what this means:
“By performing a short sale, instead of foreclosure, the one-action rule and the deficiency protections are no longer applicable.”
1. What is the one-action rule?
2. What are the deficiency protections?
My interpretation of the above statement is, in a short sale, even though Nevada is a deficiency judgement state, the lender(s) cannot sue you for a deficiency judgement; HOWEVER, they can sue you for breach of contract? UNLESS, you can get the lenders to put something in writing in the Approval Letters?
How is everyone’s experience with Wells Fargo for both the 1st and 2nd loans (both with Wells Fargo)? Have they been flexible with how to edit the Approval Letter wording?
June 30, 2010 at 6:30 am
“the lender(s) cannot sue you for a deficiency judgement; HOWEVER, they can sue you for breach of contract?” – that works, its six of one half a dozen to another….. ‘deficiency’ is really enforcing a ‘breach’ …wells Fargo is usually a ‘servicer’ so as to waiver, they rely on the investor, which usually means they do not release as they really don’t talk to the investor rather rely on the terms of the servicing agreement. Try to get into the HAFA program, as lenders are required to release. dw
June 30, 2010 at 9:34 am
DW,
This property was purchased as a 2nd home, and then converted to a rental. The investor is Freddie Mac.
October 8, 2010 at 9:44 am
[…] Seller Being Released From Liability Language in Shortsale […]
November 20, 2010 at 12:51 pm
Darren, I am confused……..I did a short sale on my home about 18 months ago….I had a 1st and 2nd, and now understand that the 2nd can sue me for breach of contract…..what I don’t understand is if the 2nd (Green Tree) which was about 50K accepted $4000 during the short sale…..how can they now come after me for the whole amount of the 2nd……I have recently received letters from a law firm here in Las Vegas that is representing them…I would appreciate any comments you may have…
December 3, 2010 at 3:44 pm
[…] Seller Being Released From Liability Language in Shortsale […]
January 3, 2011 at 5:00 pm
[…] TGIF Legal Tip: Short Sale Release Language October 2009 25 comments 4 […]
April 11, 2011 at 11:09 am
[…] Seller Being Released From Liability Language in Shortsale […]
July 31, 2011 at 8:12 am
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TGIF Legal Tip: Short Sale Release Language « Nevada Residential Real Property Law…
October 10, 2011 at 3:01 am
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October 18, 2011 at 2:06 pm
In your “Example #2” that you have marked as “Good”. … we just received that exact verbiage from chase, but no where does it say that any deficiency will be waived. Does the verbiage “To Settle Your Account …” say the same as waiving deficiency?
October 22, 2011 at 9:42 am
See my June 17 entry. https://ameglegal.wordpress.com/2011/06/17/short-sale-junior-lien-holder-rights-other-changes/
“To settle your account” should work. Further there is new legislation, which limits the rights of a Bank entering into a Short Sale to pursue you. It states in summary:
The key is “Section 3.5 of this bill prohibits a court from awarding a deficiency
judgment to the judgment creditor or the beneficiary of the deed of trust if: (1) the
creditor or beneficiary is a banking or other financial institution; (2) the real
property is a single-family dwelling and the debtor or grantor was the owner of the
property; (3) the debtor or grantor used the loan to purchase the property; (4) the
debtor or grantor occupied the property continuously after obtaining the loan; (5)
the debtor or grantor and the banking or other financial institution entered into an
agreement to sell the real property to a third party for less than the indebtedness;
and (6) the agreement does not state the amount of money still owed by the debtor
or grantor or does not authorize the banking or other financial institution to recover
that money, and contains a statement that the banking or other financial institution
has waived its right to recover the amount owed.”
You can read the whole law here – http://www.leg.state.nv.us/Session/76th2011/Bills/SB/SB414_EN.pdf
If you are an owner occupant, the Lender’s will have an uphill battle is pursuing most deficiencies.
January 1, 2012 at 2:26 am
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January 7, 2012 at 5:05 am
I do agree with all the ideas you have presented for your post. They’re very convincing and will certainly work. Still, the posts are too quick for starters. May you please extend them a little from next time? Thank you for the post.
January 10, 2012 at 12:13 am
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March 23, 2012 at 12:06 pm
[…] successful short sale, coupled with the lender releasing the seller of future deficiency liability (see my post on release language here) is more attractive every […]
October 29, 2012 at 3:23 am
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