Shortfall Liability in a Short Sale Must Be Forgiven by the Banks

After 18 long months of negotiating a short sale for a client, and after three blown attempts purely because the bank could simply not act, was paralyzed by its own inefficiencies, that bank being WaMu... we finally entered into an accepted short sale, however, the acceptance letter said shortfall liability "may" be waived.

This is a huge issue as the shortfall was not insignificant. In fact if the shortfall was not forgiven, then the defaulting borrower, our client, would be better advised to consider holding out for a higher sale to reduce the shortfall liability or allow the house to go to auction as shortfall liability will be expunged with that event.

So here is the point, if the bank is willing to accept the short sale, and allow the closing, why should the borrower be the only one picking up the tab for the short fall liability? Shouldn't the bank be willing to forgive the shortfall in consideration of the borrower being willing to sell his home for the benefit of the bank?

I think yes. That's fair.

When confronting the banks negotiator with this issue, we were told, "well that's just boiler plate, and we do not usually chase short fall liability". Good, then why hold onto this opportunity? Why not release the borrower completely and forgive the shortfall from the short sale? Shouldn't that be a reasonable part of the bargain? The banks legal department said "NO".

Our move is to inform the bank we will not be closing unless the borrower is released from shortfall liability. If that means the bank will not cooperate then we will go to foreclosure, might as well. This will result in a much larger loss to the bank, but at least the borrower will be released from shortfall liability. It is as if the bank is willing to take less and spend more all because they cannot understand the concept of fair dealing.

The negotiator agreed and sent it over to legal department, who is in their one sided, all-for-us attitude, rejected the request saying "we prefer to leave it as is, just in case we may want to someday reconsider and hold the borrower, liable."

Enough! I say enough, how can the resolution be all for the bank and nothing for the borrower? Even though they continue to admit they do not chase short fall liability, they are unwilling to release the borrower unequivocally. Why? Because they maintain the same attitude they have throughout this entire matter, all for us nothing for you. Make us whole, you defaulted, they say.

Even though it is clearly unlikely that the bank will ever pursue this recovery from the borrower, they want to hold that card just in case. So why should the borrower engage in a short sale? It would be more beneficial for the borrower to allow foreclosure where at least at the end there is no further debt due.

Silly bank and sillier bank attorney, yes, unfair play. It will eventually come back to haunt them... wait and see. Perhaps it already has, as WaMu is no longer, it failed. No surprise, yet the failing attitude prevails.

When will they learn?