I recently had occasion to talk with one of the many servicing companies that do business in California. These companies typically aren’t lenders. Instead, they collect the monthly payments made by the borrowers, and then they transfer the monies collected to the owners of the loan. These companies are often referred to as “loan servicers.” To many borrowers, it feels like the loan servicer is the lender, but actually that’s not true. The lender may never directly communicate with the borrower. It’s the servicer that handles all of the payments, and often the servicer takes action when there’s a default in the loan payments.
The servicer I spoke with was handling a “short sale” for the lender. A “short sale” occurs when the sales proceeds are not enough to pay off the balance due on the loan. Lenders often agree to “short sales” when the property is worth less than the loan. Lenders sometimes agree to these “short sales” because they’d rather have cash than another property. Lenders can lend cash for a profit – they can’t (or they won’t) lend a property.
Lenders and servicers are in the business of generating profits. They’re generally not in the business of helping borrowers. If a lender agrees to help a borrower through modifying a loan, or reducing an interest rate, or agreeing to a short sale, then there’s often a business reason that benefits the lender.
There can be real benefits to sellers in conducting a short sale. But even though there can be benefits, Sellers need to be cautious when they’re considering a short sale. There can sometimes be unintended consequences from a short sale.
For example, Sellers can get ready to close a short sale only to find out that their lender won’t release them from personal liability on their loan. New laws can make this illegal in some situations but it still happens.
So what’s a borrower to do when confronted with such decisions? They should get competent, qualified, professional help. It still surprises me sometimes when I hear of borrowers who would rather not pay a consulting fee than fully understand the considerations in these matters. These decisions can make a difference of literally hundreds of thousands of dollars. It just seems short-sighted to try to save several hundred dollars in a consultancy fee and possibly become unnecessarily exposed to a hundred thousand dollars or more in liability. And the reality is that in some situations, lenders are in fact pursuing borrowers for deficiencies in their loans. As a result, some borrowers who think their situation is over when the foreclosure or short sale is done can be in for a surprise.
Robert B. Jacobs practices Real Estate and Business Law throughout the San Francisco Bay Area and California. The foregoing article is not a complete discussion of the subject addressed, and should not be relied on. Readers with specific questions or issues should consult an attorney.