Key Terminology
The following terms have been assembled as a quick reference guide to assist you as you learn more about the world of short sales and distressed real estate:
Attorney (Consumer): Many borrowers, who are experiencing difficulty with their lenders, contact attorneys to assist them in working through the lenders’ loss mitigation departments or to attempt to retaliate against the lenders’ actions to collect. Generally, the lender’s documents are sound, and the attorney works to negotiate the best deal for the client (the homeowner) in this bad situation.
Attorney (Lender): Most lenders retain an attorney to perform the actions related to foreclosure. These attorneys work to negotiate the best deal for their client (the lender/servicer).
Auction: An auction is simply the public sale of a mortgaged property, following or inclusive of the foreclosure of the loan. In today’s market, it’s typically the first lienholder who promulgates the typical auction and ends up with the property.
Bank: See Servicing Company. In this case, the servicer and the lienholder are the same company.
Bankruptcy – Chapter 7: This form of bankruptcy is often referred to as a straight bankruptcy. It involves the liquidation of all nonexempt assets by the bankruptcy trustee, who in turn distributes the proceeds to qualified creditors. All dischargeable debts are discharged and the person(s) filing receive a “fresh start.”
Bankruptcy – Chapter 13: This is considered to be a reorganization of debt. A Chapter 13 Bankruptcy is for those individuals who have nonexempt property; they use this means of bankruptcy in order to retain their property and have enough income to “reasonably pay” the reorganized debt after covering “reasonable” living expenses.
Beneficiary: The beneficiary in a foreclosure context is generally the mortgage lender.
Borrower: Generally a homeowner but could be someone with an investment property or second home who borrowed money to purchase or improve the home.
Bottom-up Short Sale: When a homeowner/borrower and/or his or her real estate agent or representative contacts the lender or neutral negotiator to negotiate allowing the borrower to sell the property for less money than what the lender is currently owed.
Broker Price Opinion (BPO): A document created by an authorized real estate agent that provides the lender with an opinion of the value of a particular home. Generally, a BPO contains properties currently for sale that are similar to the home in question; properties that have sold within the past six months similar to the home in question; and, based on that information, the agent’s opinion of the value of that home if it is to be sold within the next 90 days. Five Star Institute has a recognized BPO Certification program.
Counselor (Credit or Consumer): Individuals trained to assist homeowners who are having trouble making their payments. These individuals understand both the borrower’s challenges and the lender’s loss mitigation departments. The credit counselors attempt to assist borrowers in navigating through the various departments of the lenders to assist in loan modifications, bottom-up short sales, or other loss mitigation strategies.
Cure: An amount of money determined by the lender needed to pay all arrearages on the delinquent loan. Successful curing will result in a withdrawn Notice of Default (NOD) and a reinstated mortgage.
Data Collector: This is the level-one person at a servicing company (lender). After a short sale package and offer have been sent in, the data collector is responsible for ensuring that all of the short sale documents are appropriate and meet the bank’s criteria. Usually, he or she forwards the package to the assigned loss mitigator for evaluation and determination. Think of the data collector as the “gatekeeper” to the short sale/negotiation process.
Deed-in-lieu of Foreclosure: The voluntary surrender of property by an owner/borrower to a lienholder. By “handing over the keys,” it eliminates the need to continue foreclosure action by the lienholder. Keep in mind, however, that the lienholder can refuse to accept the deed-in-lieu and file a Notice of Non Acceptance with the county recorder.
Default: A loan is in default when any due payment is unpaid for more than 30 days, or another term or condition of the mortgage has been violated. Lenders normally employ collections departments to handle loans in various stages of (or reasons for) default.
Deficiency: When a lien is foreclosed (sold at public auction), if the amount of the sale at auction is insufficient to pay all amounts due on the loan, the lender can sue the borrower for the amount of the shortage. Although the lender has taken the property, it still has the right to sue the borrower in an attempt to recover the shortage.
Delinquency: The first day after a due payment goes unpaid the loan is considered delinquent. This predates default.
Distressed Property: This is a general term used for any property in poor repair, is currently or on the verge of default, is owned by someone who is currently experiencing financial difficulty, or is a property where the total dollar amount of liens owed against it exceeds its current market value.
Equity Deficient: When a property is equity deficient, the proceeds from selling the property do not fully cover paying off existing mortgage debt.
First (Senior) Lien: If there are multiple liens (debts owed) against a property, the first lien will get money “first” before any other liens are paid. In the event a first lien is foreclosed, all junior liens will be extinguished and the first lienholder will receive all monies up to the amount it was due. If there are still funds remaining, those funds will be distributed to junior lienholders in the order their liens were filed. If there are not sufficient funds, the junior lienholders do not receive any funds from the foreclosure.
Forbearance: Such is not usually favored by lenders as it is generally successful in situations where there was a resolved hardship, and the homeowner is now able to continue payments, plus an additional amount of time in order to pay off the balance of arrears. Forbearances are calculated by taking the total of the arrearages and dividing them, usually by as little as six to sometimes as many as 12 or 18 months. Because the homeowner has to be able to pay this amount monthly plus his or her regular mortgage payments, very few homeowners qualify for this option.
Forbearance Agreement: An agreement between a mortgage holder and a borrower that lays out a specific loan payment plan and puts a stop on the foreclosure action so long as the borrower meets the terms of the agreement. Usually, the payment plan includes provisions for repayment to the mortgage holder of all delinquent interest and fees and could include extending the life of the mortgage beyond its original term. A Forbearance Agreement is a tool that allows the borrower to keep the property.
Foreclosure: The legal process by which a lienholder repossesses a property.
Homeowner: Someone who purchased a home to live in (owner occupant). In this context, he or she borrowed some or all of the money to purchase or improve the home.
Investor: An investor can have two separate meanings: (1) someone who is buying a property; usually this is an individual seeking to make a profit by buying a property then renting or selling it (2) an entity that buys large blocks of loans and contracts a servicing company to collect payments on its behalf.
Judicial Foreclosure: A foreclosure action conducted through the courts instead of through a foreclosure trustee.
Junior Liens: This is the generic term for any lien that falls below the first lien position. A junior lien is subordinate to a first (senior) lien. Lien priority is generally established by the order they were recorded at the governing jurisdiction’s public records location.
Lender: See Servicing Company. In many cases, the servicer and the lienholder are the same company.
Liens: A valid debt owed against a property and duly recorded in the public records of the governing jurisdiction. See also: First Lien and Junior Liens.
Loan Modification: This is when a lender representative will take the total of the arrearages and add it to the principal (the lender can even alter interest rates) and “recast” the loan over a fixed period of time. There is a qualification process for this option. Lenders/servicers have the option, at their own discretion, to discount the interest rate and, sometimes, even the principal balance.
London Interbank Offered Rate (LIBOR): An index most commonly used for adjustable-rate mortgages (ARMs).
Loss Mitigation: This is the “workout” department of the lender where the lender attempts to limit losses on delinquent mortgages by working out solutions with borrowers through the loss mitigation representatives and loss mitigation strategies.
Loss Mitigation Strategies: A short list of strategies negotiated between borrowers in default and lenders to limit losses to the lender and inconvenience to the borrower, such as:
• Loan modification
• Repayment plan
• Special forbearance
• Deed-in-lieu of foreclosure
• Short sale
Loss Mitigator (or Loss Mitigation Representative): There are different “levels” of loss mitigators within a lender/servicer. The level one representative is a data collector. The level two person is often the actual loss mitigator. Once a data collector has received and reviewed a submitted short sale package/offer, the loss mitigator often follows a set of mathematical computations (internal to the lender/servicer) in order to determine what the total loss to the lender will be. Most of the time, a loss mitigator has approval authority for a short sale offer. Sometimes the losses are too large so that the short sale approval process may involve the management chain.
Neutral Negotiator/Facilitator: A company or person who takes a central role in facilitating communication and paperwork flow between borrowers and lenders.
Notice of Election/Demand/Default (NOD or NED): These are all synonymous terms. Depending on the governing jurisdiction where the property is located, one of these terms may be more common. A NOD/NED is the result of legal action taken on behalf of the lienholder. This notice serves to inform the borrower and the public that the property has entered the foreclosure process and will be sold at an auction at some specified date (anywhere from 21 to 120 days henceforth). Some states can have a default period exceeding 400 days.
Notice of Trustee Sale: This is an official notice that is posted, mailed, published/advertised, and recorded by trustee at the direction of lender indicating the lender’s intention to sell the property at public auction. The notice includes a specific date, time, and location.
Posting: In most states, a copy of the notice of sale must be posted in a conspicuous place on the property (or sent by certified mail to the borrower) that the property is to be sold. This notice must be posted or mailed at least 20 days before the sale. Also, a copy of the notice must be posted at one public place in the city where the property is to be sold at least 20 days before the sale.
Postponement: A trustee sale may be postponed at the direction of the lienholder. This is commonly used where there is a pending offer on the property and it is in the best interest of the lender to negotiate through the offer than incur the costs of auction and possibly receive the property into its REO department.
Private Mortgage Insurance (PMI): A policy of insurance paid for by the borrower to protect the lender in the event the borrower defaults on the mortgage. Typically, PMI is required by the mortgage holder when the downpayment is less than 20 percent of the purchase price.
Public Trustee: Some states have a third-party representative between the lender and the borrower (and the public) in a deed of trust state, and the trustee is responsible for conducting the public aspects of the foreclosure process. After the NOD/NED is filed, the homeowner has to work through the appropriate county public trustee to work out his or her loans. Each county has a Public Trustee’s office whose charter is to notify the public, receive cure payments, and conduct auctions. Most states do not have public trustees, and the homeowners are able to work directly with the bank.
Qualifying Funds: In order to bid at a trustee sale, the bidder must have qualifying funds available at the sale (cash or cashier’s checks). This is different from having a qualified buyer to submit a short sale offer from the bank. In terms of a qualified buyer, a letter from the lender or proof of funds is required in order to submit a short sale offer to the bank.
Real Estate Owned (REO): When a lender/servicer has completed the foreclosure process on a defaulted loan, the lender/servicer becomes the owner. This home is classified as REO on the financial statements of the lender/servicer.
Reinstatement: This term simply refers to bringing the loan current. Typically, a borrower can reinstate his or her loan as close as five business days before foreclosure sale to avoid the public auction.
REO Loss: When a lender/servicer sells REO for less than the amount due on the loan at foreclosure (plus the costs for expenses related to the sale), the difference between the amount due and the amount recovered is considered an REO loss. This is not a short sale. REO, by definition, means the bank owns the property. Short sale, by definition, means the homeowner/borrower owns the property, and the bank agrees to allow him or her to sell for less than the current loan balance.
Servicing: The actions taken by a lender or designee to collect payments from borrowers and enforce the terms and conditions of a mortgage.
Servicing Company: Generally thought of as “banks” or “lenders,” it is actually a service provider that collects payments, supervises the account, and in general oversees all aspects of the loan for a third party. The actual lienholder could be a group of investors (Wall Street) or even a country. Short sales are typically transacted through the service provider. Also, it is not uncommon for a loan to be sold off to a different service provider. Thus, while a loan may have originated with one company, as you go to make contact with the lender, you may find another company is now servicing the loan.
Short Sale: When a lienholder allows a borrower to sell the property for less money than what the lender is currently owed. Generally, the lender will forgive the difference. The IRS has recently ruled this forgiveness will not be considered income to the borrower.
Short Sale Offer: A formal contract to purchase a home where the purchase price is less than the unpaid balance on the loan.
Short Sale Package: A collection of documents required by a particular lender/servicer that it must consider before allowing a homeowner/borrower the opportunity to sell his or her property for less than the current balance of the loan. Such documents will include, but will not be limited to: financial statements of the borrower, BPO, hardship circumstances of the borrower, short sale offer, and any other documents to explain why a short sale should be considered by the lender/servicer. The short sale package may not contain a short sale offer if the lender contacted the borrower – i.e., top-down (“pre-approved”) short sale.
Top-down (Pre-approved) Short Sale: When a lender/servicer makes the suggestion to allow a borrower to sell his or her property for less money than what the lender is currently owed.
