Distressed Housing FAQs

Question [Hardship Letters].  I am trying to do a short sale.  The bank is asking me for a “hardship letter.”  What is it they are looking for?  Do I have to have some life changing event to qualify for help, such as divorce or some financial calamity?

Answer. I rarely, if ever, have seen a borrower’s “hardship” – or lack thereof – become an impediment to their securing a resolution of their distressed housing event through short sale or deed-in-lieu. I view the hardship letter as a sort of “price of admission” in order for the banks to “justify” their providing assistance.  Despite what they might say to the contrary, many banks simply won’t help borrowers unless they are in some form of payment default.  For those folks who may be making a respectable living, but are so strapped on a day-to-day basis because of a large mortgage payment, I believe this fact alone is a valid “hardship.”  If this financial pressure is coupled with a desire or need to downsize, relocate, or other legitimate reasons, it should be included in the hardship letter.  In most cases, folks who got their loans in 2005, 2006, or 2007, were in far stronger circumstance than they are today.  That should be addressed.  For example “When we first got our loan in 2005, we were both fully employed and our combined incomes could support the mortgage payments.  That is not the case today.”

If the home is too large for your needs, it is a hardship if you cannot relocate because you cannot sell the home for enough to pay off the mortgage(s).  If you want to begin saving for retirement and cannot because your mortgage is taking everything, that’s a hardship.  Although the financial reality is that it makes absolutely no sense to continue paying on a mortgage that is $100,000 more than the home’s current value, you should avoid use of the words “negative equity.”  Even though it is usually one of the biggest hardships, banks don’t regard negative equity as a “hardship.”  So you have to find another way to explain the difficulty placed on you to pay the mortgage without using the verboten words “negative equity.”

Question [Bank Wants “Contribution”]. The bank wants us to pay them some money toward the loss they will take ($100,000) if they consent to the pending short sale offer.  They have mentioned a figure ($20,000). Will they negotiate?  We will have to borrow that amount from relatives.  They want to know the source of the funds, for some reason.  How should we proceed?

Answer. Much depends upon what available funds you have and what the bank negotiator thinks they can squeeze out of you.  An unpaid $100K promissory note does not have much value on the open market.  If they tried to sell it on the street, they’d be lucky to get 5%.  So that’s sort of my estimate of the “floor,” that is,$5000.  So take a look at your disposable savings – not retirement funds or funds set aside as capital for your business or other important reasons.  If you have $10,000 you could throw at this, then draw a line at $10K.  Start at $5K or $6K.  They want 20% which is a pretty standard starting point.  Once you reach your pre-set limit,  Hold.  Tell them the facts of life:  If they don’t reach agreement with you now, and choose to kill the short sale, then fine.  They can spend a year or more going through a judicial foreclosure.  But since the home was your primary residence as of the time you went into default, you are protected against a deficiency judgment.  So even to the Big Banks, whose business acumen has always been suspect since they’re usually gambling with Other People’s Money, the decision should be clear:  They can either consent to the short sale and accept your highest and best offer, or kill the transaction, foreclose on the property – and get nothing from you.  In many cases they will blink first.

As for borrowing funds – No, No, No!  Your weakness is your strength.  Never suggest you can tap a wealthier source than yourself.  Borrowing is what led to this mess in the first place.  If you truly don’t have the money, tell them so.   [I’d prefer offering something, rather than nothing at all.]  Although with a balance sheet showing no excess funds, I have seen the banks agree to waive their demand for “contribution” from short sale sellers.

You can say, for example: “I don’t know for sure where or how we will get the money. You can see from my financials that we have no money.  If you insist on $20,000, there’s no use continuing, since we can’t do that.”  Your own financial position speaks for itself, and alerts them that you may, in fact, be a bankruptcy candidate if they don’t work something out with you.  But don’t lie to them.

Question [Exposure to Deficiency Judgment].  I am in the middle of a short sale.  The lender wants me to pay them money as a condition to their granting consent.  The bank tells me that if they foreclose, they will seek a deficiency judgment against me.  They say I’m not protected because I moved out and rented the home for several years.  Only when my renter stopped paying did I go into default with the lender.  If Oregon is a “non-recourse state” how is it that I have possible exposure to a deficiency judgment on my note and trust deed?

Answer.  Oregon is a “non-recourse state” insofar as the first trust deed is a “residential trust deed” as of the date one goes into default.  If you were living in the home at the time of your default and then moved out, the home would have been secured by a “residential trust deed” and the bank would not be able to get a deficiency judgment against you. That did not happen in your case; you moved out before you were in default.  So if the bank were to foreclose judicially, they could ask for a deficiency judgment.  Since your trust deed doesn’t qualify as a “residential trust deed,” the anti-deficiency judgment provisions of the law don’t protect you.  If the bank were to foreclose you non-judicially, then regardless of whether it was a “residential trust deed” or not, there is no risk of a deficiency judgment.  A non-judicial foreclosure means there can be no court “judgment” and under Oregon law, the note is extinguished as of the date of the foreclosure sale.  Unfortunately, the banks are now doing almost all of their foreclosures judicially.

My personal observations:  While it is natural to fear the risk of a deficiency judgment, I have not seen that happen – even in cases in which the banks are judicially foreclosing properties in which they could ask for a deficiency.  They usually just want the property back.  They don’t want further reputational damage in going after downtrodden borrowers for deficiency judgments.  The exception, of course, is cases in which the bank believes the borrower has squirreled away funds and is now being deceitful.

Question [Judicial vs. Non-Judicial Foreclosures].  Since I signed a note and trust deed, how is it that we’re even talking about a “judicial” foreclosure, since the note and trust deed contemplate a non-judicial foreclosure?

Answer. This is because Oregon law permits the banks to elect to foreclose a trust deed judicially or non-judicially.  Until the start of this year (2012), banks were routinely foreclosing trust deeds non-judicially (except in cases where they needed a court declaration where title was clouded, e.g. a probate estate).  It was faster, cheaper and by law there could be no deficiency even if the property was income producing and not a primary residence.  However, MERS created a technical problem for the banks doing non-judicial foreclosures.  Then in July, 2012, an Oregon Court of Appeals ruling came down that effectively cast doubt on the quality of title to properties that were foreclosed non-judicially.  The result is that most banks are going judicial today – not because they want to, but because they don’t want to take back property in foreclosure if they can’t transfer good title out to a new buyer.  This may change in 2013 when the Oregon legislature meets.  I wouldn’t be surprised if non-judicial trust deed foreclosures resume next year – but it’s hard to predict because the banks – true to form – aren’t talking.