Negotiating a Short Sale


The HELOC

PART 1

A HELOC (Home Equity Line of Credit) can be a real pain in the rear end for sellers and REALTORS and is why Jim needs to know when taking your listing if your 2nd lien is a purchase money mortgage or a cash-out equity line of credit. Unfortunately, the 2nd usually wants more money than what the 1st lien holder is willing to give them. Consequently, the 2nd lien holder wants you, the mortgagee, to participate in the loss by making a cash contribution and/or signing a promissory note. If it were a cash out which is sometimes the case, then the next question is: "Are you willing to participate in the loss?" Before you answer, think of this: If you pulled cash out of your home and more than likely spent the money on consumer goods or to send your kids to college, should your debt be totally forgiven when the boat or car you paid for is sitting in the driveway? Probably not. So, if you are unwilling to consider participating in the loss by repaying some of the loan back, there may be an issue. 

Now, having said that, you may not be in a position to participate in the loss. There could be a true financial hardship and you just don't have the means to bring cash or pay off a promissory note. If this is the case then you need to know that Jim will do his best to negotiate for and with you, but there are no guarantees that the 2nd will cooperate. The 2nd may still release the lien (mortgage) so the Short Sale can close, but that does not mean that they will remove the obligation for you to pay the note without some kind of participation. It is not uncommon for 2nds to engage the service of a collection agency and to report your non-payment to credit agencies; however, as unpalatable as this sounds, it is still better than having a foreclosure on your credit report. So what can you do? If you have the means then you should be prepared to participate in the loss. You spent the money, so now give some of it back. Chances are the lender will settle for 20-30 cents on the dollar, which is a heck of a good deal. Take it and move on!

If you do not have the means, we must prove to the lender that you do not have the cash or the income to participate in the loss. The next best thing is to show the lender where the "equity money" went. If it was used to pay medical bills and put food on the table this is the ideal scenario. Same goes if you put the equity loan back into the property. Let's lay it all out and make your case. An important thing to remember is that lenders have hired negotiators whose job it is to limit the loss to the lender as much as they can. These paid negotiators are very good at what they do; some are not. Some are so tenacious that they force property owners into foreclosure and subsequently deprive their client of gaining even the little that the 1st would have conceded prior to foreclosure in the hopes of collecting down the road after foreclosure. This is why HELOC's are a pain in the rear when it comes to negotiating a short sale!

PART 2

REVERSE MORTGAGE SHORT SALE

This section details your rights and the mortgagee's rights under Title 24 of HUD - Housing and Urban Development. The excerpt reads:
206.125 - Acquisition and sale of the property.

(A) Initial action by the mortgagee:
(1) The mortgagee shall notify the Secretary whenever the mortgage is due and payable under the conditions stated in 206.27(c)(1), or one of the conditions stated in 206.27(c)(2) has occurred.

(2) After notifying the Secretary, and receiving approval of the Secretary when needed, the mortgagee shall notify the mortgagor that the mortgage is due and payable, unless the mortgage is due and payable by reason of the mortgagor's death. The mortgagee shall require the mortgagor to (i) pay the mortgage balance, including any accrued interest and MIP, in full; (ii) sell the property for at least 95% of the appraised value as determined under 206.125(b), with the net proceeds of the sale to be applied towards the mortgage balance; or (iii) provide the mortgagee with a deed in lieu of foreclosure. The mortgagor shall have 30 days in which to comply with the preceding sentence, or correct the matter which resulted in the mortgage coming due and payable, before a foreclosure proceeding is begun.

(3) Even after a foreclosure proceeding is begun, the mortgagee shall permit the mortgagor to correct the condition which resulted in the mortgage coming due and payable and to reinstate the mortgage, and the mortgage insurance shall continue in effect. The mortgagee may require the mortgagor to pay any costs that the mortgagee incurred to reinstate the mortgagor, including forclosure costs and reasonable attorney's fees. Such costs shall be paid by adding them to the mortgage balance.

The mortgagee may refuse reinstatement by the mortgagor if: (i) The mortgagee has accepted reinstatement of the mortgage within the past two years immediately preceeding the current notification to the mortgagor that the mortgage is due and payable; (ii) Reinstatement will preclude foreclosure if the mortgage becomes due and payable at a later date; or (iii) Reinstatement will adversely affect the priority of the mortgage lien.

(B) Appraisal. The mortgagee shall obtain an appraisal of the property no later than 30 days after the mortgagor is notified that the mortgage is due and payable, or no later than 30 days after the mortgagee becomes aware of the mortgagor's death, or upon the mortgagor's request in connection with a pending sale. The property shall be appraised no later than 15 days before a foreclosure sale. The appraisal shall be at the mortgagor's expense unless the mortgage is due and payable. If the mortgage is due and payable, the appraisal shall be at the mortgagee's expense but the mortgagee shall have a right to be reimbursed out of the proceeds of any sale by the mortgagor.

(C) Sale by mortgagor. Whether or not the mortgage is due and payable, the mortgagor may sell the property for at least the lesser of the mortgage balance or the appraised value (determined under 206.125(b)).

If the mortgage is due and payable at the time the contract for sale is executed, the mortgagor may sell the property for at least the lesser of the mortgage balance or five percent under the appraised value. The mortgagee shall satisfy the mortgage of record (and the Secretary will satisfy the second mortgage required under 206.27(e) of record) in order to facilitate the sale, provided that there are no junior liens (except the mortgage to secure payments by the Secretary under 206.27(e)) and all the net proceeds from the sale are paid to the mortgagee.

(D) Initiation of foreclosure.
(1) The mortgagee shall commence foreclosure of the mortgage within six months of giving notice to the mortgagor that the mortgage is due and payable, or six months from the date of the mortgagor's death if applicable, or within such additional time as may be approved by the Secretary.

(2) If the laws of the State in which the mortgaged property is located or if Federal bankruptcy law does not permit the commencement of the foreclosure within six months from the date of the notice to the mortgagor that the mortgage is due and payable, the mortgagee shall commence foreclosure within six months after the expiration of the time during which such foreclosure is prohibited by such laws.

(3) The mortgagee must give written notice to the Secretary within 30 days after the initiation of foreclosure proceedings, and must exercise reasonable diligence in prosecuting the foreclosure proceedings to completion and in acquiring title to and possession of the property. A time frame that is determined by the Secretary to constitute reasonable diligence for each State is made available to mortgagees.

(4) The mortgagee shall bid at the foreclosure sale an amount equal to the appraised value of the property.

(E) Other bidders at foreclosure sale. If a party other than the mortgagee is the successful bidder at the foreclosure sale, the net proceeds of sale shall be applied to the mortgage balance.

(F) Deed in lieu of foreclosure.
(1) In order to avoid delays and additional expense as a result of instituting and completing a foreclosure action, the mortgagee shall accept a deed in lieu of foreclosure from the mortgagor if the mortgagee is able to obtain good and marketable title from the mortgagor.

(2) In exchange for the executed and delivered deed, the mortgagee shall cancel the credit instrument and deliver it to the mortgagor and satisfy the mortgage of record.

(G) Sale of the acquired property:
(1) Upon acquisition of the property by foreclosure or deed in lieu of foreclosure, the mortgagee shall take possession of, preserve and repair the property and shall make diligent efforts to sell the property within six months from the date the mortgagee acquired the property. Repairs shall not exceed those required by local law and, in cases where the sale is made with a mortgage insured by the Secretary or guaranteed by the Secretary of Veterans Affairs, those necessary to meet the objectives of the property standards required for mortgages insured by the Secretary. No other repairs shall be made without the specific advance approval of the Secretary. The mortgagee shall sell the property for an amount not less than the appraised value (as provided under paragraph (b) of this section) unless written permission is obtained from the Secretary authorizing a sale at a lower price.

(2) Repairs shall not exceed those required by local law or the requirements of the Secretary of HUD or the Secretary of Veterans Affairs if the sale of the property is financed with a mortgage insured by the Secretary of HUD or guaranteed, insured or taken by the Secretary of Veterans Affairs.

(3) The mortgagee shall not enter into a contract for the preservation, repair or sale of the property with any officer, employee, owner of ten percent or more interest in the mortgagee or with any other person or organization having an identity of interest with the mortgagee or with any relative of such officer, employee, owner or person.