Has anyone run across a situation like this? Two families (wives are sisters) purchased a property. Purchased in Couple 1's name with a first and a HELOC. Then they had a lawyer document a wrap-around mortgage and deeded to Couple 2, who have been living in the home for 4 years.
With a combination of diagnoses of serious illnesses and loss of income, they need to sell. Meeting with lawyer and accountant this week. Has anyone tried to do a short sale where the underlying loan is in one name and the deed in another? All I can think to do is unwind the arrangement and get title back into Couple 1's name...although for them it is then an investment property.
Mahalo (thanks) in advance for any guidance.
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Hi Maria and Donna
Thanks for your comments.
Maria--the point Donna brings up is actually the issue. There were due on sale clauses in both 1st and HELOC, plus a 12 month occupancy requirement, so I did not want to expose my Sellers to any difficulties from their lender on ss approval due to them having violated provisions of their mortgage.
Donna--just got the paperwork from the lawyer this weekend for both couples to sign, release of mortgage and deed back into Couple 1's name. It turns out the accountant has been treating it as an investment property already. And most of my short sales here are for 2nd home/investment properties rather than primary residences.
From here on out this will be straightforward...or at least as straightforward as any short sale LOL
It's funny you ask this, because I was just looking into how to do a wraparound mortgage for some people who want to buy one of my properties but can't get bank financing because they just went through a short sale. A wraparound is usually done on an assumable loan (even though the buyers don't necessarily assume the loan). Usually the only loans that qualify these days are really old loans from the old days when they were all assumable and didn't have acceleration (due on sale) clauses. Now, only VA and FHA loans offer this option.
If this is truly a wraparound mortgage and the second couple didn't just assume the first couple's payments, couple one can foreclose on couple two. That's one way to get it back into the first couple's name where the note and the deed are in the same name and then short sell it. In a normal situation, a foreclosure would be bad for couple two's credit, but in this case, it won't damage couple two's credit unless couple one reports it to the credit bureaus. Of course, that means it is now an investment property for couple one, but that does not necessarily mean they can't short sell it.
That's my best guess. I'm not a lawyer, and I would love to hear what the lawyer tells you in your meeting. Please be sure to report back to us!
I worked on a deal like this for one year, got an approval but never closed although the buyer wanted to do so. Make sure everybody signs an Agreement with you, make disclosure of the problem to a possible buyer. If all these people are not committed I would forget about. Good luck!
Thanks, all. I went with them to meet with attorney, after ordering a rush title report and printing all the relevant docs. As Bryant said, there were due on sale clauses (along with other provisions that were "YIKES") in the underlying docs. Bottom line in case anyone else runs across this, is that the lawyer is drawing up docs for a Deed in Lieu to unwind the sale/wraparound prior to our listing the property. Hardship case of course to be based on situation of Couple 1 only with no mention of the existence of Couple 2. It was great to have the attorney give them the advice and keep me clear of "practicing without a license" or any implication that I had conspired in mortgage fraud!
It seems there is always something new to learn in the short sale world.
Thanks, guys, they are meeting on Wed with the attorney who drafted the wrap around mortgage and deed. I was surprised too as these were common here in the 80s but not since due on sale clauses became the norm.
The question on the HUD has already been answered by my escrow officer, it wasn't about how to handle the two Chase mortgages as we do that all the time, it was whether we needed to show and/or allocate for the wrap. We recently had another file with 4 partners where the fourth came in on a PMM from one of the other three and they had to put it on the HUD first submitted. Subsequently both of them agreed to cancel the mortgage and get the 4th off title...but by then they already appeared on listing agreement and purchase contract and it is complicating things as we move forward in the ss process.
That's why I don't want to move too quickly on this one, as the listing agreement and any contract would have to be in the name of Couple 2, and I worry it would complicate ability of some low level processor at Chase to understand what that had to do with loan in name of Couple 1.
I agree with Bryant, they need to seek legal council ASAP. Couple #1 is who is going to need the short sale in the end with Chase/Wamu. Going back to your HUD question, I would give the first all but $10,900 that would go to the second to get them 10%. The mortgage with Couple #2 is irrelevant in this situation and the short sale can proceed providing couple #2 agree to sign the deed back to couple #1.
Beth. The issue I see is that both mortgages probably have a due on sale clause that would have prohibited the wrap around to begin with. If this is the case, and I'm not an attorney, I would think the safest way is to deed the property back into the name of couple of # 1 before any of this takes place.
Basically what you have have outlined is that couple #1 purchased this property as a primary (for loan purposes) and then did the wrap around and the deed right after they purchased. And now couple #2 can't make the payments. Well according to the lender they should have never been responsible for the payments to begin with. How would you look at this if you were the lender?
These folks need an attorney.
Both couples are wanting to sell the house, which means doing a short sale with Chase/Wamu. They will do whatever they need to between them to make that work best.
But part of the hardship case is that the couple owning/living in the house can't make the payments to Couple 1 and have exhausted their entire savings. End of the line. That means couple 2 is suddenly headed for a "train wreck" asthey describe it, right when one of them just got a serious diagnosis that might mean liver transplant!
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