Senate Bill No. 414 was introduced to address some of the consequences of the downturn in the current real estate market. Section 2 of the Bill was intended to prevent a bank from calling a commercial mortgage loan due if the borrower is not in default. That section was quickly eliminated by amendment from the final bill.
SB 414 mandates lenders respond to short sale requests within a reasonable period of time. A “reasonable period of time” is defined to mean a response within 90 days after receipt of the offer, unless the parties agree to a written extension of time.
Section 3 was the gravamen of SB 414. It prohibits a lender from unreasonably delaying a response to an offer for a residential short sale. It further prevents lenders from obtaining a deficiency judgment against a borrower in certain instances.
The Nevada Senate Committee on Commerce, Labor and Energy (the “Committee”) (where the bill originated) was concerned about lenders pursuing deficiency judgments against residential borrowers after they had completed a short sale. Senator Schneider, said the following:
“I was concerned about people who are upside down in the mortgages on their homes, cannot make payments anymore, for whatever reason, and they short sell their home. I do not want banks going after the seller for the difference between what the house sold for and the mortgage.”
The Committee sought to remedy this issue by prohibiting lenders from further pursuing the borrower after the short sale has been concluded, if all the parties agreed.
William Uffelman, President and CEO of the Nevada Bankers Association (the “NBA”), testifying on behalf of the lenders, sought to balance the lenders’ very real concern of potentially having to write down or write off loans to satisfy the FDIC, the Office of the Comptroller of the Currency, or U.S Department of the Treasury, with individuals being forced into bankruptcy or foreclosure while trying to protect their homes.
Typically, lenders that hold first deeds of trust are more willing to forego a deficiency, whereas second deeds of trust holders are less likely to do so. Short sales are often held up because second trust deed holders are more intransigent. Lenders also will seek to take a strategic advantage by delaying responding to the borrower’s overtures for a short sale. SB 414 addressed both issues.
The NBA’s Mr. Uffelman conceded that financial institutions could retain the right to a deficiency judgment right if they responded within a reasonable period of time, and they reserved the right to a deficiency judgment in the short sale agreement executed by all the parties. This allows a lender to pursue a borrower for a deficiency judgment when the borrower makes a “strategic default,” yet it gives most borrowers finality.
As Senator Schneider so eloquently stated, “the concept here is that for all our constituents who are doing short sales, we do not want to leave them hanging there and later have the big bank looking to squeeze more blood out of them.”
Historically, the forgiven or waived portion of a debt is subject to tax as income when all or a portion of a debt has been forgiven by a lender. However, Congress enacted a law in 2007, which does not subject debt forgiveness to tax when the forgiven debt is due to foreclosure. SB 414’s deficiency judgment waiver rules prohibit any debt forgiveness liability under any IRS tax rule changes that may take place after December 31, 2012.
The Committee believed it was not enough for the borrower to depend on a statement of the lenders’ intent to waive a deficiency judgment. The Committee wanted to have all parties state their intentions regarding a waiver of a deficiency judgment in clear and unambiguous language. Thus, SB 414 will require a written, conspicuous statement, acknowledged by the debtor or grantor which states that the lender has waived its right to recover a deficiency and the amount of recovery that is being waived.
SB 414 was approved by Governor Sandoval on June 13, 2011.
Underwater borrowers may have a new 
Nevada requires that a deed of trust be used to secure a real estate loan. Although commonly referred to as a mortgage, a deed of trust has significant differences from a mortgage. In addition, states using deeds of trust differ among themselves in their requirements.
When one hears the word “insurance,” you automatically think you are “covered” from any and all “qualified” loss that exists under the umbrella of that coverage. Unfortunately, that does not appear to be true as all types of insurance from medical to long term disability have been the subject of movies and articles slamming the insurer’s failure to pay when the insured comes to collect on a valid claim. The same also appears to be true in the mortgage industry. The private mortgage insurance company, Old Republic, was sued last week by Bank of America for failure to pay on purportedly valid claims totaling approximately $160 million dollars. Bank of America should not be alone in their frustration as borrowers, many of whom have paid monthly for private mortgage insurance, are now liable for a greater deficiency on their short sale as a result of the mortgage insurer refusing to cover any of the difference. For example, in the event that someone sells their home with a $200,000 mortgage for $100,000 there is a deficient amount of $100,000. If we assume that the mortgage insurance company covers approximately 30% of the original note, as most cover somewhere between 20%-50%, then the deficiency balance the lender may now pursue the borrower for is only $40,000. The borrower, once liable for $100,000 loss, is only paying the $40,000 due to the mortgage insurance covering $60,000.00. However, when the mortgage insurance company fails to pay on claims, the borrower may now be facing a $100,000 suit from their lender. Considering the aforementioned, it is not only Bank of America and other lenders that are suffering from coverage denial but the borrowers who, unlike Bank of America, don’t have in-house counsel.
Nearly 1.7 million homeowners received a foreclosure-related warning between January and June of this year. That translates to 1 in 78 U.S. homes. It is projected that more than 1 million homeowners are likely to lose their homes to foreclosure this year as lenders work through a huge backlog of borrowers who are delinquent on their mortgages. The number of households facing foreclosure in the first half of the year climbed 8 percent versus the same period last year.
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