JPMorgan Chase is taking a hard line with some borrowers who want to sell their homes for less than they owe on the mortgage and avoid foreclosure.
Last month the third-largest mortgage servicer began notifying certain borrowers in preapproval letters for the so-called short sales that they will remain on the hook for the amount of debt not covered by the proceeds.
The lender's tough new stance is a sign that even as they work with troubled borrowers, lenders are trying to recoup as much as possible.
"If they think there's a chance of recovery, they will pursue it," said Sam Ehlers, a managing attorney at Cooper Castle Law Firm in Murray, Utah, who represents banks (but not Chase).
JPMorgan Chase's new policy also illustrates the obstacles to short sales, which the mortgage industry and the government have been pushing as a less-expensive alternative to foreclosure.
The preapproval letter says the proceeds from a short sale will pay for "the release of Chase's security interests only, and the borrower is still responsible for all deficiency balances remaining on the loan, per the terms of the original loan documents."
JPMorgan Chase did not respond to questions about its new short-sale policy.
Raffi Tal, the chief operating officer at IShortSale, a Woodland Hills, Calif., firm that advises distressed borrowers, said that three of his clients — one in Arizona, two in California — received the letter. "When Chase does it, I'm afraid if they succeed, the others will follow," he said. "We are seeing more and more banks going after borrowers, which in many cases forces the borrower to file bankruptcy. Who can write a check for $250,000?"
It's unclear how widely JPMorgan Chase is applying the policy — or how much success it would have collecting the leftover debt in those two states.
Arizona and California are among the 20 or so states that do not let lenders seek deficiency judgments when the money raised by selling the collateral is insufficient to repay the mortgage. Lawyers said the letter likely would not supersede the law in such states, and could be a form letter that is being widely distributed. "They've probably been directed to put this language in all states even those that have antideficiency statutes," Ehlers said.
Simply sending the letter would not be illegal in states that do not allow deficiency judgments, he and another lawyer said.
Many borrowers mistakenly assume that when a lien is released, their mortgage debt has been settled in full. JPMorgan Chase is "just being clear because of lawsuits where borrowers thought it had been waived," Ehlers said.
In a short sale, the home is sold for less than the amount owed on the mortgage and the lender accepts a discounted payoff.
Until the current crisis, banks typically waived their right to collect the deficiency amount in a short sale, experts said.
"It was always pretty explicit that for the short sale to close they were waiving the debt," said Jim Satterwhite, executive vice president and chief operating officer at Infusion Technologies, a Jacksonville, Fla., provider of short-sale services, and a former JPMorgan Chase executive.
Observers said some banks require borrowers to sign "lien release" documents that are vague about the borrower's obligations after a short sale but leave room for the lender to seek repayment of the remaining debt. JPMorgan Chase is going a step further by spelling out early in the process that it reserves the right.
"If you're not explicit, you run the risk that the borrower could challenge it and they assumed they were released from any liability," said Steven Horne, the president of Wingspan Portfolio Advisors, a specialty servicer in Carrollton, Texas.
The government's Home Affordable Foreclosure Alternatives program, which provides incentive payments for lenders to allow short sales, does not allow lenders to pursue a deficiency judgment. However, some mortgage insurance companies require that the borrower sign a promissory note, which has become a roadblock for the HAFA program.
The government also is concerned that borrowers with ample resources will strategically default — that is, try to walk away from their obligations even if they have the ability to pay. In June, Fannie Mae issued guidelines prohibiting borrowers with "substantial unencumbered assets or significant cash reserves equal to or exceeding three times the borrower's total monthly mortgage payment, or $5,000, whichever is greater," from its short-sale program.