BOA Now Going After deficiencies?

[Tony Severino]

The reality these days is that the rules are changing every day. It is extremely important for investors to stay on top of the news and know what the real impact of the headlines is. There was some really big news in the short sale world recently, so I wanted to take this chance to explain its impact and how I am dealing with it in my business.

Bank of America, which also now owns Countrywide, quietly added a clause to its short sale agreements recently that obligates homeowners to pay back the deficiency owed as a result of the short sale. In many cases, homeowners we deal with are only agreeing to short sales when the deficiency portion is waived by the lender. Because of this, we have stopped taking on deals that have Countrywide loans. Bank of America's new policy is expected to begin scuttling many short sales now in process with Bank of America or Countrywide because a lot investors like us now find it to be a complete waste to bother spending the time negotiating a deal knowing that they're most likely going to slap a provision on there that makes it difficult for us to get a short sale approved that is acceptable to the homeowner.

Now, Bank of America is probably just doing what it deems necessary to protect its investors from further losses. It's also trying to curb granting short sales to people who have resources available to continue paying unwanted mortgages.

It is short-sighted though, because it's going to have a number of extremely negative impacts:

1. More short sales that have been in process (sometimes for several months) will fail just short of the closing table.

2. More homeowners will be forced into bankruptcy in order to avoid deficiency payments when the property is finally foreclosed.

3. More homeowners will ultimately be forced into foreclosure.

4. Bank of America and its subsidiaries will be left with more inventory on the books for a longer period of time. The increasing numbers of REOs will end up lowering the value in many markets that are already suffering. It's likely that Bank of America will revise the policy again once it becomes clear to them that it's not making their investors more money. Unfortunately, the people who get caught in the middle are the homeowners who put their faith in the short sale process and may end up getting the short end of the stick.

To help these homeowners out, short sale investors should have their negotiators touch base with the loss mitigation specialists assigned to these cases and have them confirm that the deficiency is being waived. Have them send a copy of the current short sale agreement language and discuss any changes with homeowners.

If it appears that a deficiency clause is going to sink the short sale, the best bet is to come right out with it and tell the bank that if there is a deficiency clause, you will not do the deal, and they will lose out on your offer. Some people are having success with this approach. Lender short sale rules ebb and flow depending on the market and the lender's bottom line in any given quarter. Right now, we aren't bothering to do any deals with Countrywide but that may change as their policies change. I will try to keep you on top of the changes as they happen!