- March 22, 2011
- All Issuing Offices
- Short Sale Transactions
This Bulletin outlines general procedures to be followed when insuring short sale transactions.
A short sale transaction (also known as a short payoff) occurs when the proceeds received from a sale are less than the outstanding balance of the mortgage(s) encumbering the property, and the seller is unable to pay the shortfall. In many cases, the value of the property has declined, and the seller is in default or is already facing foreclosure. In order to avoid the costs involved in pursuing a foreclosure and the possibility of acquiring the foreclosed property, the existing lender agrees to release the mortgage in exchange for an amount less than the outstanding balance of the mortgage debt. The terms of the short payoff may be negotiated by the seller directly with the existing lender, or through a third party (e.g., a short sale intermediary or foreclosure consultant). From the buyer's perspective, the transaction proceeds mostly in the same manner as a conventional purchase.
The following guidelines apply to situations where the existing lender has agreed to accept an amount less than the outstanding balance of the mortgage (including all accumulated interest and penalties). Your local Underwriter may also advise you regarding additional requirements, if any, that may apply in your jurisdiction. If there is no agreement by the existing lender to accept such lesser amount, the existing mortgage must remain as an exception on the new policies, and this may be unacceptable to the buyer and the new lender.
General Guidelines Relating to Short Sale Transactions
1. Please obtain a written payoff letter from the existing lender. It should state the reduced amount that the existing lender is willing to accept in full satisfaction of the loan. If there is a written agreement between the seller and the existing lender describing the terms of the short sale payoff, please obtain a copy for your records.
2. Many short sale transactions are conditioned upon the seller receiving no proceeds or only a small amount. All payments, whether made at closing or outside of escrow, must be disclosed on the HUD-1 Settlement Statement. You may be asked to prepare a preliminary HUD-1 Settlement Statement showing the most accurate available figures, and to forward it to the existing lender. In general, unusual charges or credits may cause the existing lender to decline to proceed with the transaction. Prior to closing, obtain both the new lender's and the existing lender's written approval of the final HUD-1 Settlement Statement.
3. Please pay close attention to the existing lender's closing instructions and special conditions, if any. These may include restrictions on closing costs (for example, broker's commissions) and the payoff amounts to other creditors (for example, junior lenders). You should be able to reasonably determine that, upon your compliance with the existing lender's instructions, the existing lender will provide a satisfaction, release or reconveyance, as applicable.
4. Please do not overlook junior mortgages and other liens. Such mortgages and other liens must remain as exceptions, unless the seller has arranged for their release (for example, by convincing the junior lender or lienor that there is insufficient equity in the property to satisfy them), and you receive acceptable documentation from the junior mortgagee or other lienor releasing such mortgages and/or liens. Occasionally, two or more existing lenders may be involved in the short sale transaction, with the potential for inconsistent closing instructions, which must be reconciled prior to closing.
It has been reported that some second mortgagees or their representatives may have requested payments to be made outside of closing, as a condition to releasing their junior liens. If you are aware of any payment made to any lienholder, whether disbursed from proceeds at closing or paid outside of closing, you must show all such payments on the HUD-1 Settlement Statement.
5. If foreclosure proceedings have been commenced, please contact the foreclosure attorney and obtain written confirmation that, upon tender of the amount stated in the "short" payoff letter, the attorney will dismiss the foreclosure action and discharge the Lis Pendens, with no additional fees or costs.
6. After the closing, please promptly follow up to obtain recordable satisfactions or releases, as applicable, of all mortgages and other liens.
7. Please be aware of equity skimming schemes that can accompany some short sale transactions. In such situations, distressed owners are contacted by companies claiming to be able to assist the homeowner. The company offers to negotiate with the existing lender in exchange for title to the property. The company acquires the property from the distressed owner, negotiates a short sale, then resells the property for a substantial profit. The company's agreement with the distressed owner may include a share of the profit upon resale, although typically these arrangements are not known by the settlement agent. If the existing lender is induced to accept a lower payoff than market forces might otherwise indicate, the existing lender may subsequently seek to set aside the short sale transaction and/or ask a court to impose a constructive trust on the property.
Short Sale Transactions and "Flip" Transactions
Disclosures become extremely important when a short sale transaction is also part of a flip transaction (a contemporaneous transfer to a different ultimate buyer). Although there may be legitimate reasons for a flip transaction, there is often a concern that an inflated appraisal may be obtained in order to substantiate the resale price and a larger purchase money loan.
Please refer to previously-issued guidelines for closing and insuring flip transactions. In addition to those requirements, if the short sale transaction is also part of a flip transaction, you must disclose all transactions to all lenders. You must send both HUD-1 Settlement Statements to both lenders (the existing lender and the new lender) and obtain their written approval of both of them.
Short Sale Transactions and Bankruptcy Proceedings
A motion to lift the automatic stay in order to allow the lender to proceed with a foreclosure is insufficient to authorize a short sale transaction. If there is a bankruptcy proceeding regarding the seller, in order to proceed with a short sale transaction, you should obtain an order that is specific to the contemplated short sale transaction or an order of dismissal or discharge of the bankruptcy proceeding.
Restrictions on Subsequent Sales
Some first mortgagees insert conditions restricting the subsequent sale of the property for a period of time after the closing, for example, 30 days. If you encounter such a provision:
1. Obtain an affidavit from the buyer confirming that the property will not be sold within that timeframe. Click here for Buyer Subsequent Sale Affidavit.
2. Insert the following exception in the Owner's Policy excepting to the terms of the payoff and any claim of reinstatement of the lien for failure to comply (insert references to the time period and the mortgage that was satisfied):
The transaction vesting the Title as shown in Schedule A is subject to a condition prohibiting the transfer of the Title within ____ days after Date of Policy. This policy excepts any claim of reinstatement or refusal to release the _______________ lien recorded ________________ as a result of the failure to comply with said condition.
Short Sale Intermediary
The large number of distressed properties has given rise to short sale intermediary enterprises. A short sale intermediary (sometimes known as a foreclosure consultant) provides facilitation services relating to the negotiation of the business and/or legal terms of a short sale transaction, and the coordination of various aspects of the transaction. These services can include obtaining appraisals, negotiating with first and second lenders regarding payoff terms and amounts, assembling and submitting documentation required by the lender, navigating the lender's loss mitigation department, negotiating brokerage commissions of the seller's real estate agent and the buyer's real estate agent, expediting review and processing by the lender, and coordinating among the various parties required for closing. Such functions may be regulated by state law, and may require licensing or registration.
Issuing Offices are reminded that you are not authorized to function as a short sale intermediary or foreclosure consultant on behalf of Stewart Title Guaranty Company. If you provide such services, you should familiarize yourself with applicable requirements to engage in such activities and consult with your attorney to confirm that you are in compliance with such requirements.
If you have questions related to this bulletin, please contact Stewart Legal Services or your local underwriting personnel.
For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.
THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.
- Bulletins Replaced:
- SLS2008005 Short Sale Transactions
- Related Bulletins:
- CA000024 Distressed Homeowner/Short Sale Transactions
- FL2008002 Short Sale Transactions
- GA2008001 Short Sale Transactions
- SLS00234 Loan Fraud (Replaces both SLS00229 and SLS00230)
- SLS2009005 Short Sales
- SLS2010004 Short Sales
- Underwriting Manual:
- Exceptions Manual: