Benjamin “Ben” Hillard, Esq., JD/MBA

I have spent most of my career as an investment banker and consultant conducting residential and commercial loan acquisitions due diligence; essentially buying loans from other banks. I’ve conducted loan purchase due diligence on literally billions of dollars of loans and have worked for Ocwen, Lehman Brothers, Goldman Sachs, Countrywide and many other institutional lenders conducting loan-level acquisitions due diligence.  I have first-hand knowledge of: how Bank “A” buys loans from Bank “B”; individual loan analysis and portfolio pricing strategies; and put-back or repurchase provisions of loan purchase contracts. I have also been through Countrywide’s forensic loan fraud training. Finally, I maintain a Florida real estate broker’s license and I am a former Florida licensed real estate appraiser and title agent. I can’t imagine there is anyone better prepared to render advice and litigate mortgage loan issues.

Our average client is probably $150,000.00 upside-down in a primary residence or an investment property.  Our client base includes lawyers, banking executives, mortgage brokers, investment managers, real estate brokers and other business executives. The litigation goal of the vast majority of our clients is to get the lender to refrain from pursuing a deficiency judgment (cancel the promissory note) in exchange for surrendering the property or its equivalent value via final judgment, deed-in-lieu or short sale.

I also accept speaking engagements, and, over the past twelve months, have spoken at the Greater Tampa Association of Realtors (“GTAR”), the Mid-Pinellas Chamber, RBC Bank, and The Board Tampa Bay. Topics included: “The Financial and Banking Crisis”, “How Banks Make Decisions Concerning Upside-Down Loans”, and “The Statistical Correlation between Average Incomes and Average Home Prices”.

Another set of factors that contribute to the length of time involved in resolving a foreclosure suit is that court system is clogged and that the plaintiff, “the lender” in a foreclosure suit, is largely responsible for the pace of the litigation. When the attorney for the lender, or the in-house attorney for the lender is ready to deal with a file or has recently reviewed a file, that is the time that deals are struck.

A recent development that concerns the time involved in resolving a foreclosure suit is the implosion of several firms that represent the lenders; David Stern’s office and now Ben-Ezra & Katz. This not only causes problems for those cases that are no longer going to be handled by those firms, but the foreclosure cases pulled from these firms must be sent elsewhere. We have a number of files that have sat for six or eight months awaiting new counsel to appear on behalf of the lender. It also takes time for the remaining foreclosure plaintiffs firms to ramp up, hire attorneys and staff, and to figure out the status of the cases recently transferred to the new firm. All these factors will certainly contribute to longer timelines in the foreclosure defense arena going forward.

Our firm’s success, in avoiding deficiency judgments, typically comes from negotiating with the lender’s attorneys inside the scope of aggressively defending a foreclosure suit. After gaining some leverage defending a foreclosure suit, where the lenders own attorney advises the lender to take a certain course of action, the lender is much more likely to listen. In other words, the lender’s attorneys have the ear of decision-makers inside the lender’s offices.

By comparison, the lender’s policy makers make policy based on the lender’s balance sheet that particular quarter. This brings up another point, it is likely not important who hands the lender a short sale or loan mod package, outside the scope of foreclosure litigation, the lender’s balance sheet controls the decision-making.

Inside the scope of aggressively defending a foreclosure suit however, settlement agreements negotiated between borrowers and lender’s attorneys specifically spell out, or should spell out the rights and duties of the parties following a short sale. In fact, one of the best reasons to employ a foreclosure defense attorney is to attempt to avoid a deficiency judgment altogether. If you do not defend a foreclosure suit, the lender could go unopposed to get a deficiency judgment. Another reason to employ a foreclosure defense attorney is to put affirmative defenses in place within the foreclosure suit to help avoid the deficiency later if lender attempts to pursue a deficiency judgment following a short sale or foreclosure. Finally, there is a huge value associated with knowing, with some degree of certainty, that you will not be sued or harassed for a deficiency following foreclosure or short sale. It is still amazing to me how few foreclosure suits are ever defended. A foreclosure suit is likely the largest lawsuit the average person will face their entire life, and yet, the vast majority of foreclosure defendants never consult a single attorney, let alone getting a second and third opinion from several attorneys.

Back to short sale approval letters. In looking at the approval letter itself, there are often positives and negatives concerning whether the lender would try to sue you or otherwise pursue other collection efforts concerning a balance owed or a deficiency following a short-sale. Where the lender uses the term “discounted payoff,” when I was in banking, I understood this to mean that the lender was resolving an obligation for less than the face value of the obligation. It is also helpful where the lender agrees to execute a “full satisfaction and release of mortgage”. While the promissory note is the operative document that establishes the debt or obligation itself, the particular wording used in a satisfaction of mortgage could be evidence of a lender’s intent to forgive a deficiency.

Other paragraphs found in short sale approval letters could prove to be problematic for borrowers. Many short sale approval letters contain a statement that “Except as stated above, all provisions of the Note …. shall remain in full force and effect.” This same paragraph is often found in short sale approval letters that state that the short sale is approved as a “discounted payoff”. This statement is clearly inconsistent with the idea of a “discounted payoff”.

We do not currently know of any clear-cut case law that defines the term “discounted payoff”. If an appellate court undertakes to define the term “discounted payoff”, it would likely be sending hundreds of millions, if not billions of dollars one direction or another.

Lenders intentionally create vague short sale approval letters so that they can sell the opportunity to pursue a deficiency balance against XYZ borrower to collection companies. Deficiency balances that remain following a short sale are an opportunity for a collection company to make some money dialing for dollars. Collection company’s purchase these opportunities to pursue a deficiency against you / opportunity to sue on the promissory note itself. Such a sale or collection efforts could occur immediately following a short sale or foreclosure or years later. Such opportunities to pursue deficiency balances are often sold in bulk for pennies on the dollar. If you find yourself being pursued for a deficiency balance following a short sale or foreclosure, you should speak with a competent attorney.

One thing I would like to mention here is that a large portion of the leverage that borrowers possess is their ownership of the property and their ability to deed the property to a person who is willing to pay the lender something for the property in a short sale transaction. Ownership of the property gives standing to defend a foreclosure suit. Following foreclosure or short sale, this leverage is gone. The borrower should utilize such leverage while its available, prior to being defaulted in foreclosure suit.

I would also encourage borrower facing a deficiency balance to refrain from attempting to clean up your credit rating following a short sale or foreclosure. When I was in the lending business, we purchased opportunities to pursue deficiency balances along with other loans and assets. As such, we rarely pursued people with low credit scores – it would have likely been throwing good money after bad.

In short, if you choose to close on the sale of your property in a short sale transaction under a vague short sale approval letter, you will likely face collection efforts ranging from dialing for dollars to a full-blown suit bases on the promissory note. Speak to a lawyer before deciding. For that matter, speak to a lawyer before missing that first payment. There are a few things that borrowers can do prior to missing that first payment that could eliminate or go a long way towards preventing the lender from pursuing a deficiency balance.

Finally, there is some value to you in a vague letter that would appear to let you off the hook. A vague letter cuts both ways. There is also value in being rid of an upside-down property. There are also no guarantees of permanently resolving the deficiency judgment issue inside of the foreclosure suit. However, your success rate will likely go up exponentially where you engage competent legal counsel.

for Borrowers Facing Foreclosure to Cut Deals

According to an article in the South Florida Business Journal, Florida is tied with Georgia and Illinois for having the most banks in the nation with major capital shortfalls according to a study by The Street.com ratings and SNL Financial.

Where lenders and banks are under capitalized, borrowers have greater opportunities to cut deals with lenders on upside down properties.  There are many reasons why undercapitalized banks and lenders present better opportunities for borrowers to cut deals.

First, undercapitalized lenders often do not have sufficient staff or resources to participate in highly structured loan workout programs.  In other words, undercapitalized lenders often have more flexibility to consider a wider range of loan workout proposals.

Second, because there is often less formal internal structure, undercapitalized lenders may be more likely to take the borrowers individual circumstances into account when making loan resolution decisions.

Third, Florida foreclosure defense attorneys have an easier time defending foreclosure suits by lenders or banks that have been taken over by the Federal Deposit Insurance Corporation (“FDIC”), the Office of Thrift Supervision (“OTS”), or by another bank in lieu of government takeover.  Initially, after a loan is transferred to a new owner/entity, it often takes several months for the new owner/entity to get up to speed on the loan or foreclosure status.  Secondarily, after such an acquisition, the risk profile of the assets [loans] should shift in the direction of market value.  In other words, if a new entity owns the loan, it should have acquired the loan at a significant discount, giving the new/current owner of the loan more flexibility to cut a deal with the borrower to resolve a contested foreclosure.  Finally, Florida foreclosure defense attorneys have an easier time defending foreclosure suits where the loan has changed hands one or more times.  Where a loan has changed hands several times, discovery becomes more complex, assignments may be missing, original documents could be lost, authority to foreclose may become unclear.

Therefore, the banks pain becomes the borrower’s gain.

While  most lenders will not approve a short sale if the mortgage is current, selling a property by way of short may be accomplished between the period after missing that first payment and before the lender files a foreclosure suit.

Historically, a lender does not file a foreclosure suit until the borrower is 90 days delinquent.  However, in this market, some lenders are waiting 120 days or more before filing and serving a foreclosure suit.  Quite often, if a short sale is pending, the lender refrains from filing suit while awaiting a short sale.

It is during this period, from one month delinquent to four months delinquent that it is possible to short sell a property prior to the lender filing and serving the foreclosure suit.

The short sale process starts with (1) engaging a realtor and getting an offer to purchase, (2) a short sale application. However, there are important items to take care of prior to accomplishing these two seemingly simple tasks.

The real first step is meeting with attorney familiar with foreclosure defense and lending /banking.

A foreclosure defense attorney is necessary to look out for your interests when engaging a realtor to list and sell a property by short sale.  Many real estate brokerage agreements contain provisions that may be adverse to you in your attempt to short sell a property.

Things you may want to consider,

include: (1) make the real estate broker commission contingent upon actual closing, (2) provide that the Seller has discretion concerning the type and nature of the documents to be provided to the Lender for the Lender to evaluate whether or not to approve the short sale, and (3) that the Seller is not obligated to sell/close unless the Seller is satisfied with the terms of the Lender’s approval letter, contract or settlement with the Lender.

A foreclosure defense attorney may also be necessary to advise the borrower on how best to fill out a short sale application.   An attorney may help determine what things to include in the short sale application, and what things to omit and/or tell the lender that your attorney has advised you not to provide certain information because this matter may wind up in litigation.

After engaging a realtor, for a quick short sale, the goal is to list the property at a price that will get noticed.

A lender is often willing to accept an amount less than what the lender believes is the true value because the lender typically evaluates loan resolution scenarios based on the time value of money.  In other words, a lender may be better off receiving $175,000 today as proceeds from a short sale, than $225,000 in 12 months after paying a foreclosure attorney thousands of dollars in fees and costs to conduct the foreclosure suit plus real estate broker commissions, carrying costs, property maintenance costs, and the costs of maintaining the lender’s loss reserve accounts.

After getting an offer and completing all or a portion of the short sale package, it is in the lender’s hands.

However, if an offer to purchase can be acquired and short sale package completed prior to the lender filing a foreclosure, chances are that the lender will not file the foreclosure suit while closing is pending.

Hiring the right realtor or real estate broker to conduct a short sale may be one of the largest challenges facing short sellers today.  Messing this step up could devastate your chances of avoiding a deficiency judgment.

Your Realtor or real estate broker may not have your best interest in mind. Your goal is to avoid the potential for the lender to seek a deficiency judgment.  The Realtor or real estate broker’s goal is to sell the property and collect a commission, regardless of whether the Lender agrees to refrain from pursuing a deficiency judgment.  This is one of the most important reasons to be represented by an attorney.  Be certain that your interests are being protected throughout the short sale process.

Many Realtors only look out for the commission and do not care whether or not the homeowner avoids a deficiency judgment, and their brokerage agreements read accordingly.  In fact, it has become prevalent for real estate brokers to include a short sale addendum in the real estate brokerage agreement that could have a negative impact on your best interest. For example, many short sale addenda to real estate brokerage agreements require that the client provide “ALL” information the Lender may request to evaluate whether on not the Lender with “approve” the short sale.  The problem is that the Lender’s request for financial information is a fishing expedition to determine whether or not the Lender will pursue a deficiency judgment.  You don’t want your agreement with your real estate broker to have a negative impact on your end goal of avoiding a deficiency judgment.

Therefore, it is important to have an attorney review the agreement between you and your real estate agent or broker before you sign a real estate brokerage agreement.

Likewise, it is also important to have an attorney review the offer to purchase or real estate purchase and sale agreement prior to signing.  Many real estate brokers include a short sale addendum that doesn’t include a provision that makes “closing” contingent upon the Lender’s agreement to refrain from pursuing a deficiency judgment and cancel the promissory note.  This is important because without such a provision, the short sale buyer/purchaser could sue to force the short sale seller to “close” where the Lender approves the short sale, but will not agree to refrain from pursuing a deficiency judgment and canceling the promissory note, the ultimate goal of many of our clients.

Every short sale situation is different.  Therefore, you need advice that is specifically tailored to your individual situation. Because real estate brokerage agreements come in as many shapes and sizes as there are brokers, a thorough review of the proposed brokerage agreement is mandatory to ensure a consistent strategy to avoid a deficiency judgment.  Castle Law Group typically recommends the use of one of our addendums to the brokerage agreement, and one of our addendums to the purchase and sale contract.

The advantage in having Castle Law Represent ONLY YOUR BEST INTERESTS in a Short Sale:

Our addendums typically include the following: (1) make the real estate broker commission contingent upon actual closing, (2) provide that the Seller has discretion concerning the type and nature of the documents to be provided to the Lender for the Lender to evaluate whether or not to approve the short sale, and (3) that the Seller is not obligated to sell/close unless the Seller is satisfied with the terms of the Lender’s approval letter, contract or settlement with the Lender.

A study done in September, 2008 by AARP indicates that, at that time, Americans 50+ years old represented 28% of those who were delinquent, in foreclosure or who had been foreclosed.  The study titled “A First Look at Older Americans and the Mortgage Crisis” is available by clicking HERE.

The assumption that they are in good shape during this crisis,  based on equity and low fixed interest rates,  has not proven true.  Unlike younger homeowners, who may eventually be able to recover from such a loss, homeowners in this age group may never recover, and may suffer significant financial reprecussions into older age.