Use Of Short Sale Promissory Notes To Squeeze Underwater Home Sellers Gaining In Popularity With Lenders?

In Seattle, Washington, the Puget Sound Business Journal reports:

• When her Edmonds condo went on the market, Mindy Moore thought she had managed to avoid foreclosure. Moore listed the home in Edmonds for about $30,000 less than she owed on the mortgage. She thought the “short sale” agreement signed with the bank meant the bank would absorb the loss. Then she discovered that her lender, Bank of America, might still come after her for the difference. That means she may have to let the bank take back her property, or file for bankruptcy because she can’t afford to pay up.

• Experts say the wording,(1) which was recently and quietly added to Bank of America’s short-sale agreement, could have major ramifications for a large group of distressed homeowners in Washington and across the country.

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• Bank of America said in a statement that it asks for a promissory note from sellers — the term used to describe the written promise to pay back the difference — to protect its “investors and shareholders from the losses in a short sale.” [...] While Bank of America’s short-sale agreement wording appears new, Kevin Kim, a short- sale consultant in Seattle, said other lenders have similar wording in their agreements that would require homeowners to pay the money left on their loan amount.

• Bank of America’s short-sale agreement illustrates the financial complexities facing hundreds of Washington homeowners struggling to deal with underwater mortgages (in which the owner owes more than the house sells for). It also shows the tug-of-war between banks and borrowers as banks try to recoup as much money as they can from their failed loans.

For the story, see BofA wording may cause more foreclosures.

(1) According to the story, at issue is a sentence in Bank of America’s agreement that says its mortgage servicing arm “and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due unless agreed otherwise or prohibited by law.” That means Bank of America could pursue a court order against a homeowner after the short sale is completed.