Today, at the monthly NAHREP (National Association of Hispanic Real Estate Professionals) meeting in San Marcos, California, I had the pleasure of speaking about short sales. After the meeting, Ken Davis approached me and asked me about mortgage insurance. Short sale aficionados (or should I call them short sale suckers?) already know that mortgage insurance is a serious beast of burden when it comes to the negotiations of the short pay.
Here’s the deal—and a very long answer to Ken’s very short question (drink a cup of coffee before continuing so that you are sure to stay awake): Many short sale transactions can be closed and settled without the seller ever having to bring a dime to the closing table. However, not all transactions are that way. Understanding how the bank operates and why they want what they want can be very helpful to you.
Caveat: don’t advertise that a short sale is ‘free’ ‘cause it isn’t always free. Yes, it’s true that some sellers can participate in a short sale and not have to pay a penny, but others may actually have to come up with some cash—as in the cases with mortgage insurance.
When you embark upon the short sale adventure, you are required to submit a lot of financial documentation to the bank: a financial statement, two years tax returns, bank statements, pay stubs. So, when the bank looks at the seller’s financial package, they are looking to see if there is a financial hardship and whether the seller qualifies for the short sale. (Some banks don’t fixate on hardship.) If there is not evidence of a significant hardship, sellers may be asked to make a cash contribution or to sign a promissory note, particularly when it appears as if the seller has a bit of money tucked away.
Are you still awake?
The second reason that a promissory note may be required is due to investor guidelines. Many times a borrower pays his or her mortgage to a servicing company (such as Litton, Aurora, Ocwen, or Bank of America) who is paid to service the mortgage (collect payments) for the note holder. The note holder could be a private investor, a GSE, or another large financial institution. Investors set up guidelines as to what they will accept as far as a short sale goes. For example, an investor might say to the servicer that they will accept 80 cents on the dollar based on the current market value. The servicer will merely convey that information to the agents or parties involved in the transaction.
Some loans have mortgage insurance. If the property goes to foreclosure, the owner of the note (the investor) will receive money from their mortgage insurance company (if, in fact, the mortgage insurance company has not gone bust in the last few years). If a seller is asked to sign a promissory note, it is possibly because the investor holds mortgage insurance. This investor is savvy and knows that whether the property is foreclosed upon or not, the investor will still receive a specified amount money because of the insurance policy. The money will simply be collected through his insurance policy. For this reason, the investor can really dig their heels in and insist upon that promissory note or even a cash contribution.
Ken asked me, “What can be done when there is mortgage insurance and the mortgage lender holds out for cash or a promissory note?” My best advice would be to ask a lot of questions and to find out exactly why the bank is asking for the cash and/or the note. You may learn that this request is for other reasons. Then, negotiate (don’t alienate) to your heart’s content and see if you can bring the amounts down a bit. Of course, make sure that you seller also consults with the appropriate professionals in order to understand the consequences of both the short sale and any decisions with regard to a promissory note or a cash contribution. The best thing to remember is that a short sale is a form of debt settlement. Some debts will stick with you forever, and some institutions will settle for a song.
Abracadabra—maybe that short sale will be approved after all. (And, by the way, short sales and magic really do not have much in common.)
Did you make it to the end without falling asleep?