Bulletin: GA2008001

Date:
March 20, 2008
To:
All Georgia Issuing Offices
RE:
Short Sale Transactions

Dear Associates:

This memorandum addresses closing procedures when insuring short sale transactions. A "short sale" transaction occurs when the net proceeds realized from a sale are less than the cost of selling the property and the seller is unable to pay the difference at closing. In some cases, the lender will agree to accept less than the amount needed to fully satisfy the mortgage debt in order to avoid the costs involved in a foreclosure. In many instances, the sellers are either facing or already in foreclosure. Therefore, it is important to exercise caution when handling these transactions.

GUIDELINES FOR CLOSING A SHORT SALE TRANSACTION

1. Obtain a written estoppel/payoff letter from the discounting lender and explicitly follow the payoff instructions.

2. If foreclosure proceedings have been filed, obtain a written estoppel/payoff letter from the foreclosure attorney. It should confirm that upon tender of the amount stated in the payoff letter, the attorney will dismiss the foreclosure action and discharge the Lis Pendens with no additional fees or costs.

3. Prepare a preliminary HUD-1, with the most accurate and available figures and forward to lender. No unusual unrelated charges or credits will be permitted.

4. Many short sales are conditioned upon the seller receiving little or no proceeds. All disbursements must be disclosed on the HUD-1.

5. Seller should acknowledge the estoppel/payoff letter by signing it at closing. This will eliminate a possible claim in the event the letter indicates that the note will not be fully satisfied.

6. The short sale transaction should be an arms length transaction to a bonafide purchaser for value. In other words, unless fully disclosed and approved by the discounting lender, the purchaser should not be related to the seller.

7. Once the transaction is completed, follow up to be sure that the mortgage is satisfied or released of record. Note that it is possible for a lender to refuse to satisfy a mortgage if they were provided with false or misleading information to obtain the short sale approval. Therefore, it is imperative to retain the written estoppel in the closing file.

IF THE SHORT SALE TRANSACTION IS PART OF A "FLIP"

Disclosures become extremely important when a short sale transaction is also part of a flip transaction. Consequently, please proceed with caution.

1. The previous Stewart Bulletins containing guidelines for closing and insuring flip transactions are still in effect. For online viewing of Stewart's prior bulletins, log onto http://vuwriter.com for specific requirements.

2. In addition to the disclosures set forth in the previous bulletins, if the short sale transaction is also part of a flip, and the end buyer's lender is funding the first transaction, you must disclose the second sales transaction to the discounting lender. You must obtain written authorization from the Seller to inform the discounting lender of the second sales price. See Exhibit A attached to this bulletin.

3. Obtain a General Warranty Deed from the Seller to Buyer #1, and a General or a Special Warranty Deed from Buyer #1 to Buyer #2.

4. No Quit Claim Deeds as they are often used in suspect transactions.

SCENARIO: Investor approaches a desperate seller under the guise of assisting with the short sale. The owner executes a quit claim deed conveying his interest to the investor. The short sale fails and the investor disappears. The seller remains obligated on the note and mortgage and has clouded title to his property by recording the quit claim deed.

5. Powers of Attorney should be scrutinized and must not name a party associated with the investor or Buyer #1 as agent to execute the closing documents. Our preference is to have all parties present at closing to acknowledge all closing documents.

IF THE SHORT SALE TRANSACTION IS PART OF A BANKRUPTCY PROCEEDING

A lender's motion to lift the automatic stay to allow the lender to proceed with foreclosure is insufficient if the transaction is a short sale.  In order to proceed with a short sale transaction that is part of a bankruptcy proceeding, you will need another order that is specific to the short sale transaction or an order of dismissal or discharge of the bankruptcy proceeding in order to proceed with insuring the transaction.

Please contact a Stewart Georgia underwriter if you have any questions concerning this topic.


Exhibit A:
Authorization to Disclose to Discounting Lender (click here to view)

THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER  AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.

References

Bulletins Replaced:
None
Related Bulletins:
FL000068 Flip Transactions
 
FL000083 New Bulletin - Flip Transactions/Recent Transactions
 
FL000126 Cash Back to Buyer Transactions
Underwriting Manual:
None
Exceptions Manual:
None
Forms:
None