Real Estate Finance Committee
December 23, 2008
(This material is for discussion purposes only and has not been reviewed by
the Legislative, Real Estate Finance or Executive committees, or the Board of
Should C.A.R. sponsor legislation to create a "Shortclosure" process to
expedite resolution of short sale transactions?
1. Sponsor legislation
2. Amend legislation of others
4. Do Nothing
REALTORs® working to put short sales together complain that lenders ignore them
for unreasonably long periods of time. Lenders often do not respond in a timely
manner as to what price or terms are acceptable to them. In many cases delays
by lenders result in a failed short sale and the property going to foreclosure.
The proposal is to develop a "shortclosure" process that provides sellers,
seeking to complete a short sale, with leverage on the lender to generate a
response in a timely fashion and, failing that, to expedite the return of the
property to the lender free of junior liens while relieving seller of debt in
excess of the value of the property.
As mentioned above, the short sale process is complex and varies
from lender to lender. Indeed, the process with at least some lenders is
reportedly so difficult that REALTORS® are steering away from that segment of
the market, or hiring transaction processors that are familiar enough with the
idiosyncrasies of a given lender to successfully document short offer.
Reportedly, Lenders delay responding to sellers seeking a short sale, hoping to
get a better offer. They have an incentive to do so, knowing that if they must
foreclose, junior liens will be wiped out and the lender will be able to take
the property back free of those liens at the foreclosure sale.
It is no solution, at least under existing law, for the owner to threaten to
give the property to the lender via a deed in lieu of foreclosure if the lender
doesn't approve the sale. The lender is not required to accept it, and is
motivated to refuse because the "deed in lieu" doesn't wipe out junior liens
like a foreclosure does. Even worse, there may still be personal liability on
the mortgage for the seller that simply abandons the property.
The Goal: Develop a process that provides sellers, seeking to complete a
short sale, with leverage on the lender to generate a response in a timely
fashion and, failing that, to expedite the return of the property to the lender
free of junior liens while relieving seller of debt in excess of the value of
The "Shortclosure" proposal: In an effort to give lenders effectively
the same incentive they have when they foreclose, namely, the ability to take
the property back free of junior liens, and the greater incentive of getting
the property back quicker than the minimum 111 days necessary for the a
completed foreclosure, legislation could add to the existing foreclosure
process a hybrid process called a SHORTCLOSURE. Basically it would provide
1. When a seller receives a short sale offer, it can be presented to the lender
who will then be obligated, within a set period of time, to accept or reject
2. If the lender rejects the short sale offer, the borrower could convey the
property back to the lender by way of a statutorily-authorized deed in lieu. In
other words, the lender has a first right of refusal on the short sale. If the
short sale looks an appropriate value, the lender accepts it. If not, and the
lender thinks it can do better; it rejects it and (at the seller's option) gets
the property back. This gets these properties "moving," avoiding the
foreclosure process, which is expensive time consuming, and works to the mutual
detriment of the borrower and lender.
3. If the lender ignores the short sale offer in the time specified, the short
sale price will be deemed the balance due on the debt, allowing that debt
(under state contract law) to be "discharged". The borrower would convey the
property to the lender by way of a deed-in-lieu. Note: this is the same result
that occurs if the lender takes by foreclosure and is prevented from going
after the borrower personally (one action rule and anti-deficiency) with the
exception that here, this new law would prevent the lender from reporting the
transaction as a borrower's "default".
4. Finally, if the lender takes the property via a deed in lieu "jingle letter"
(one that contains the house keys), then the transfer will wipe out junior
liens, just as they are wiped out now in a foreclosure sale. Junior lenders
will suffer no practical loss over existing law, as they would have been wiped
out in a foreclosure sale anyway and they will still retain their right (if
any) to pursue the borrower for personal liability on the note.
It is not clear how lenders will react. On the one hand, it creates a procedure
for getting the property back, free of junior liens, more expeditiously than
the existing foreclosure process permits. On the other hand, it puts REOs on
their books perhaps faster than they would like, affecting their reserve
It is also unclear how consumer groups will react. By giving the homeowner more
leverage to force the lender to react to a bona fide short sale offer; and by
keeping the discretion to go forward in the hands of the consumer, the proposal
is consistent with previous policy pronouncements of the consumer groups. On
the other hand, the new process may result in home owners leaving their homes
more quickly, and the consumer groups may resist that possibility.
Should C.A.R. sponsor legislation to create a "Shortclosure"