I thought I’d blogged on this subject before, but it turns out I wrote a related article for Sterling Education. It was about lenders’ Net Present Value analysis for approving or denying short sales. Here is the link. I think it will give you some real insights into the “negotiation” process.
To summarize, when a lender is evaluating a short sale, it goes through a mathematical calculation regarding which scenario provides the larger amount of money: (1) the short sale or (2) a foreclosure. The foreclosure route is discounted to present value. In other words, if the lender thinks they might ultimately get $100,000 in cash after a foreclosure, but it will take three years, what is that $100,000 worth today? If the lender would gladly take $85,000 today rather than wait three years to (maybe) get $100,000, then the discounted value of the foreclosure scenario is $85,000.
Once you understand this process, and the math, you will get a lot more short sales approved. Things that used to seem mysterious will be clear. You’ll also understand strategies like the one I describe in this post.
The amount the lender might recover after a foreclosure depends on two things: (1) what profit will it make when it sells the foreclosed real estate, after taking into consideration all foreclosure, holding, and disposition costs; and (2) how much of the deficiency balance can it recover from the borrower, either through collection agency activities or a lawsuit?
Many times, the lender realizes it will not recover any money on a deficiency after a foreclosure. That is because the borrower does not have valuable assets that could be seized after a judgment. In addition, the borrower might not make enough money to justify wage garnishment, or the borrower might file for Chapter 13 if the lender tried to garnish their wages.
In such a case, the lender will assign a value of $0 to the deficiency. So, if the short sale will net $87,000, and a foreclosure would result in a net of $85,000, the short sale will be approved.
If the deficiency after a foreclosure would be collectible, the lender might assign a value of $5,000 to it, as an example. Meaning, even if the deficiency might be $300,000, the lender thinks they will be able to collect only $5,000. In that instance, the short sale might net $87,000 but a foreclosure scenario might net $90,000. That’s the $85,000 from selling the real estate, plus the $5,000 they might collect on the deficiency. In that instance, the lender will deny the short sale and foreclose instead, unless the buyer pays an additional $3,000 or the borrower brings $3,000 to the closing table. If the value of a short sale very nearly equals the value of a foreclosure, the lender will choose the short sale.
Does that all make sense, now that I’ve explained it? So, here’s the reason it’s important to understand that: Suppose only the husband, or only the wife, signed the promissory note when the money was borrowed? Probably both of them signed the mortgage, because both of them owned the real estate given as collateral. Frequently, though, only one or the other, but not both, signed the promissory note.
The mortgage gives the lender the right to foreclose. The promissory note gives the lender the right to “sic” the collection agencies on someone for a deficiency, or to file a lawsuit against them.
If the wife, for example, did not sign the promissory note, then the lender cannot try to collect the deficiency from her.
I’m sure that makes sense, now that I’ve explained it.
Let’s go back to the short sale negotiation now. Remember I said that part of the lender’s analysis for a foreclosure scenario depended on how much it could recover on the deficiency after a foreclosure? If the wife owned most of the assets in the family, and if the wife had the high paying job, then the entire deficiency will have to be collected from only the husband. If the husband did not have much in the way of assets or income, the lender would probably think they could not collect much money from him. They might assign a value of “$0” to a post foreclosure deficiency. That makes it much more likely that a short sale will be approved, and that the deficiency will also be forgiven if the borrower–the husband in our example–asked for it.
Bottom line, when negotiating a short sale, always find out exactly who signed the note. Most importantly, you want to find out who did NOT sign the note. Whichever one did not sign the note, you do not need to provide any of their asset or income information when requesting short sale approval.
Remember, this is the 21st century. Husband and wives are not responsible for each others’ debts unless they sign something agreeing to be responsible. If the husband owes money, the wife’s assets and income are her private business, and do not have to be disclosed to the lender.
Loan modifications are different, because you are asking a lender to change the terms of the loan for you. In that case, the lender needs to know that you can make the new mortgage payments, and they aren’t just wasting their time talking to you. In that case, family income as a whole might be very important, even though one spouse or the other did not sign the promissory note. Unless you plan to sell assets to help make the mortgage payments, though, the non-signing spouse’s assets are not relevant and need not be disclosed when requesting a loan modification.
If your client cannot find their copy of the promissory note, ask them to check their credit reports. Usually, if the loan is being reported on both of their credit reports, then both of them signed the note. I’ve known of banks to make mistakes and report their loan on both the husband and the wife, when only the husband signed the note. That was a mistake, though, and it is rare.
Do not provide more information than is necessary to support short sale approval! You could end up shooting yourself in the foot!