Short sales allow people to sell their homes for less then they owe on their mortgage to avoid foreclosure. In Arizona, though, some former homeowners are finding they are still in debt to their lenders, even after completing a short sale.
Short sales, unlike foreclosures, are not typically covered by Arizona's anti-deficiency law.
That law protects most distressed homeowners if lenders foreclose. It bars lenders from seeking payment from the borrower if the home doesn't sell for as much as the amount owed on the mortgage.
Some lenders apply the same protection to borrowers who complete a short sale.
But a growing number of former homeowners in metro Phoenix are receiving unwelcome calls and letters from lenders or collection agencies telling them they still owe on mortgages for houses they no longer own.
Because the short-sale concept is designed specifically to help homeowners avoid having to pay their lenders more money, some sellers have been careful to negotiate their deals so the lender, by contract, can't later seek payment. Those who haven't done so are at risk.
"I know that there is a great deal of confusion and uncertainty about this issue," said Michelle Lind, general counsel for the Arizona Association of Realtors. She said that real-estate lawyers differ on which situations are subject to the anti-deficiency statutes but that, depending on the kind of loan and the terms of the short-sale contract, the seller can be liable.
"The law is unclear," she said, "and there are many variables that factor in."
Sellers should tread carefully
Tricia Goldblatt sold her Phoenix home through a short sale last year after losing her job as an executive assistant at an engineering firm. A few months ago, she started receiving calls from a collection agency.
"They are telling me I owe $10,000. I did a short sale to get out from under my mortgage," she said. "I don't have that money. I had to move in with my mom."
Goldblatt said she thought the documents for her short sale specifically stated her liability for both her first and second mortgage would be terminated. But the collection agency said it bought the note on her home-equity loan from her lender and wants to be paid.
Home-equity loans, or second mortgages, appear to be the biggest pitfall in such cases.
Plunging home values in metro Phoenix left many homeowners unable to sell their homes for enough money to cover what they owed on their first mortgages, let alone a second mortgage. In short sales, lenders agree to let homeowners sell for less than what they owe. The seller typically gets nothing, but the lenders are at least paid a portion of the original principal.
Some homeowners can work out deals to close their second mortgages. Often, lenders who issued a home-equity loan will accept $2,000 to $5,000 to let the homeowner walk away from the debt.
Some lenders also seek to recoup more of the debt, requiring sellers to sign promissory notes to pay a portion later.
But many sellers think that once the short sale is completed, they are free of liability. That's when the unwelcome calls can begin.
There usually is a lag between a short sale and when a lender will try to collect on unpaid debt or sell it to a collection agency. It was almost a year after Goldblatt's short sale when she was contacted by the collection agency.
Many real-estate agents working with homeowners on short sales refer them to attorneys or make sure the deal calls for the dismissal of all the debt related to the house. The sales require more paperwork and negotiations and are still relatively new to many agents. And, with short sales at record levels in metro Phoenix and nationally, lenders are continuously updating their guidelines.
"It's tough to figure out who owes what to whom in a short sale," said Margie O'Campo De Castillo, a Phoenix real-estate agent. She said she advises sellers to visit an attorney before closing their deals.
'Deficiency issue is muddy'
Real-estate agents and attorneys say some lenders are forgiving all portions of mortgages not covered by the home's resale. But homeowners shouldn't count on it.
"The short-sale contract controls the liability between the seller/borrower and the lender. The anti-deficiency statutes apply only to trustee sales and judicial foreclosures," said Diane Drain, a Phoenix real-estate attorney. "If the short-sale contract does not provide for a full release of personal liability, then the seller has a high probability of receiving a demand for the deficiency."
Kevin Kauffman of Keller Williams Arizona Realty said some of the big lenders, including Bank of America, have said they are applying Arizona's anti-deficiency law to short sales.
"But it's still important to get it in a signed contract. The deficiency issue is muddy, to say the least," said Kauffman, who has closed 120 short sales this year. "You can talk to 10 different lawyers or real-estate agents and get 10 different answers."
Andrew Houglom hired Kauffman to handle the short sale of his Queen Creek home last year.
"We made sure it said in my documents that the deficiency on my loan was paid in full with the short sale," Houglom said. "I did a lot of research before I did the deal and knew lenders were holding some homeowners liable for part of their loan after a short sale."
Lawsuits are stemming from deficiency judgments. Lenders sue homeowners who don't pay, and then homeowners sue their real-estate agents, accountants or other consultants for not protecting them for the liability.
"My warning is that short sales are very dangerous for the seller," Drain said. "They must get legal and tax advice from someone who does not profit from the short sale."
by Catherine Reagor The Arizona Republic Nov. 26, 2010 12:00 AM
Some Arizona homeowners still owe after short sale
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