LawsonGroupMediation

Ken Lawson, JD your short sale coach

A lot of people have been required to sign a promissory note as a condition to the lender approving a short sale.

The promissory notes are usually for a small to moderate percentage of the deficiency balance, paid over ten (10) years, with no interest.  The promissory note requirement is usually a good deal, and see my other articles on this subject concerning predicting when a promissory note will be required.

However, many homeowners are in severe financial distress, and the thought of having another payment following the short sale is not a happy one!

Most borrowers after a short sale need to find a place to rent, and another payment on top of rent might often push the borrowers over the edge.  It is often the case that a short sale falls through simply because the borrower rejects the idea of a promissory note.

However, do not despair!  There is a way out of it.

Your seller may only have to make the promissory note payments for a year, or even less.

Why?  Because after the file is closed and the new loan (promissory note) has been set up for collections, a short time is required for the lender to see that the borrower makes faithful payments.  If so, then about a year out (often as soon as immediately, depending upon the lender), the borrower can seek to settle the debt for a fraction of what is owed.

“But for how much?” you might ask.  Almost any lender will settle a promissory note for 80%, without hesitation.  60% takes some discussion and effort to convince them, but many will do it.  To settle the debt for 50% may require financial distress on the part of the borrower, with low income and difficult circumstances.

The best way is to go to a lawyer and have the lawyer draft a letter and fax it to the lender’s customer service department (collections), with a copy to the lender’s bankruptcy department.  The lawyer can state that the borrowers have come to him to discuss the promissory note obligation, and their difficulty paying it.  They are considering bankruptcy, but this promissory note is the only issue causing that consideration.  The lawyer then makes an offer for 10%-30% depending upon the borrowers’ financial condition.

In my law practice, we often contacted various creditors when the clients did not really need a bankruptcy, but did need relief.  10%-30% was often the amount for which the lenders would settle.  However, it was often the case that my being an attorney was the instrument that got them to agree.  Why?  Because the lenders know we are serious.

Best wishes,

Ken Lawson, JD

TheLawsonGroup Mediation Services

In the last article, we discussed the basis upon which lenders will seek a deficiency balance and how to predict it.

The question then comes to the issue of when a promissory note will be required as a condition of approval of the short sale. Since the debtor owes the entire deficiency, a promissory note with no interest and easy terms for only a portion of the balance is not unreasonable.

Although usually the secondary market investor (SMI) requires seeking the deficiency balance after short sales, but sometimes it will be the servicing lender.

I am poviding merely a guide. Promissory notes are not always required, but the following factors may be helpful to be prepared if a promissory note is required in your short sale case.

1. Borrower has assets. A borrower with a true hardship may still have substantial assets, even if those assets are exempt, such as IRAs and retirement funds.  Even though creditors may not be able to forcibly take those assets, a borrower may still pursue a short sale. However, the SMI is not required to approve the short sale unless the borrower agrees to the promissory note.

2. Borrower is an investor. If the borrower has other property and making other mortgage payments it may trigger the requirement for a promissory note. When lenders see mortgage payments being made to other entities, they may require a promissory note.

3. Borrower rehabilitation. When the entity sees the borrower unloading a lot of debt with a good income, they may require a promissory note. Borrowers with deteriorating health or elderly are less likely targets of a promissory note, but borrowers young enough to be financially rehabilitated may be so required.

4. Lender/SMI needs. Entities in deep financial trouble may increase the cutoff for requiring promissory notes.

5. Purchase price below net to lender minimum threshold. Some SMIs will allow an offer to be approved even if the offer is below the net to lender minimum threshold percentage of the fair market value. An offer that is $20,000 below may require up to a $20,000 promissory note.

6. Lender requires a financial statement. Whenever a lender requires a financial statement to be completed 0by the borrower, it may be not only to confirm hardship, but it may help determine if they are going to require a promissory note for part of the deficiency. Some lenders require them of all, but for others it may be a clue to whether they are seeking the promissory note.

These 6 factors are not in themselves reliably predictive of whether a promissory note will be required as a condition of short sale proposal, but they can alert the short sale Realtor to brace for that possibility.

If I can be of service to any of you, please do not hesitate to contact me.

Best Wishes,

Ken Lawson JD

TheLawsonGroup Mediation Services