Loan Modification

Short Sales and Bank of America

By Wendell Sherk, Missouri Attorney

Bank of America has made a splash recently by updating its short sale agreements. The bank is now, intentionally or not, making it simpler for folks to decide to allow a foreclosure or file bankruptcy instead.

Bank of America has reportedly changed its short sale agreements to provide that the homeowner will remain liable for any unpaid balance owed on the mortgage after the sale.  It has claimed this is simply to protect their investors and insurers.

In its own way, this is a good thing.  In states that allow a mortgage lender to retain a personal claim against a former homeowner to the extent a mortgage is not paid after a sale or foreclosure (called a “deficiency balance”), the disclosure by BofA that the debt will still be subject to collection may provide more information to consumers than other lenders are doing now.  It may help homeowners be better informed.

Of course, in most situations where BofA forecloses on a first mortgage, they have not in the past typically pursued collection of this deficiency, even if they were legally entitled to do so.  Thus, the change in policy could foretell a change in BofA’s deficiency collection strategy — which in itself will lead to a Pandora’s Box of litigation over how foreclosures were done and whether the lender obtained the best possible prices for their collateral.  Or it could be one of the more effective ways to discourage anyone from taking on the burden of trying to complete a short sale that almost entirely benefits BofA and its investors in the first place.

Only time will tell how bad a decision this will be for America’s Bank.  But at least consumers are getting better warning about what they’re getting into in working with them.  So that’s something, I guess.

Full post as published by Mortgage Law Network on July 07, 2009 (boomark / email).