Short Sale and Full Bids: As the landscape surrounding short sales and foreclosures continues to change, REALTORS® must understand how the law applies to these new circumstances. For example, it would appear that more and more lenders are conditioning short sale approval on the seller’s agreement to pay all or a portion of the shortfall. Further, it would appear that more lenders are now bidding less than the full amount owed at foreclosure sales. REALTORS® representing sellers in short sales occurring after a foreclosure sale must be aware of the “full bid credit rule.” This “full bid credit rule” has been discussed before in this column and in a number of white papers, and is fairly straightforward. The “full bid credit rule” is perhaps easiest to explain through an example. Assume that a seller owes $200,000 on his mortgage. A foreclosure sale is held and the seller’s lender bids $200,000. This is commonly referred to as the lender “bidding its debt.” At the foreclosure sale, the lender is not required to write a check for $200,000, as it would simply be writing a check to itself. In these situations, Michigan law is quite clear. When a lender bids its debt at a foreclosure sale, the seller no longer owes the lender any money. In our example, when the lender bid $200,000, i.e., the amount owed it; the seller was discharged from any further debt to the lender. The possible application of the “full bid credit rule” in a short sale occurring after a foreclosure sale becomes apparent as we expand upon our example. Assume that two months after the foreclosure sale at which the lender bid $200,000, the listing REALTOR® brings in an offer for $175,000, which the seller accepts subject to his lender’s approval and further subject to the seller’s approval of the lender’s conditions. The lender approves the short sale conditioned on the seller’s agreement to execute a promissory note at closing for $25,000, i.e., the difference between the original amount owed and the sale price. Is there any legal requirement or reason why the seller should execute a $25,000 promissory note to his lender? The answer is “no.” Because of the “full bid credit rule,” the seller has no legal obligation to pay his lender any additional money. Presumably, the seller will not want to incur any new indebtedness by agreeing to sign a promissory note at the closing on the short sale. As this example illustrates, it is extremely important that a seller understand his financial obligations to his lender when considering a short sale after a foreclosure sale. All the listing REALTOR® and seller need do is compare the amount stated in the sheriff’s deed with the amount owed as stated in the notice of foreclosure. If those amounts are the same, then the “full bid credit rule” will apply. In other words, in our example, if the sheriff’s deed shows an amount bid of $200,000 and the notice of foreclosure shows the amount claimed owed by the lender was $200,000, the “full bid credit rule” would apply. If the lender does not bid the entire debt amount, the amount of the deficiency is determined by comparing the amount set forth in the sheriff’s deed against the amount claimed owed by the lender in the notice of foreclosure. If, for example, the amount in the notice of foreclosure is $200,000 and the sheriff’s deed indicates that the lender bid $185,000 at the foreclosure sale, the potential deficiency the lender may seek against the seller is $15,000. The amount the lender subsequently sells the home for will not affect the deficiency amount. In other words, in our example, if a short sale did not occur during the redemption period, the lender took possession of the home at the end of the redemption period and thereafter sold it for $100,000; the deficiency owed by the seller would still be the same, i.e., $15,000. Again, it must be remembered that in Michigan, the amount bid by the lender is treated the same as if the lender had received a check for that amount from a third party at the time of the foreclosure sale.

If a short sale occurs prior to a foreclosure sale, then unless the lender agrees otherwise, the lender may pursue the seller for the shortfall. The only way for sellers to leave a closing from a short sale knowing that they will not be pursued by the lender for any shortfall is to have a written statement in their hand from the lender indicating that the sellers are released from any further liability or that the lender will cease all collection activities upon closing. If the lender will not provide a written release or an instruction letter indicating that collection activities will cease, sellers should assume that the lender or someone else will be knocking on their door in the future seeking to collect the difference between the amount the lender received at closing and the amount that was owed to the lender at the time of the closing. If the short sale is occurring after foreclosure sale and the lender has bid its debt, i.e., all of the amount owe it, completing the short sale will not revive any debt owed to the lender. In other words, in our example, if the lender bid $200,000 on $200,000 debt and the short sale occurred for $175,000, but the seller did not sign a new promissory note agreeing to pay $25,000, there would be no deficiency against the seller as the lender was paid in full at the foreclosure sale. If, for example, the debt owed was $200,000 and $185,000 was bid at the foreclosure sale, a subsequent short sale for $150,000 would NOT increase the potential deficiency owed to the lender. That is, unless the seller signed something to the contrary, the deficiency would be $15,000, not $50,000. Many out-of-state lenders and their lawyers do not understand the “full bid credit rule” in Michigan or the limitation on deficiencies to the amount actually bid by the lender at the foreclosure sale. REALTORS® should rest assured that there is a line of cases in Michigan which leave no doubt of any kind as to either the existence or the application of the “full bid credit rule” in Michigan. MAR

Gregory L. McClelland, Esq. Mar Legal Counsel.

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