February 9, 2010

As many of you know, foreclosures differ in procedure from state to state, with certain states being “judicial” and others being “non-judicial”. Another distinction is whether a state is a “deficiency” state or not. A “deficiency” is the amount of money remaining after subtracting the amount which the foreclosing party receives from a short sale from the amount claimed due, or the difference between what a home sells for in a sale and the amount claimed due. Certain states provide that deficiencies are waived in certain instances as a matter of law, and certain states permit a waiver of deficiency. However, we are seeing a disturbing trend where foreclosures are allegedly “resolved” through the short-sale process where the borrower still winds up inheriting another lawsuit.

Although the foreclosing party may agree to stop the foreclosure pending a short sale, this does not, in the absence of the proper papers being obtained, result in a waiver of the foreclosing party’s right (if provided by law) to seek a deficiency against the borrower. As such, those who push borrowers to short sales without the condition that the foreclosing party provide a signed General Release and express release of any deficiency liability wind up saddling the borrower with a separate lawsuit for the claimed deficiency. The language of the General Release is a legal matter which is (or should be) known to and is best handled by attorneys. Real estate brokers or other non-legal persons may not be familiar with this concept and the effect of a short-sale without obtaining a release.

Thus, for borrowers who think that they are settling their foreclosure case with a short sale, beware. Without a fully executed General Release and express release of any deficiency claims, the borrower will probably be staring down the barrel of a new lawsuit which could seek money “damages” into the hundreds of thousands of dollars even though the borrower thought they had “settled” the foreclosure.
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Jeff Barnes, Esq. www.ForeclosureDefenseNationwide.com