How Does a Bank Define A Short Sale?

A Short Sale From The Loss Mitigators and Banks Perspective

In this series we will focus on the short sale, but more from the banks and loss mitigators perspective. Many of the insights and perspectives are from a former loss mitigator.

A short sale is when a property owner is selling a property and has debt of more then the property is worth and the owner is unable to sell the property for at least the amount to satisfy the debt.

The bank, or mortgagor in cooperation with the note holder may allow the owner of the property to sell the home for less then the outstanding obligation, but the obligation may or may not be forgiven.

The intent of the bank is to recoup as much of the money as possible and that may include a short sale or a foreclosure or they many ask the seller to sign a note to pay back the difference or part of the difference between the value of the note and the amount settled upon through the short sale.

You must realize that the bank has sold off the loan or originated it using other entities money and just as the home buyer has an obligation to pay back the debt, so does the bank to the investor.

As a home owner you don't see the entire loss because it is not your money, but the bank does realize the actual loss, unless there is insurance involved.

The gist of it is that you have an obligation to pay back the debt just as much as the bank has an obligation to pay back the debt to the investor. We get into some moral an ethical dilemmas here and I don't want to get into it in this post, but in Arizona borrowers, for the most part, have non-recourse loans and as borrowers we pay more for that privilege. What it basically means is that we pay a higher rate and often pay mortgage insurance because the banks only recourse is the property, that is unless you refinanced or got an equity line of credit.

Even if you don't pay the debt the bank is responsible for the debt to the investor so when the property owner defaults it puts the obligation upon the bank. So what happens when the homeowner defaults?

The bank cannot meet the obligation of the debt to the investor. The bank has a contractual obligation to the investor and will have to pay the debt from other funds or assets. The bank may elect to purchase default insurance on the loan, this is insurance on the back end which many of you don't know about, but it influenced the bank how they will take back the debt, via short sale or foreclosure.

The bank may also request that the borrower pay back the funds even after the sale though a separate note: and there are many instances where people agree to this.

Come back for further installments in the series. The next one is, 'How the homeowners is impacted upon default' followed by 'the role of loss mitigation' then other posts.