HUD partial claim - short sale

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HUD partial claim - short sale

Ari Bauer
Realtor · Lakewood, NJ · Member since 2015 · 24 posts · 11 votes

I was hoping someone could help me out with a deal I'm working on.

I'm negotiating a short sale on a property with three liens, a 1st mortgage, 2nd and a HUD partial claim.

I've reached agreements with the 1st mortgage for a short payoff with the HUD claim recording the total amount owed.

The second lien had originally agreed to a payoff of 2k (about 5% of what they're owed). All went well until I sent the 2nd a preliminary Hud1 and they saw that the HUD claim (which was recorded in 3rd position) was receiving 6x the amount that the second was receiving.

At that point, the 2nd stated that they wanted to know why the HUD claim ( which is in 3rd position) was receiving more then they are.

As far as I understand it, even though the HUD claim was recorded 3rd, they still have a higher claim because of the subrogation.

I had an attorney draft a letter to the 2nd lien holder explaining this, however they are still saying that the hold a higher position then the HUD claim and as such won't agree to the Hud claim receiving that amount.

Does anyone who has dealt with a deal like this have any suggestions as to what I can do to help the 2nd understand that the HUD claim is in a higher position then them?

Thanks

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Ron S.
Paradise, CA · Member since 2015 · 1k+ posts · 871 votes
8y

I don't think the attorney route would be as useful as one would think/hope considering there is no statutory obligation for the 2nd to take anything less or, allow anything more to any other lien holders. The second can just sit there and blow the entire deal up. Junior lien holders hold as many cards as the senior does in short sales.

While the attorney drafted letter may have done a good job explaining what a HUD partial claim was, again, the 2nd can use the letter for birdcage liner if they wanted to.

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  • Alexis Adams
    Real Estate Agent · Fort Lauderdale, FL · Member since 2018 · 44 posts · 16 votes
    8y
    Usually on the partial claim, there is some verbiage about needing to be paid in full at the sale of the property. I would show the 2nd as much documentation as you can. I’m wondering if you can also maybe get something directly from HUD - have you taken a look at the Mortgagee Letters? And/or get something from the 1st mortgage outlining that they are obligated to pay the partial claim in full. Who is the 2nd mortgage with? I would try to escalate as high as possible within the 2nd to someone who understands how the process with the partial claim works. Happy to share any contacts I have, depending on who services the 2nd mortgage.
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  • Ari Bauer
    OP
    Realtor · Lakewood, NJ · Member since 2015 · 24 posts · 11 votes
    8y

    The 2nd is with liberty savings Credit Union.

    Until now I have been dealing with with the attorneys office that's representing them. 

    I had sent the subrogation agreement and with the attorneys letter for their review but that didn't seem to help anything.

    After speaking with the attorneys office and explaining what a HUD partial claim is, they still don't seem to understand.

    I think your advice of escalating it is what I'm going to do. What I realy need is for someone at the bank to understand what The HUD claim is, after they understand what it is, there shouldn't be any problem getting their reapproval

    As this is the only thing holding them back from reissuing the approval.

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  • Brett Goldsmith
    Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
    8y

    Partial claims need to be paid in full. It's HUD guidelines no exceptions.

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  • Ron S.
    Paradise, CA · Member since 2015 · 1k+ posts · 871 votes
    8y

    I don't think the attorney route would be as useful as one would think/hope considering there is no statutory obligation for the 2nd to take anything less or, allow anything more to any other lien holders. The second can just sit there and blow the entire deal up. Junior lien holders hold as many cards as the senior does in short sales.

    While the attorney drafted letter may have done a good job explaining what a HUD partial claim was, again, the 2nd can use the letter for birdcage liner if they wanted to.

    1Reply
  • Alexis Adams
    Real Estate Agent · Fort Lauderdale, FL · Member since 2018 · 44 posts · 16 votes
    8y

    I guess it also really comes down to the specific situation. How underwater is the first mortgage? Maybe explaining to the 2nd that there is no money for them if the property goes to foreclosure, taking SOMETHING is better than getting NOTHING.

    What is the seller’s situation? If this sale falls through, what if they decide to file BK? This would leave the credit union to possibly recover nothing as well. I’m not a big fan of threatening BK but the 2nd should understand that recovering something is better than nothing. 

    If you’re able to escalate, do it. Maybe find out when the board meets and/or if it’s a local credit union, meet with someone in person. 

    I’m sure you’ll find a way to get this deal done, I’m not surprised that it’s a credit union that’s playing hardball. 

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  • Ron S.
    Paradise, CA · Member since 2015 · 1k+ posts · 871 votes
    8y
    Originally posted by @Alexis Adams:

    I guess it also really comes down to the specific situation. How underwater is the first mortgage? Maybe explaining to the 2nd that there is no money for them if the property goes to foreclosure, taking SOMETHING is better than getting NOTHING.

    What is the seller’s situation? If this sale falls through, what if they decide to file BK? This would leave the credit union to possibly recover nothing as well. I’m not a big fan of threatening BK but the 2nd should understand that recovering something is better than nothing. 

    If you’re able to escalate, do it. Maybe find out when the board meets and/or if it’s a local credit union, meet with someone in person. 

    I’m sure you’ll find a way to get this deal done, I’m not surprised that it’s a credit union that’s playing hardball. 

    Sadly, while commonly used, the "Something is better than nothing" tactic is flawed. It IS sometimes better to let it go to foreclosure. Some states have single action laws meaning, you can take but one action and while usually "action" is defined as a court action, agreeing to participate in a short sale would also be deemed as taking action and as such, some lenders would prefer NOT to accept pennies in a short sale and instead, let it go to foreclosure so their rights as a sold out junior lienholder are preserved, meaning, they get to sue the borrower for the full amount should they choose. Also, another flawed tactic in today's economy is the "You get nothing in BK". If there is one dime of equity over the senior lienholder's balance, there is no lien avoidance or stripping of junior lienholders. The BK is simply going to stall any foreclosure for a couple of months but after that, they pick up where they left off. While yeah, they would lose the rights to sue them upon discharge, the threat of filing BK doesn't work as much today as it might have in 2012.

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  • Aniceto Mata Jr
    Member since 2017 · 1 post · 0 votes
    8y

    If a property has a HUD partial claim lean on it, and the property gets foreclosed, does the HUD partial claim lean get wiped out?

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  • Maurice Grant
    Member since 2018 · 2 posts · 0 votes
    7y

    If a property has a HUD partial claim lean on it, and the property gets foreclosed , does the HUD partial claim lean get wiped out in the Sheriff sale? Also if the home is sold in a short sale, is the partial claim included and paid out to hud with those proceeds? Also one last thing. In 2014 I got a home modification which included the hud partial. I filed chapter 7 bankruptcy in 2015 and didn't reaffirm the mortgage. How does that affect both scenarios as far as the hud claim. Thanks for your time.

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  • Ari Bauer
    OP
    Realtor · Lakewood, NJ · Member since 2015 · 24 posts · 11 votes
    7y

    @maurice grant

    When a home is sold at a sheriff s Sale the HUD partial claim will be paid off from the proceeds of the sale so the claim will no longer encumber the property.

    If the home is sold through a short sale, the HUD partial claim will be paid out of the sale proceeds.

    In regards to your 3rd question, filing for bankruptcy will have no impact on the HUD partial claim.

    What filing bankruptcy will do is grant an automatic stay to prevent creditors from collecting a debt from the debtor. However the bank will then file a motion asking the judge to allow the foreclosure to proceed, and if the judge allows this, the foreclosure will proceed as normal.

    I'm happy to answer any other questions that you may have.

    Disclaimer: I am not an attorney and this is not legal advice.

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  • Maurice Grant
    Member since 2018 · 2 posts · 0 votes
    7y

    Ari, thank you! I’ve trying to find these answers for over 2 weeks. One more thing.. Is it true that since I didn’t reaffirm my mortgage, I won’t have to pay the deficiency amount of the short or sheriff sale? And I also read somewhere that there should be no further impact to my credit report after either situation. My report since the 2015 discharge says: Wells Fargo “Included in Bankruptcy” 0 balance. 

    Thank you! 

    0Reply
  • Ari Bauer
    OP
    Realtor · Lakewood, NJ · Member since 2015 · 24 posts · 11 votes
    7y

    I can't tell you if they will likely be a deficiency Judgement or not, that is a question that you should ask an attorney.

    However, I actually closed a short sale with Wells Fargo a couple months ago where there was a HUD partial claim, and part of our negotiated agreement was that they waived their right to collect a deficiency judgement against my client.

    As far as how a foreclosure/ short sale would affect your credit score, that's not really my forte, but a quick search online seemed to imply that what you're saying is correct.

    I sent you a message in case you would like to have a phone conversation about how the for 

    forclosure/ short sale process works.

    0Reply
  • Helga Klein
    Member since 2019 · 1 post · 0 votes
    7y

    I am working in a Short Sale transaction that has a HUD Partial Claim in the amount of $35,000. The sales price is $90,000 and the appraisal value is $85,000. The total costs are $8,000. The net proceeds is based in the 84% Do you see any possibility to close this deal considering the partial claim of $35,000?

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  • Minna Reid
    Real Estate Broker · Jacksonville FL & Middletown, CT · Member since 2008 · 1k+ posts · 632 votes
    7y

    @Helga Klein Yes - the partial claim will be paid off in full. You can include the partial claim after the 84%. This will not be a problem. 

    As long as the net is greater than the partial claim amount, you will be fine. I recall a situation once, in which after costs and the partial claim I had $15 left for the first. It was approved and closed.

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