Estoppel The Insanity!

In the state of Florida, if a homeowner purchased a property with a first and second mortgage (100% financing) at time of purchase; is it true that if the home is sold short sale that the second mortgage company cannot go after the seller for the unpaid balance of the note?

Carol

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Hi Carol,

That is not necessarily true.  It is much more common for the shorting lender to release the lien only to accommodate the short sale and then pursue the homeowner after closing for the remaining deficiency.  This is why it is extremely important to review that short payoff letter that the seller signs as a condition of closing.

Here is the second mortgage short payoff letter for a purchase-money second in Florida.  You’ll notice that the second mortgage is not silent about the deficiency and explicitly states in three places: “release of deed/mortgage only” at the top and the word “only” in the first sentence and at the bottom “HSBC Mortgage Services will retain the note on this loan.  The customer shall be responsible for any deficiency remaining on the balance.  All terms of the original note shall remain in full force.”  Incidentally, HSBC and Wilshire are the two worst second mortgage lenders in my opinion; rarely will they ever provide a full release of liability, although it does happen (HSBC wars before & after).

Yesterday, I had a three-way call with the seller and the listing agent on this deal.  You’ll notice that HSBC wants this payoff letter signed and sent to HSBC along with the $2,500 check at closing; however, that’s not how we’re going to do this.  The seller is going to cross off the three areas described above on the payoff letter that consent to continued collection and I’ll submit this now, in advance of closing.  Will they agree?  Maybe, maybe not; but in the event the property goes to foreclosure the lien is extinguished and the balance, some $40 thousand dollars, is a lawful amount for HSBC to pursue and they do pursue these balances.  Conversely, this particular HSBC loan hasn’t had a payment in a long time and maybe, just maybe, $2,500 might be a fair and equitable resolution.  The time to push for that favorable disposition is now.

BTW, Florida is judicial foreclosure, but for others elsewhere it’s important to note that even in non-judicial foreclosure states where borrowers may have a non-recourse loan, that short payoff letter acts as an estoppel, so always be careful of what the seller signs.

And finally, whatever you do, don’t be like: Second Mortgage Pay Me?, Chasing Julie After The Short Sale, My HELOC Follows Me & sadly countless others.  Whatever move a seller makes, it should be a conscious decision that they have made (as oppossed to someone making the decision for them) once they have been given all the facts.

Thanks for the questions and hope this helps.

Paul

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.