Short Sales and Bankruptcies from B of A

Short Sales and BankruptcyI could write a post about what happens when short sales and bankruptcy filings collide but, frankly, the folks at Bank of America already did so for me.

Quick disclaimer: all of this comes straight for Bank of America. Always, always, always check with a tax and/or bankruptcy advisor before going down either the short sale of the bankruptcy road (or both).

Bank of America can review a short sale offer while the loan is in an active bankruptcy. To complete a short sale and issue the approval letter, the bankruptcy documents must be filed and approved by the court. Any final agreement will require bankruptcy court approval.

Homeowner(s) should consult with their Bankruptcy Counsel about how these programs could affect their mortgage and their bankruptcy case.

When a loan is in bankruptcy, there is an Automatic Stay, also known as a “hold,” of any collection activity placed on any and/or all debts to which the debtor is a party. Before the short sale specialist can discuss the short sale, Bank of America must have written authorization from the Homeowner(s’) Bankruptcy attorney on the law firm’s letterhead to discuss loss mitigation options with the borrowerThis is in addition to the Bank of America Third-Party Authorization Form needed from the borrower to speak to the bankruptcy attorney and the listing agent.

If Homeowner(s) is/are currently in a bankruptcy proceeding, or have previously obtained a discharge of this debt under applicable bankruptcy law, all communication and notices are for information purposes only and is not an attempt to collect the debt, a demand for payment, or an attempt to impose personal liability for that debt. The Homeowner(s) is/are not obligated to discuss their home loan with Bank of America or enter into a short sale agreement or other loan-assistance program. Customers should consult with their bankruptcy attorney or other advisor about their legal rights and options.

For a short sale to be processed to completion for a loan in bankruptcy, Bank of America must receive one of the following releases issued by the bankruptcy court:

  • Granted Motion to Sell*
  • Granted Motion for  Relief from Automatic Stay with noted short sale negotiation*
  • Dismissal
  • Discharge with Abandonment, Closing Order, Final Decree, Trustee No Asset Review

*A granted Motion differs from a requested Motion.

  If Homeowner(s) receive(s) a discharge under a Chapter 7 a bankruptcy proceeding: discharge releases the Homeowner(s) from personal liability for certain specified types of debts. The Homeowner(s) is/are no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the Homeowner(s) from taking any form of collection action on discharged debts, including legal action and communications with the Homeowner(s), such as telephone calls, letters, and personal contacts.

Although a Homeowner is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.

Bankruptcy Frequently Asked Questions

1.   What additional documents will be needed to complete this short sale?

Bank of America must have written authorization from the Homeowner’s bankruptcy attorney (on the law firm’s letterhead) to discuss loss mitigation options with the Homeowner.  The customer and the attorney may determine that they do not want to give this authorization and the short sale can be negotiated through the attorney.  This attorney authorization permitting Bank of America to speak to the Homeowner(s) is in addition to the Bank of America Third-Party Authorization Form needed from the Homeowner(s) to speak to the bankruptcy attorney and agent. Communication cannot occur with the real estate agent/Homeowner(s) until the bankruptcy attorney’s written authorization on the firm’s letterhead and the Bank of America Third-Party Authorization form are received.

2.   When will I receive the approval letter?
An approval letter cannot be issued until the releases, identified above from the bankruptcy court has been received. Once the release is received, the file can be submitted for approval to the appropriate investor(s) and/or mortgage insurance company. The file will then follow the normal approval process to ensure it meets investor requirements.

3.   Why can’t you approve a short sale file while waiting for the bankruptcy to be released?
An approval must follow the direction provided in the release by the bankruptcy court. That is why a short sale will not be approved unless a court order permitting the sale is first received.

4.   What fees can be paid related to the bankruptcy proceeding?
Any fees that are directly associated with the bankruptcy would be subject to further review and approval. For example, if Bank of America incurs fees to file a pleading to approve the short sale in the bankruptcy court, Bank of America may seek permission from the bankruptcy court to allow such attorney and filing fees.

5.   Can a homeowner qualify for a Home Affordable Foreclosure Alternative (HAFA) incentive while in bankruptcy?
Yes. However, any funds going to the Homeowner(s) through state incentives or other incentive programs must be properly disclosed and handled in accordance with bankruptcy legislation and local rules.

6.   Are additional documents required for a short sale when the homeowner is in active bankruptcy?
Yes. Two additional documents are needed for a short sale that is in active bankruptcy:

  • An attorney authorization letter from the bankruptcy attorney providing permission to speak with the Homeowner(s) is required. This is separate and in addition to the required Bank of America Third-Party Authorization Form signed by the Homeowner(s) permitting Bank of America to speak with the bankruptcy attorney and the real estate agent.
  • Bank of America must receive a release issued by the bankruptcy court (listed above).


Schwab Bank Gives Bad News for Potential Short Sales

Heard from a rep at Quicken Loans, the loan servicer for Schwab Bank/PHH mortgage, that Schwab Bank Moretgage only will consider near-full payoffs on short sales of homes that it had financed. Which, naturally, entirely defeats the purpose of a short sale for 95 percent of the population who may be considering such a move here in the Phoenix area.

This is one of those areas where logic has taken a holiday. All statistics show lenders receive a better payoff on a short sale than on a foreclosure. And yet, Schwab Bank will not go that route, preferring instead to believe saying no will cause the homeowner to start paying their mortgage once again in spite of whatever hardship may have befallen them over time.

But at least Schwab still has the homeowner go through the considerable effort of requesting an Application for Success from Quicken, soliciting offers and submitting a full short sale package just to find out the answer’s been no all along.

Should this change, I’ll provide an update.

Preparing for a Quicken Loans Short Sale

So you’ve decided to short sell your home and you’ve got the basic paperwork in order:

  • Last 2 bank statements
  • Last 2 tax returns
  • Hardship letter
  • Form 4506-T
  • Uniform Borrower Financial Worksheet (aka Form 710)
  • MLS listing

In many cases, you’re good to go. But if your loan happens to be held by Quicken, or if you just had your loan purchased by Quicken Loans (as just happened to many Schwab Bank Mortgage loan holders), you’ve got an important extra step to take care of.

Before you do anything else, Quicken Loans requires you to call in to discuss your options. Once the rep on the phone is satisfied there’s a legitimate hardship, then Quicken Loans will send you their “Application for Success.” Yeah, I know. The name’s pretty goofy. But it is what it is. Send that form in and Quicken will see what home retention options you might qualify for and then, once all avenues are exhausted, Quicken will consider the short sale.

Still unknown is what Quicken might do should you have no interest in a loan modification or whatever other options happen to be “available.” As we’ve seen from Bank of America in the past, “available” and “useful” are two different things. (And, for that matter, available doesn’t really mean available much of the time there.)

Should you be considering a short sale, whether it’s on a Quicken Loans, Bank of America or another lender’s mortgage, call me at 602-502-9693 or e-mail me at info at and we can talk more about what might work for you.

Is My Mortgage Backed by Freddie Mac?

President Obama’s Home Affordable Foreclosure Alternatives initiative still is out there and continues to offer $3,000 to qualifying homeowners who short sell their homes – an exception to the general rule that sellers come away empty-handed on a short sale.

One of the requirements is the homeowners’ mortgage be “owned, guaranteed or securitized” by Freddie Mac … but how does a homeowner know if their mortgage is in that category?

Fortunately, Freddie Mac offers a website that tells owners whether Freddie has a hand in their mortgage. Simply enter your name, address and the last four digits of your social security number and you’ll find out if you’re eligible for the HAFA program.

Facing foreclosure is difficult. HAFA is one program to make it a little less painful.

Have specific questions? Call me today at 602-502-9693 and I’ll be happy to talk with you about your options.