Unreleased Mortgages - The Hidden Nemesis

I recently ran into a very surprising situation involving a real estate transaction that should have been simple.  The client was selling a residential property.  It was a single family home with a simple single mortgage.  Ordinarily, you can pull a title search, prepare the commitment and close within two weeks of opening the file.  However, this title search revealed an unreleased mortgage from 20 years prior to the search. 

The issue is that normally none of the succeeding transactions would ever occur without the mortgage being released, but sometimes, mortgage companies would not record the release because they would send it to a customer and make them record it which the customer oftentimes would not do because the sale had already occurred with proof of payment being in the HUD-1 at closing.

The result.  A perfect closing with perfect title, except it isn't on public record.  Only with the title commitment can you fully know that the mortgage has actually been paid off, released, but the release hasn't been recorded.


The solution:  Get a copy of a prior title policy showing the mortgage as cleared.  So what do you do if the title policy is not accessible.  Bottom line - forensic title work.  Usually you are looking for any indications of a title company or title insurer on successive mortgages that come later in time.  Then you call them, ask for a copy of title and work backwards.

The morale of the story.  Even if everything should  be on public record. You should:

Keep a copy of your HUD-1
Keep a copy of your title policy
Keep a copy of your recorded deed
Store them in your safety deposit box

TODAY the story is different.  When you close today, the title company collects $48 for each mortgage so that the release is guaranteed to be recorded.  This law was enacted in the later days of the housing boom as unrecorded mortgage releases became rampant.

Bottom line - be prepared, when you sell your house, you may have an unrecorded release of mortgage to deal with.  Good luck and Clear titles to you.

Short Sale Tips and Strategies

Since the decline in real estates price began in approximately 2008, more and more people have been seeking to do short sales.  So what are they?

A Short Sale is simply a sale of real estate where the purchase price is too low to fully pay off the lender.  Therefore the lender is "shorted".  When you sell real estate, you have to provide clear title to the buyer.  To do this all of your mortgages (lenders) have to be paid off along with taxes and any other encumbrance on title.

A typical example of a short sale with one lender.

Sale price of home:  $150,000
Mortgage Payoff:     $150,000
Costs of Closing     $25,000
Deficiency:               $25,000

*In this case, the seller will request that the mortgage (lender) allow the seller to pay only $125,000 of the $150,000 owed to get a release of mortgage at closing.  The lender then chooses whether to collect the $25,000 deficiency or write it off.  Typically, the lender will write off the deficiency and sell it to a third party who will try to collect the deficiency by filing a lawsuit and obtaining a garnishment against the seller's wages.

Bottom line - in this case, the short sale got rid of the house but left the seller with a deficiency of $25,000 owed to the lender.  A great result if only getting rid of the house was the goal.  Typically this is people who are moving a long ways away and make enough money to pay off the deficiency.

A more typical example is:

Seller has lost his job.  Seller is in foreclosure.  Seller wishes to sell his house before the house if taken at a foreclosure sale.  Pre-2008; oftentimes the house would be sold for enough money to satisfy all of the lenders foreclosure costs and balance owed.  Post 2008 this is not the case.  Today, a seller will often take a 40% loss against the value of their home in 2006.  This means that the following example happens often:

Sale Price:               $200,000
First Mortgage         $210,000
Second Mortgage     $80,000
Closing Costs:          $25,000

In this case, the seller sold the house.  The first mortgage lender agreed to allow the second mortgage to be paid $2500 and the first mortgage lender received $172,500 ($200,000 - $25,0000 - $2500).

Here is the effect to the seller:

1)  The foreclosure is dismissed with a satisfaction and no judgment on seller's record
2)  Second Mortgage Lender is still owed $77,500 which they can collect themselves or sell for collection
3)  The First Mortgage Lender is still owed $37,500 PLUS $25,000 in costs of foreclosure and arrearages.

What happens nexts:  Most often the seller is given a chance to pay off these deficiencies or is sued by the lenders for the deficiency.  The deficiency judgments are good for 25 years in Illinois with proper renewal.  Therefore, without bankruptcy or settlement, the deficiency is paid off at 100% plus 9% interest per year using the maximum garnishment which is 15% of the sellers gross income.

Bankruptcy is an imperfect solution, but is often used in a catrastrophe like the example above.  Assume that the seller makes $75,000 a year.  Has a family of four and credit card bills of $40,000.  Bottom line, the seller has over $125,000 in debt to pay off on a salary of $75,000.  You couldn't pay this off in 100 years.  It is in this situation where a bankruptcy discharge of the debt is helpful.  It is also helpful for retirement, because retirement savings are exempt in bankruptcy.  With your debt under control it is easy to start saving for retirement.

In conclusion - what is the niche for a short sale - it is great for someone who really needs to get rid of a property and is not necessarily concerned about a deficiency judgment.

Can I get a waiver of a deficiency judgment - you can if your attorney remembers to ask for this and is successful in these negotiations. 

Why on earth would a lender waive a deficiency?  The best answer is - if they know that the seller is insolvent and doesn't have assets and/or income to pay they will usually waive the deficiency if the lender is receiving more money than if they were in a foreclosure sheriff's sale.

10 Steps to Purchasing Your First Home

1.  Call the IRS by calling 800-829-1040 and request free tax transcripts for the last four years
2.  Call your HR department at work and request a payroll report for the last six months
3.  Visit a reputable lender such as a bank or mortgage broker
4.  Get Pre-Qualified for a loan to learn how large of loan you qualify for.
5.  Interview 3 skilled realtors who work in the area you want to find a home in
6.  Meet with a housing counselor to learn about grants and first time homebuyer incentives
7.  Search for homes in only the neighborhoods you like and have reasonable commute times
8.  Limit your search to homes that are 20% less in cost than what you re pre-approved for
9.  Interview at least 2 homes inspectors use them whenever you make an offer.
10.  Hire good legal counsel that is experienced and focused on real estate.

Good Resources:

A.  Latin United Housing Association (www.lucha.org)
B.  www.irela.org
C.  NLO First Time Homebuyer Guide - request at info@nelsonlawoffice.com

First Time Homebuyer Seminar March 26th

I will presenting the Real Estate Law section of a First Homebuyer's Class Saturday, March 26, 2011.  The class is sponsored by NLO Nelson Law Office and Latin United Community Housing (lucha.org).  To reserve your space at this free class, please call our office at 877-GO-GO-NLO and call LUCHA at 773-276-5338.

Time:  10am to 2pm
Location:  1152 N Christiana; Chicago
Cost:  $0.00
Reservations:  Required

Topics Covered:  Lending, Legal, Home Inspection, Realtor, Insurance.

About the presenters:  For nearly 10 years

Daley Center Re-Fit

Anyone who goes to the Daley Center for a Court hearing knows that the Daley Center is getting a bit run-down.  In fact, it needs a re-organization and touch up work on its physical aspects.  I recommend that Mayor Emmanuel re-direct the City's carpenters for two months to do refinishing of all court/counsel tables and judge's benches.  The wood is of excellent quality and should be able to bear the refinishing.

I believe our court should adopt the Federal Court System rules of blind assignment of judges and should roll-out electronic filing to all matters.  I think Mayor Emmanuel and Toni Preckwinkle need to get together to see about borrowing the programming used for the Federal ECF system and implement it for Cook County.  Not just for cost savings, but also to improve the quality of our judiciary system.

Illinois has a very liberal foreclosure law sometimes taking 9 months or longer

Real Estate Law is State law, not federal law.  Therefore, every state has different foreclosure laws.  Here in Illinois, the land of Lincoln, we have one of the most liberal foreclosure laws in the country.  It takes at least 9 months to get an order of possession against a homeowner from the first missed home mortgage payments.  Oftentimes in practice, this time is 14 months or more.

Why is this - well there are title states and lien states.  In title states, the lender has title to property until the loan is paid off and the mortgage is released.  States like this are California and Florida where it takes about 3 months to throw you out of your home.  Here in in Illinois, the lender has a lien against the property and based upon our foreclosure law has to go through an extensive series of steps to foreclose.

Why do we have such a liberal foreclosure law?  Because we are a farm state!  Yes it's true, everybody thinks of Chicago and its big city glitz but the reality is that we are an agricultural powerhouse and our state does not like to see farmer's lose their farms.  But the real impetus for our law is the great depression when things were so bad that they gave a tax holiday for one year which is why we pay our taxes one year in arrears. 

So hears to Illinois - the state that is conservative in its politics and liberal in its homeowner rights.

The Bank Won't Foreclose and I am not paying my mortgage

Sometimes, lenders decide not to foreclose on homes that have delinquent home loan mortgages that are in default.  For example, Joe has a mortgage for $200,000 on his home.  His monthly payment is $1000.  $200 is escrowed each month for taxes and insurance.  Joe has not paid his mortgage payment for 6 months.  Joe is $7200 behind in his mortgage.  Ordinarily, the lender would being foreclosure proceedings beginning in the fourth month of non-payment.  Nine Months Later, the lender would have an order for possession and the foreclosure sheriff's sale of the home would be confirmed and complete.

However, sometimes, a lender doesn't want the property back.  The following are the most common reasons:
1)  The property will not be easily resold
2)  The property is occupied and is not being vandalised.
3)  The lender has documentation problems and needs to wait until they have been able to correct documentation problems.

Let's say that you simply want it "all over".  Then you have a problem.  Even though you are behind in the mortgage, you are still the owner and liable for any building code violations or other violations such as leaving a vacant building.  In most cases, you are best off living in the property until the lender asks you to leave.

The benefits of staying in your home:  1)  Time to save up funds to get a rental unit  2)  Time to save up funds to pay off any deficiency judgment or pay for a bankruptcy  3)  Ability to allow your family to remain in the home longer to allow children to finish High School or simply enjoy their home, family and neighbors.

Why do people hate staying in their homes?  They are anxious about the foreclosure knowing that inevitably they will be thrown out of their home.  Another reason - they just want to get away from the bad experience of owning the home and losing it due to default.  Here's the problem - the painful staying in the home is often best financially.  Although avoiding a bankruptcy may not be possible, avoiding the financial destruction of your family is by maximizing the amount of benefit you can get from staying in the home.