SHORT SALE ISSUES REVISITED: Avoid the hidden time bomb of a short sale without a written agreement to satisfy the underlying note.   8.27.08 By: Stephen J. Nash Nash & Lodge, PLLP nash@nashandlodge.com   In the May, 2008 NL E-mail Update I wrote about a potential change in the short sale marketplace – agents were reporting that Wells Fargo and Countrywide had taken new positions and were refusing to accept any short sales.   At the time, I pointed out that nothing was set in stone when it came to lenders and it remained to be seen whether this was a temporary or permanent change.  Well, the short sale world has not stopped changing. The “no short sale” position did not seem to last very long* but another issue arose that has created numerous time bombs set to go off at some undetermined time in the future in the face of the unsuspecting homeowners and their real estate agent.  The issue that arose was whether the lender would release the mortgage and satisfy the underlying loan or would only agree to a short sale without satisfying the loan.   In some cases, lenders asked for the borrower to sign a new note for the difference in value between what the lender would be paid at closing and what the lender was owed.  This turn of events has led to an unfortunate hidden time bomb for homeowners and their real estate agents.  A short sale is approved, the closing takes place, everyone leaves the closing smiling until a year later when the homeowner receives the lawsuit seeking the amount still owing on the loan.  The homeowner is stunned and calls his/her agent to see if this is some type of mistake, after-all, the short sale was approved.  The agent is confused because the short sale was approved.  Unbeknownst to either the homeowner or the agent the lender only agreed to release the mortgage.  The homeowner is now furious because he/she would never have agreed to the short sale unless the debt was actually wiped out.  The agent has nothing in writing from the lender as to what type of short sale was agreed upon and has no notes of any conversation with the homeowner regarding advising him/her to obtain legal council as to whether they were legally protected and the agent gave the homeowner no written disclosure with respect to the short sale.  Guess who the homeowner is going to blame for this mess? Since lenders generally did not limit their short sale approvals until this summer many of those time bombs are still ticking and in most cases nobody even knows that they exist! Our office has already begun to see these types of situations begin to pop-up.  In one case, a local bank sued the homeowner on a loan secured by a second mortgage.  There was a short sale where the second lender was paid a small amount in exchange for their approval of the short sale.  The twist in this case is that the real estate agent did a great job and obtained a written letter from the lender approving the short sale with language that said they agreed to “satisfy the loan”.  Everything went well until sometime after the closing the homeowner was sued by the bank for the remaining debt on the loan that the homeowner had believed to be satisfied.  Our office represented the homeowner in this case.  The banks position was that they “intended” only to release the mortgage, not to satisfy the loan and they brought a summary judgment motion to the court to have the court determine that they should win without the need for a trial.  It was our contention that the letter clearly spelled out the agreement, the agent signed an affidavit stating that both sides clearly talked about releasing the mortgage and satisfying the loan and we pointed out to the court that if homeowners and the real estate industry could not rely on a written agreement that clearly states that the lender was satisfying the loan it would be difficult to proceed with short sales.  The court ruled in favor of the homeowner by denying the lender their motion for summary judgment but failed to go further and award the homeowner their own motion for summary judgment which means that the case will proceed to trial. While I am confident that the homeowner will ultimately prevail, a victory in court does not take away the time, worry and expense of going through the process.  Luckily, the agent in this case did a great job.  If we didn’t have the written letter that clearly stated that the loan was to be satisfied it would have been a much more difficult case to win.  We would have to rely on the testimony of the person who negotiated the short sale.  How can we buttress this testimony?  Well, did that person take notes of the conversations?  Did this person send a follow-up letter to the lender confirming what was said?  Are there any documents that support the position that the lender intended to satisfy the loan?  Maybe some indication can be found in the written payoff statement or the instructions to the closer.  If there are no notes, no follow-up letters and no written indication of any kind supporting our argument, who knows if the homeowner will win?  If the other written documents in any way indicate that only the mortgage was to be released, a weak case just got weaker.        Unfortunately, many agents were and still are unaware that a short sale does not necessarily mean that the lender is writing off the loan.  If the agent represented to the homeowner that they would negotiate the short sale but failed to properly protect the homeowner, they subject themselves to liability.  Did the agent advise the homeowner that the lender might only agree to release the mortgage and not satisfy the loan?  Did the agent advise the homeowner to seek the advice of an attorney and/or accountant?  Did the agent provide the homeowner a written disclosure so that there is a clear record that the agent properly advised the homeowner?  The fact that the agent did not know that a short sale doesn’t necessarily mean that the loan would be satisfied is not a defense.  The fact that the agent was merely repeating what the agent was taught or told, is not a defense. The easiest way to protect the homeowner and protect yourself is to clearly spell out what your role is in the short sale transaction (in the listing agreement), provide written disclosures that spell out the dangers of this type of transactions and make sure that you do not exceed your expertise in the transaction.  You can’t stop the real estate world or lenders from continually changing the hoops and hurdles that you and the homeowner have to navigate to have a truly successful closing but you can control your own actions so as to best protect your client and yourself.   *I have heard new reports from some agents that Wells Fargo is telling people that they will not approve a short sale after the Sheriff’s Sale because the law prevented them from doing so.  While this makes no sense, the actions of lenders in the past have not exactly been logical.  Let me know if you have run into anything similar or if you are getting a different response.     NOTICE: The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation.   Copyright 2008 Nash & Lodge, PLLP