The short sale of 123 Elm Street finally closed on Friday. Everyone's patience and perseverance finally paid off. The transaction was in escrow for 18 months. The buyer secured a new renter and all was well in the world. That was on Friday.
Monday, the nightmare began. The escrow agent received notification that the short sale payoff wire was rejected. From the Escrow agent and title insurer’s perspective the successful closing of a short sale transaction is based on the short sale lender’s acceptance of the payoff funds and their subsequent reconveyance of the lien on the property.
As a real estate broker or escrow officer, you may have found yourself in this situation. What could possibly have gone wrong? The short sale lender received the minimum net proceeds, so what else do they want? Well, to everyone’s surprise, the minimum net proceeds was not the only thing that mattered to the short sale lender. Short sale lenders have multiple requirements and a number of factors can cause rejection of the payoff funds.
What can cause the rejection of payoff funds?
- Closing a short sale without final HUD approval is a common cause for rejection of payoff funds. Even if you are certain that all conditions have been met, final HUD approval is usually the last requirement prior to closing.
- If the short sale was approved under a specific buyer’s name, changing the name without approval may cause rejection of payoff funds.
- Many short sale lenders prohibit refunds to the seller or buyer. If the buyer deposits excess funds into escrow, the resulting refund may cause a rejection of payoff funds.
- If the short sale lender’s post closing audit reveals that private mortgage insurance approval was not obtained, a rejection may occur.
- If conflicts arise between the first and second lien holder’s requirements, a rejection of payoff funds is likely. Additional money deposited by the buyer, or other third parties, such as real estate brokers willing to contribute commission towards a resolution, will likely be considered an increase in the sales price. The first short sale lender may require all additional monies be paid to them.
- If the final HUD and other required documents are not uploaded by the real estate broker through the Equator system, the payoff funds will be rejected.
Risks beyond closing:
- If the short sale lender fails to cancel the pending foreclosure, the new owner will receive a notice of default. Sometimes the loss mitigation department does not coordinate with the foreclosure department.
- An immediate sale of the property by the new owner is often a violation of the short sale lender’s agreement.
- Since it is the escrow agent’s wire that has been rejected, it is incumbent upon the escrow agent to negotiate a resolution with the short sale lender.
- The rejection of funds may have resulted because the short sale lender did not receive the final required documents. The escrow agent must upload, email or fax the final documents and re-wire the funds.
- In the event one of the provisions of the short sale lender’s approval letter has not been met, the escrow agent must work with the lender to obtain a revised approval letter which fulfills the terms of the closing. This can require resubmitting documents and a re-approval process. Interfacing with management level personnel of the short sale lender is often required when re-approval is necessary.
- If a rejection is due to a refund to the buyer, the short sale lender may approve application of the excess funds to principal reduction on the buyer's new loan.
When all else fails:
When all attempts for remedial action fail, complete rejection of the short sale results in the complete failure of title for the buyer and the buyer's lender. In such an event, the buyer's ownership remains subject to the short sale lender's lien, which is superior to the buyer's ownership interest and the buyer's new loan. The escrow agreement with the buyer and seller typically provides for insuring title free and clear of the short sale lender's lien. If the short sale lender will not cooperate in finding another remedy, there are very limited options to make a buyer whole. The inability to resolve short sale deficiencies may result in an obligation of the title insurer or escrow agent to cover the monetary shortfalls. Generally speaking, closing short sales requires perfection, as the liability incurred when things go awry will be considerable. Real estate brokers may sometimes feel that their escrow officer is being a bit too picky when closing a short sale. However, when one considers the potential liability, precision seems appropriate.
The nightmare continued…
Although the nightmare on Elm Street manifested itself shortly after the closing, it all started with the sales agreement. The buyer had requested that the sales agreement be written in the name of Frederick Krueger, or designee. Krueger’s intention was to use money from his self-directed IRA. As the actual closing date approached and it was time to prepare final documents, the real estate broker provided escrow with an addendum assigning the buyer’s interest to Retirements 'R Us, Custodian FBO Fred Krueger IRA. Since the short sale lender had approved the sales agreement with the "or designee" language, everyone assumed this would not be a problem. After all, the buyer's individual name was still a part of the designee's name. The escrow officer, thinking that all conditions of the short sale approval had been met, made the fatal mistake of not obtaining final HUD approval. When the wire was sent and the final HUD was faxed to the short sale lender, the short sale lender disagreed. The short sale approval letter contained two provisions which clearly disallowed this substitution of the buyer's name:
- This approval is based on the purchase contract dated 10/31/09 between Frederick Krueger and Don and Marge Thompson.
- The purchase contract may not be assigned.
When the wire was rejected by the short sale lender the escrow officer realized that this was a critical situation. The escrow officer immediately contacted her supervisor for help, who escalated the matter to a supervisory level at the short sale lender. In the end, the short sale had to be re-submitted and re-approved in the name of the Krueger IRA. The short sale lender made no promises that the sale would be approved as re-submitted and could not say how long the process might take.
After a month of anxiety, word was finally received that the sale was approved in the Krueger IRA and the rejected wire could be re-sent. A catastrophe was averted and the nightmare faded with a new dawn.
George Slape, Oregon Real Estate Board Member
Editor's Note: "Board Blog" features the opinions of Real Estate Board members. The views expressed are not necessarily those of the Oregon Real Estate News-Journal, Oregon Real Estate Agency or Agency staff.