Is This Lawyer Right??
I'm looking at a home in foreclosure where the client has just finished a Ch. 7 bankruptcy, it was discharged last December.
I'm interested in working a short sale with him, but he's concerned about the 2nd mortgage issuing a discrepancy notice for the short sale. Particularly since they do not have any debt at this point.
His bankruptcy lawyer told him that if the house were sold at the trustee sale the 2nd could not issue a discrepancy notice, but if we negotiated a short sale they could.
This doesn't sound right to me. What difference would it make to the 2nd mortgage company if sold at the trustee sale and a short sale? I would think if they are going to issue one they would issue it regardless of how the house was sold.
If any one has advice I'd appreciate it. Thanks! 
" but he's concerned about the 2nd mortgage issuing a discrepancy notice for the short sale "
Do you perhaps mean, "deficiency?"
If you were to attempt a short sale, it's likely that the second mortgagee would be involved....since their junior position would bear the brunt of the proposed shortfall. If they agreed to the terms of the short sale proposal, they would forgive the debt... and not pursue a deficiency.
sorry people but what exactly is a deficiency notice and what are its ramifications?
In the case of realty transactions, a deficiency (deficit) is the difference between the amount that is owed, and the amount that is paid. For example, if a home's mortgage is foreclosed and the property is sold at Sheriff's Sale for an amount less than what had been owed... in many cases the former mortgagee can legally pursue a 'deficiency' from the former owner, compelling the former owner to pay.
Thanks for reading between the lines, I did mean deficiency. Oops!
I'm aware the 2nd will either take the largest discount, or get nothing if it goes to sale so they have the most to lose.
The 2nd has already told the seller they will issue a deficiency notice to him, regardless of how the house is sold. My confusion is over the seller's lawyers statement that if sold at trustee sale the 2nd can't issue a deficiency, due to the chapter 7 bankruptcy, but if sold on a short sale they can issue one.
This is the seller's hang up with doing a short sale. He doesn't see why he should do one when according to his lawyer if it goes to the Trustee Sale he gets to walk away from any further obligations.
I don't understand why that makes a difference (sold at the sale or a short sale completed) and how that ties to the chapter 7 bankruptcy that was discharged last December.
Just questioning the lawyers statement, realizing I know little about bankruptcies.
It has been my little experience that if there is value in the property above that of the 1st and 2nd that you can guarantee that the holder of the second will show up at the auction and bid up the price so that they are sure to recieve their $$$. Once the price is above both notes than they drop out and its a rat race...
But about the attorneys comment I would contact an RE attorney, have him do the research to shut up the 2nd. I have had my attorney write a few letters to mortgage companies. Once an attorney steps up with a letter clarifying the issue correctly you receive a kind letter of their misinterpretation. The 2nd knows if it goes to sale they won't have to discount the note. If you short sell it they may.
Hope the margin is worth the $250-$400 for the letter.
who is the lawyer you spoke to?
(i'm in SLC too)
...one question... did the debtor "reaffirm" the second mortgage? - this could be the reason why the atty is talking about he client being on the hook for the deficiency - although deficiency is not the right word if the mortgages were discharged. - ... humm... interesting
[ Edited by Utah_Bkatty on Date 09/25/2003 ][ Edited by Utah_Bkatty on Date 09/25/2003 ]
please excuse - post is not easy to read - and I dont want to take the time to analyze it.
In Calif you can not get a defiecency judgement on a purchase mney loan but you can on a hard mpney loan. Maybe Utah has similar rules. In this case, if 2nd was issued as part of purchase - not able to get def judge otherwise can. Is it possible that you are effectively converting a purchase money mortgage to a hard money mortgage by doing whatever it is that you are trying to do?
My understanding of the situation is as follows: There was a chapter (7) bankruptcy which was discharged. This did not have any impact on the real property because it is a secured debt and was not included in/with the assets liquidate because of reaffirmation.
There's both a first and second mtg(T.D.) encumbering this property.
I presume the 1st mortgage holder is foreclosing. If this is the case, the second mtg will be "wipedout" (divestiture). The second mortgage holder can bid at the sale to protect their interest. It is my experience that they seldom do so. If they wanted to protect their interests (I'm assuming the sale date is close) they could advance the arrearages to the 1st mtg and then they themselves could foreclose on the property. Since they have not done anything to date, I don't think they plan to do anything to protect their interests..
After the sale, funds are distributed according to priority. The first mtg get all that's owed them. If there are excess funds, then the second mtg receives them. If the amount available to the second does not completely satisfy the debt then the second can file a deficiency judgement.
It depends on the type of loan and the policy of the lender wether or not they actually file a deficiency judgement. A purchase money second mortgage in CA can't file a deficiency judgement but they can file in most other states.
There are 2/3 things you need to determine:
1. Will the 1st mtg holder do a short sale? (FHA-VA have a maximum you can pay to satisfy the 2nd mtg holder).
You will have to deal with the 2nd when you do the short sale. Otherwise when you payoff the 1st mtg the second mtg now because of priority of recordation becomes the senior debt and the entity that lent you the money will not want to be a junior lienholder. The 2nd could subordinate but probably would not want to do so.
2. Will the 2nd mtg holder take a discount from what is owed them. If yes, then it's easy to include a clause that the funds received will satisfiy the debt and that no other amount will be pursued once the funds are received. The second mortgage holder becomes more motivated to take a discount as the sale date approaches. Some lenders will not discount and will pursue a deficiency judgment for the shortfall amount. You need to see what the seller wants, You need to (with authorization) deal with both the 1st & 2nd mtg holders .and you need to be sure that there's a big enough pay day for you to do all this work.
It is not mute, but in California a PMTD cannot go for a deficiency. However a Trust Deed that is not a PMTD can, but to do this he has to abandon the remedy of a Trustee Sale and go Judicial foreclosure. Clumsy and is seldom done.
In the present instant. lst Variable, just what is the property worth and how much will the Buyer give on a short sale.
Then you take the demand of the lst now in forcl. and you take the demand of the second not in foreclosure. You start to bargain. Inform the second that if it goes to foreclosure sale they will take nothing in view of lack of active bidders. Your friendly Real Estate Broker should try to control the second by purchase if there is any equity. $100 love and kisses whatever. If no short sale discount can be obtained from the first and there is equity you can always bring current or offer some form of payment to achieve current status on the first and then deed in from the second. Paper this transaction with great care it is really a natural for litigation shortly thereafter.
The End.
cheers Lucius
go to the owner and tell him that you will try to negotiate with the second regarding the deficiency issue and put it the sales contract that way the owner and his attorney are satisfied. If the second mortgage doesnt budge then no harm done, house gets foreclosed, owner and 2nd mortgage get zero...
If the seller has just completed a Chapter 7 (liquidation) bankrtupcy proceeding and his debts have been discharged there should be no deficiency. The discharge afforded by Chapter 7 would apply to all personal obligations of the debtor to include a defiency judgment obtained as a result of a property sold for less than the amount owed. The discharge would limit the lender's claim solely to the in rem (against the property) recovery afforded by the court sale. State differently, because the debtor was discharged the bank can only look to whatever it is able to recover from the judicial sale; it cannot look to the discharged debtor for any excess recovery.
The bank's willingness to participate in a short sale in this case would be governed by its perception of being able to recover more from participating in the short sale than it would at the judicial sale. The discharge would act to make your proposal that much more compelling. Use it to your advantage.
[ Edited by jorge121 on Date 09/28/2003 ]
Thanks for jumping in, Jorge. Though I know that you are not offering legal advice, I respect your JD opinion, and enjoy reading and learning from your posts.
Sorry for jumping in but I''m a newby following with interest. Can someone advise what a short sale is.
Thanks
Bill
Thanks everyone for your comments and suggestions. I'm learning a lot about bankruptcies! I have a meeting with the seller this weekend and will present my best case. There appears to be enough in this deal to pay for an attorney's letter if needed. Jorge's opinion really makes sense to me and is the approach I'm going to take. I'll get in touch with the second and see what I can do. Thanks again!
[ Edited by wph on Date 10/05/2003 ]