Q: First, let me say how much I enjoy your column every Saturday and thank you for publishing my question. My wife and I sold our house a few years ago through a short sale. We had two loans at the time. The first was with Bank of America and the second was with a local credit union. It took a while, but our tireless Realtor ultimately did a great job in pushing the sale through. Since then we’ve been able to rebuild our credit and have gotten pre-approved to get a new loan on a home. Or at least would have gotten pre approved except for one continuing “ding” on our credit report. It seems that the credit union in question has continued, month after month, to report missed payments on our second mortgage despite the short sale. Everything else on our report looks great except that. Frankly, we were really surprised to see it when our loan broker pulled up the report. So our question regards how we get the credit union to stop reporting us as being behind on our payments and how do we get them to remove all the bad credit reports they’ve made between the short sale and now?
A: It would have been very helpful to know exactly when your short sale occurred, whether the credit union loan was an original loan, or purchase money loan for regular readers, and exactly what your short sale approval letter from the credit union said.
Despite the fact that short sales have been going on for over five years now, there remains a lot of confusion about them. On its face, a short sale is nothing more than the sale of a piece of property without having to pay off all of the liens, such as when the owner owes more on the loans than the house is worth.
Prior to 2011, all a short sale meant was that the banks had agreed to remove their liens in order to allow you to sell your home.
But other than the removal of the liens themselves, the loans still survived. It was then up to the homeowner to work something out with the banks. That led a lot of people to have to file for bankruptcy in order to get rid of the debts.
At the beginning of 2011 the law changed. Generally speaking, if the first mortgage permitted the short sale, the bank was then prevented by law from trying to get back any money they lost. Then, in the middle of the year, the law was expanded to cover every bank that had a lien.
In other words, whether or not the law determined that the balance of the loan was no longer due depends entirely upon when the sale occurred.
But even before the changes in the law, it wasn’t uncommon for lenders to demand a ransom in exchange for approving a short sale. Sometimes the offer was, “We will approve the short sale if you give us $5,000 in cash up front, although we will retain the right to sue you later.”
The alternative was a similar offer except that if you paid the money and the property closed escrow, the balance of the loan was specifically forgiven. So the language in your credit union’s short sale approval letter could be very important.
And finally, if the credit union loan was an original loan you used to purchase the property, in which you subsequently lived, the loan is called a “purchase money” loan.
In that case, you have no legal liability towards the bank regardless of when you sold your home or what the short sale letter said. But, strangely enough, that doesn’t necessarily mean they can’t report the missing payments.
Typically, a bank will make a final credit report entry such as, “Loan satisfied for less than owed” or something like that. Then the bank takes the loss and writes the loan off their books. But they don’t have to on a purchase money loan. The theory is that although the bank is forbidden from suing, it doesn’t legally follow that the contract to pay isn’t still in effect.
This is a gray area in the law. I know of no state appellate cases that have decided this question. So if your credit union loan was a purchase money loan, and you can’t get the credit union to stop reporting the missed payments, you might be the first one in the state to bring a lawsuit that gets the matter decided for you and everyone else.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like to have answered in this column you can contact him at SolanoScene@TJones-Law.com.