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| Release of Mortgage vs Satisfaction of Mortgage |
When a homeowner and their lender(s) agree on a workout alternative to Foreclosure, it's important to understand the terms of the
deal. GPS always recommend you GET ALL TERMS IN WRITING. What a Loss Mitigation Negotiator or anyone else at the bank tells you
verbally is pretty meaningless if it's not backed up in writing. Could you imagine going to court later if a lender chooses to still try to
pursue you for a shortfall difference and you tell the judge "well Mr Jones at the Bank said that I wouldn't have to pay any shortfall."
Obviously if you don't have the Lender's Terms IN WRITING, you will be hard pressed to get the judge to believe you.
That said, let's discuss an important topic that relates (in most states) to situations in which a homeowner wants to GET
RID OF THEIR HOME (ie Deed In Lieu, Short Sale, etc)...
What is a "Release of Mortgage" vs a "Satisfaction of Mortgage"?
WHAT IS A “RELEASE”:
A Lender may offer to “release” its security interest against the property in exchange for an amount which is LESS than the total
amount of the promissory note. In most closings, the full obligations of the note would have to be paid off in order for the lender to
accept/allow the sale, however if they lender agrees to a "release" they are essentially saying that they will allow the property to be
sold without having to fully pay off the obligations of the note. Getting a release is a basic MINIMUM in order to proceed with a DIL,
short sale, or any other sale in which the amount of the (prospective) payoff is less than the amount owed to the lender(s).
So, what's the concern? Just this...the Promissory Note is NOT satisfied.
Advantages: A successful DIL or short sale WILL allow the property to be sold and thus the homeowner can avoid a foreclosure.
Disadvantages: The remaining debt on the property still exists. This creates a "DEFICIENCY BALANCE" which the you may still liable for.
In other words, because the note was NOT paid in full, you may still owe the remaining balance.
Point to Ponder: Not every state will allow the lender to seek a deficiency, and some loans are more "deficiency-proof" than others. In
addition, unless you have other significant assets, the lender may not choose to go through the time and expense of legally pursuing
you to try to collect that shortfall balance - after all, you can't squeeze water out of a rock, right? (Although God DID in the Old
Testament!).
What's the BOTTOM LINE: a Release is required in order to complete a DIL or short sale. With a Release alone, the lender MAY still
retain the right to pursue you for a deficiency balance. If the lender will grant you a Release but not a Full Satisfaction (see below),
then you have to decide if you want to complete the deal. Consider that if you choose to decline a DIL or Short Sale simply because
the lender won't grant a Satisfaction, you may be making a mistake because if you let the property simply go to Foreclosure, then you
will be facing the FULL deficiency AND have the negative "FC" on your credit as well. (In addition, the balance owed to the lender(s)
may actually be larger because of the additional attorney fees, holding costs, etc - all of which could create a higher Deficiency
Balance). Obviously the best solution of all is to get a Release AND a FULL Satisfaction. But if you can't get that, then you should try
to negotiate for one of the "Alternatives to Satisfaction" shown below.
WHAT IS A “SATISFACTION”:
A Lender may agree to accept less than it is owed as "complete and total satisfaction" of the note AND release its lien against the
property. This is the best case scenario!
Advantages: Your note and obligation to the Lender are satisfied for less than you owe. When the property is sold, the debt is paid
off completely. You walk away "free and clear!"
Disadvantages: You may have some tax consequences that you should discuss with your tax advisor due to the fact that the Lender is
making money you owe disappear, which could create 1099 Tax "income" for you. Again, consult your tax advisor for more details and
options.
Points to Ponder: This is a "home run" deal - it should be the goal in every transaction. Nonetheless, depending on the amount owed
on the property, the value of the house vs mortgage, how many lenders are involved, which lenders are involved, and many other
factors, it's a simple fact that not every deal will be a "home run." You need to be prepared to face the fact that your lender may not
grant you a FULL Satisfaction. This is especially true if you are asking the lender to accept a deal in which they stand to lose a LARGE
amount - for example, it's pretty easy to get a lender on a typical mortgage to accept a shortfall of $50k or less, but once you get
over that, it becomes more difficult. And if you are asking a lender to accept a $100k shortfall on a low value house (worth say $200k),
then it's not likely the lender will allow a FULL satisfaction.
Alternatives if you can't get a FULL Satisfaction:
1) Perhaps the lender will allow you to make a small payment to buy out the note. For many 2nd mortgages, you may be able to buy
out the mortgage for 10% on the dollar. Thus, a $40k mortgage, might be satisfied for $4k
2) Perhaps the lender will allow you to take a smaller personal (unsecured) side note for a reduced amount. Maybe, as a condition of
granting a release and satisfaction, they will require you to sign a new note for say $100/mo for five or ten years, in the hopes that
they can collect something more towards their large loss. (TIP: be sure to ask/demand a ZERO INTEREST note so that ALL of your
payment goes to principal). Keep in mind that this note is UNSECURED by property, so that essentially it may be considered like credit
card debt - pretty low on the debt totem pole and likely subject to elimination if you become insolvent (obviously you need to consult
a tax advisor and/or BK attorney for more info on this). Furthermore, down the road, the investor who holds this note might be open
to allowing you to buy out the note for a further reduced amount if you offer to pay in a lump sum - the KEY is to first get the bank
to agree to Satisfy your House Note so you can get rid of the non-performing asset you don't want!
3) Perhaps they want a combination of #1 and #2 (ie a small upfront payment + a personal note).
4) Something else?
What's the BOTTOM LINE: if your goal is to avoid FC and the lender won't allow for a FULL Satisfaction despite all your negotiation
efforts, then you need to consider any options which WILL help you get a deal completed. As noted in the "Release" topic above,
there is clearly a benefit to avoiding the FC and there is no guarantee that the lender will come after you for a Deficiency balance. That
said, most people want to minimize their future (unknown) risk by negotiating a deal which will allow them to KNOW FOR SURE what
they are facing - this is where the "Alternatives to Satisfaction" come into play. Only you can decide what is best for you, but the point
is to UNDERSTAND that OPTIONS DO EXIST.
HOW CAN GPS HELP?
You should be aware that GPS always attempts to secure a RELEASE AND A FULL SATISFACTION on all of our deals and we are
successful in accomplishing this greater than 50% of the time. When the lender won't allow a full satisfaction, as Negotiation Experts,
we are familiar with the options which lenders allow and thus have still been able to help homeowners and their lenders come to a
mutual agreement on deals that will allow an alternative to FC, thus avoiding FC!
Therefore, if your goal is truly to avoid FC and you are open to alternatives in the event that your lender won't allow a complete
satisfaction, AND you desire GPS services, then please, APPLY NOW! so we can review your case.
deal. GPS always recommend you GET ALL TERMS IN WRITING. What a Loss Mitigation Negotiator or anyone else at the bank tells you
verbally is pretty meaningless if it's not backed up in writing. Could you imagine going to court later if a lender chooses to still try to
pursue you for a shortfall difference and you tell the judge "well Mr Jones at the Bank said that I wouldn't have to pay any shortfall."
Obviously if you don't have the Lender's Terms IN WRITING, you will be hard pressed to get the judge to believe you.
That said, let's discuss an important topic that relates (in most states) to situations in which a homeowner wants to GET
RID OF THEIR HOME (ie Deed In Lieu, Short Sale, etc)...
What is a "Release of Mortgage" vs a "Satisfaction of Mortgage"?
WHAT IS A “RELEASE”:
A Lender may offer to “release” its security interest against the property in exchange for an amount which is LESS than the total
amount of the promissory note. In most closings, the full obligations of the note would have to be paid off in order for the lender to
accept/allow the sale, however if they lender agrees to a "release" they are essentially saying that they will allow the property to be
sold without having to fully pay off the obligations of the note. Getting a release is a basic MINIMUM in order to proceed with a DIL,
short sale, or any other sale in which the amount of the (prospective) payoff is less than the amount owed to the lender(s).
So, what's the concern? Just this...the Promissory Note is NOT satisfied.
Advantages: A successful DIL or short sale WILL allow the property to be sold and thus the homeowner can avoid a foreclosure.
Disadvantages: The remaining debt on the property still exists. This creates a "DEFICIENCY BALANCE" which the you may still liable for.
In other words, because the note was NOT paid in full, you may still owe the remaining balance.
Point to Ponder: Not every state will allow the lender to seek a deficiency, and some loans are more "deficiency-proof" than others. In
addition, unless you have other significant assets, the lender may not choose to go through the time and expense of legally pursuing
you to try to collect that shortfall balance - after all, you can't squeeze water out of a rock, right? (Although God DID in the Old
Testament!).
What's the BOTTOM LINE: a Release is required in order to complete a DIL or short sale. With a Release alone, the lender MAY still
retain the right to pursue you for a deficiency balance. If the lender will grant you a Release but not a Full Satisfaction (see below),
then you have to decide if you want to complete the deal. Consider that if you choose to decline a DIL or Short Sale simply because
the lender won't grant a Satisfaction, you may be making a mistake because if you let the property simply go to Foreclosure, then you
will be facing the FULL deficiency AND have the negative "FC" on your credit as well. (In addition, the balance owed to the lender(s)
may actually be larger because of the additional attorney fees, holding costs, etc - all of which could create a higher Deficiency
Balance). Obviously the best solution of all is to get a Release AND a FULL Satisfaction. But if you can't get that, then you should try
to negotiate for one of the "Alternatives to Satisfaction" shown below.
WHAT IS A “SATISFACTION”:
A Lender may agree to accept less than it is owed as "complete and total satisfaction" of the note AND release its lien against the
property. This is the best case scenario!
Advantages: Your note and obligation to the Lender are satisfied for less than you owe. When the property is sold, the debt is paid
off completely. You walk away "free and clear!"
Disadvantages: You may have some tax consequences that you should discuss with your tax advisor due to the fact that the Lender is
making money you owe disappear, which could create 1099 Tax "income" for you. Again, consult your tax advisor for more details and
options.
Points to Ponder: This is a "home run" deal - it should be the goal in every transaction. Nonetheless, depending on the amount owed
on the property, the value of the house vs mortgage, how many lenders are involved, which lenders are involved, and many other
factors, it's a simple fact that not every deal will be a "home run." You need to be prepared to face the fact that your lender may not
grant you a FULL Satisfaction. This is especially true if you are asking the lender to accept a deal in which they stand to lose a LARGE
amount - for example, it's pretty easy to get a lender on a typical mortgage to accept a shortfall of $50k or less, but once you get
over that, it becomes more difficult. And if you are asking a lender to accept a $100k shortfall on a low value house (worth say $200k),
then it's not likely the lender will allow a FULL satisfaction.
Alternatives if you can't get a FULL Satisfaction:
1) Perhaps the lender will allow you to make a small payment to buy out the note. For many 2nd mortgages, you may be able to buy
out the mortgage for 10% on the dollar. Thus, a $40k mortgage, might be satisfied for $4k
2) Perhaps the lender will allow you to take a smaller personal (unsecured) side note for a reduced amount. Maybe, as a condition of
granting a release and satisfaction, they will require you to sign a new note for say $100/mo for five or ten years, in the hopes that
they can collect something more towards their large loss. (TIP: be sure to ask/demand a ZERO INTEREST note so that ALL of your
payment goes to principal). Keep in mind that this note is UNSECURED by property, so that essentially it may be considered like credit
card debt - pretty low on the debt totem pole and likely subject to elimination if you become insolvent (obviously you need to consult
a tax advisor and/or BK attorney for more info on this). Furthermore, down the road, the investor who holds this note might be open
to allowing you to buy out the note for a further reduced amount if you offer to pay in a lump sum - the KEY is to first get the bank
to agree to Satisfy your House Note so you can get rid of the non-performing asset you don't want!
3) Perhaps they want a combination of #1 and #2 (ie a small upfront payment + a personal note).
4) Something else?
What's the BOTTOM LINE: if your goal is to avoid FC and the lender won't allow for a FULL Satisfaction despite all your negotiation
efforts, then you need to consider any options which WILL help you get a deal completed. As noted in the "Release" topic above,
there is clearly a benefit to avoiding the FC and there is no guarantee that the lender will come after you for a Deficiency balance. That
said, most people want to minimize their future (unknown) risk by negotiating a deal which will allow them to KNOW FOR SURE what
they are facing - this is where the "Alternatives to Satisfaction" come into play. Only you can decide what is best for you, but the point
is to UNDERSTAND that OPTIONS DO EXIST.
HOW CAN GPS HELP?
You should be aware that GPS always attempts to secure a RELEASE AND A FULL SATISFACTION on all of our deals and we are
successful in accomplishing this greater than 50% of the time. When the lender won't allow a full satisfaction, as Negotiation Experts,
we are familiar with the options which lenders allow and thus have still been able to help homeowners and their lenders come to a
mutual agreement on deals that will allow an alternative to FC, thus avoiding FC!
Therefore, if your goal is truly to avoid FC and you are open to alternatives in the event that your lender won't allow a complete
satisfaction, AND you desire GPS services, then please, APPLY NOW! so we can review your case.