REQUIRED READING: The short sale is undoubtedly preferable to a foreclosure, and properly executing one can be tricky. But a large number of short sales fail, by some estimates up to 60%, and those failed short sales ultimately end up in foreclosure.
There are a variety of reasons why short sales don't go through, but the existence of a junior lien is often a stumbling block. RealtyTrac reported in July 2012 that nearly 40% of loans entering foreclosure have at least one junior lien attached. The existence of junior liens on these loans certainly does not preclude a short sale, but it does make the transaction more complicated.Â
For starters, the holders of liens, such as second mortgages or home equity lines of credit, need to approve a short sale for the transaction to go through – and that can be a challenge. Junior lien holders are generally the ones absorbing the loss in a short sale because they recover whatever money remains after all the associated costs are paid.
All too frequently, the amount remaining isn't satisfactory to the junior lien holder. And sometimes, there's nothing left for junior lien holders at all, so it's easy to see why they might be reluctant to agree to a short sale.
Even the Federal Housing Finance Agency sees second liens as a stumbling block to short sales. In late August, the regulator announced that Fannie Mae and Freddie Mac are issuing new guidelines to mortgage servicers that will align and consolidate existing short sales programs into one standard short sale program. The guidelines, which went into effect Nov. 1, 2012, stipulate that Fannie Mae and Freddie Mac will offer up to $6,000 to second lien holders to expedite a short sale.
Factor in the more complicated documentation process when there's more than one lender, and it becomes clear that these transactions – and ensuring that all of the necessary documentation is in place – can become very difficult.Â
Improper or missing documentation can stall a short sale substantially, particularly when there is more than one lien holder. Whether a lender chooses to perform the function in-house or to outsource it, assembling all the necessary documents and providing for timely and properly conducted lien releases are critical to the success of short sales. Unfortunately, there are a number of ways that improper or missing documents, as well as poorly executed lien releases, can stop a short sale in its tracks.
At the beginning of the process, the seller's mortgage lender needs to thoroughly review a seller's short sale request. Collecting and assembling the required documentation can be a time-consuming and frustrating process. It may be difficult to obtain the required paperwork from the seller, who could be uncooperative or otherwise delay submitting the required documents.
Preparing the paperwork and getting the deal accepted by the mortgage lender can also be a lengthy and difficult undertaking. The challenge becomes even greater if there's more than one lender involved.Â
A clear title is needed: verification is required that the mortgage is properly recorded with the first lienholder, and that the title policy is accurate. In cases where there are one or more additional lien holders, clearing the property title requires more time and effort.
If the loan was sold to an investor, the investor will have to approve the short sale, and investors have their own set of requirements before they'll grant approval. When there are mistakes or missing documents, the loan file needs to be returned to the lender, and the process takes place again.
A current owner search needs to be performed to show how any and all liens are recorded to confirm all current lien holders are of record. There are times when an assignment may be missing. When a loan has been sold several times, there is a good probability that at least one of the lien holders isn't properly recorded. In those cases, an interim assignment or assignments of records is necessary.
Avoiding litigation
When a short sale is completed, a lien release needs to be performed promptly in order to avoid future problems, including the potential for litigation. Each state has a different timeline for how quickly lien releases need to take place, ranging from 30 to 90 days. Delaying or not properly performing and documenting a lien release will leave the lien holders vulnerable to being sued for an open balance. The potential for this sort of litigation is considerably higher in the case of short sales with subordinate liens.
The proper paperwork needs to be returned to the borrower, depending on whether or not the lender is seeking a deficiency balance. A lender or servicer can either accept the amount recovered in a short sale, or go after the borrower for a deficiency balance.
When a servicer opts to seek a deficiency balance, the note is not returned to the borrower. If the short sale is accepted as paid in full, then the mortgage note and recorded release are sent to the borrower.
With delinquency rates at high levels, there are more chances for mistakes to happen in documentation. Improper documents need to be repaired, and missing documents need to be located. In addition to cost and time, servicers also need to keep in mind that new mandates by regulators, investors and the secondary market agencies are continually changing, particularly for loans that are in a pre-foreclosure status. Â
When it comes to documentation, tracking of ownership, and lien releases, getting it right the first time will clearly save servicers time, money and headaches. Determining whether those services should be performed in-house or outsourced to a document services vendor will depend on the size and the resources of the servicer.Â
Ownership tracking, recording of assignments and lien releases are a complicated business, made even more so by the continually changing guidelines. Even one misstep can jeopardize ownership security and ultimately halt a short sale or foreclosure.
A successful short sale is good news for all involved, but missing or improper documents can stall the short sale process or, in some cases, halt it altogether. The bottom line message is clear: Make sure that you have all of your docs in a row!
Mike Wileman is president and CEO of Orion Financial Group, based in Southlake, Texas. He can be reached at mew@orionfgi.com.
