Closing and insuring short sale transactions (wherein the mortgagee accepts less than the full amount due under the mortgage and note) are unique and often challenging.
With the increased potential to encounter fraud, straw purchasers, and violations of creditor’s rights laws, short sales are considered high-risk transactions for the title industry. This is especially so in New York where the Home Equity Theft Prevention Act (HETPA) applies. HETPA seeks to protect “vulnerable homeowners” in default on their loan obligations or facing foreclosure from fraud, deception and unfair dealing. It requires, among other things, specific forms of notice (for foreclosure proceedings) and contractual terms and remedies (for non-court ordered sales), and can be found at NY Real Property Law § 265-a and Real Property Actions and Proceedings Law § 1303.
While some requirements may vary amongst title companies, what follows are generally applicable to insured short sale transactions.
The estoppel (or short sale) letter. The mortgagee’s approval of the short sale will be presented in a short sale letter, typically titled an estoppel letter. In addition to providing the mortgagee’s approval, it will contain the closing conditions and requirements, all of which must be complied with. Further in this regard:
- The mortgagee’s approval of the short sale cannot be conditional or revocable. Title companies will require documentation to evidence the mortgagee’s final consent and approval.
- If the mortgage is not in foreclosure, the estoppel letter (or a separate writing) must state that, upon receipt of the loan payoff funds, the lender will release its lien(s) (mortgages, UCCs, etc.) from the property.
- If the mortgage is in foreclosure, the foreclosing attorney (not the short sale lender) must provide a letter stating that, upon receipt of the payoff funds, including all expenses, charges and legal fees (the total of which must be provided), the attorney will discontinue the action, cancel the lis pendens, and discharge the referee if one was appointed.
- If the estoppel letter is issued by an entity or individual other than the mortgagee of record, proof that the entity or individual issuing the short letter has authority to act for the mortgagee of record will be required.
- If an estoppel letter restricts the resale of a property for a period of time following the purchaser’s acquisition, the title company will likely except coverage in the owner’s policy for (i) resales of the property, and/or (ii) violations of the terms and conditions of the estoppel letter (this is the arena where creditor’s rights laws can be violated).
Charges and expenses. The closing invoice and/or settlement statement must contain all charges and payments (i) detailed in the estoppel letter (e.g., mortgage and other lien payoffs, broker fees, etc.) and (ii) to be made by and on behalf of the buyer and seller. Both the mortgagee and title insurer must approve the invoice/settlement statement.
Satisfaction/release of liens. Unless the insureds are willing to accept policies with exceptions for liens of record, anything not being released as part of the short sale must be paid off.
Proceeds. Excluding the rare circumstance where the estoppel letter authorizes a seller to receive proceeds of a short sale, the invoice/settlement statement should not reflect that the seller is receiving proceeds. Note that some title companies will require an affidavit from the settlement agent and purchaser stating that the seller has not received any of the proceeds.
Powers of attorney. Title insurers are reluctant to accept powers of attorney because it should be apparent throughout the transaction that the short sale is being made with the full authority, knowledge, understanding and consent of the owner/mortgagor. The logical thought that the granting of a power of attorney specifically for the short sale conveyance is sufficient to express the authority and consent of the owner will not be persuasive and the owner/mortgagor should sign the deed and closing documents instead of granting a power of attorney.
Related parties. To ensure that the short sale is a legitimate arm’s-length transaction to a bona fide purchaser for value, the buyer and seller should not be related (and the parties will have to sign affidavits stating that they are not related). If there is a relationship, it must be disclosed to the mortgagee, and the title company will require a written acknowledgement that the mortgagee is aware of the disclosure.
As should be apparent from these requirements, short sales are not only nuanced, but are also quite onerous. Connecting with your title insurance professional early on is always advisable, but that communication is even more imperative when dealing with a short sale.
Jason C. Bergman is a vice president and underwriting counsel with Kensington Vanguard National Land Services in New York City, New York.