Wednesday, July 01, 2009|
Examining Short Sales from a Title Insurance Perspective
By Cynthia Kern, Esq.
In a short sale, a lender agrees to a reduced payoff based on the belief that the market value of the property is lower than the loan balance. The lender thereby avoids paying for a foreclosure action which results in months without mortgage payments and a property that may sell at a much lower price at auction, if at all.
Sellers also have incentive to accept a short sale, since they walk away from the house without a foreclosure tarnishing their credit even further. Finally, buyers benefit from a short sale, receiving a vacant property at a depressed price with clean title.
The title company must make certain that the new lender will be in a first lien position, and diligently examine the short sale transaction to make sure all steps are followed. It is important for both the title company and the lender to communicate throughout the process, since most problems in short sales arise from simple oversights that can be easily resolved with cooperation from all parties.
Here are some typical issues that can arise during a short sale:
Lender of Record Does Not Match Lender on Short Sale Letter
In some cases, borrowers close on a mortgage with a certain bank, but receive monthly bills from a different servicer. A borrower who goes into default on the bank’s mortgage typically receives a short sale agreement letter from the servicer. Unfortunately, this letter is not satisfactory to a title underwriter, since the servicer cited is not the lender of record.
Even if the servicer provides written approval of the short sale, a lender can challenge the short sale (even after closing) if it never directly consented to taking less than full payment. Therefore, the bank must either give separate written approval, or the servicer must produce a power of attorney from the bank that includes the servicer’s authority to negotiate and approve the short sale.
In addition, at least two New York lower courts have recently dismissed foreclosure actions because the powers of attorney between the lenders and servicers weren’t properly executed. When handling a short sale it is incumbent on all parties to carefully examine the approval letter and if the name on the letterhead doesn’t match the lender of record in the title report to ask the servicer to provide the necessary additional documentation.
Discontinuation of Foreclosure
Although many borrowers negotiate a short sale with their lenders before foreclosure proceedings have been filed, it is common for lenders to agree to short sales while foreclosure is pending. The title report will raise any Lis Pendens of record against the property, which must be canceled once the lender receives the negotiated payoff funds. If your title report shows that the owner is being foreclosed on, then the attorney representing the lender should separately acknowledge, in writing, that s/he is aware of the transaction and will discontinue the foreclosure and cancel the Lis Pendens.
Terms of the Short Sale Approval Letter
Prior to issuing short sale approval, the lender conducts extensive investigation, of not only the seller’s financials, but also the contract and appraisal or real estate broker’s opinion stating the value of the property. Typical short sale letters approve the purchase price, purchasers, closing cost amounts, and require approval of the HUD-1 prior to closing. Most importantly, the letter states that the sellers cannot walk away from the closing with any funds. Failure to comply with all terms can void the transaction.
Purchaser's Intended Use for the Property
New York has promulgated multiple statutes intended to protect homeowners from losing properties in foreclosures without due process or through fraud, with remedies at law that include the right to rescind the transaction up to two years post-closing. Because short sales deal with mortgages in default, and most of these properties are sellers' residences, some foreclosure laws also apply to short sales. Consequently, if the purchaser plans on residing in the property, then under these laws the transaction will pass the minimum requirements for insurability. However, if the purchaser is an entity or is structuring a flip, it will be challenging to find a title underwriter willing to insure the sale. Reasons for this include: the law’s preference for owner-occupying purchasers of distressed property; potential for the transaction to be voided by the seller up to two years after closing; and, in the case of a flip, a potentially fraudulent market value allowing the transaction to be voided by the lender.
Short sale transactions have a lot of moving parts, from the lender’s, borrower’s and title insurer’s perspective. Selecting a title insurance provider well-versed in closing short sale transactions can help make the difference between a rough and smooth closing.
Cynthia Kern, Esq. serves as In-House Counsel at TitleVest, a Manhattan-based provider of title insurance and related real estate services. An affiliate of 1031Vest and InsureVest, TitleVest’s clients include many of the leading law firms and institutional lenders who enjoy outstanding service and free access to TitleVest’s arsenal of proprietary web-based tools such as ACRISasap™, Legal Form Generator™, Interactive Online Reports™, ACRIStracker™,and UCCtracker™. For more information, visit www.TitleVest.com .