The Trusted Adviser
October 2011 | Volume 4 • Number 8

Update from ATG Short Sale Coordination Department

Your Partner in Short Sales
by Karen Courtney, Managing Attorney, ATG Short Sale Coordination Department

Since launching the Short Sale Coordination Department in early 2011, our experienced Short Sale Coordination professionals have been hard at work helping attorneys and their clients complete the administrative tasks involved in obtaining short sale approval.

Short sales are most successful when a team effort is made by real estate professionals (including attorneys, real estate agents, coordinators, and title company professionals) and the parties to collect legible and error-free documentation and respond to the short sale lender's documentation requests in a timely way.

Help improve this team effort and increase your clients' chances of obtaining short sale approval by reading the following valuable information about the short sale approval process:

The Short Sale Approval Process: Ten Important Practice Tips

To improve your client's chance of obtaining short sale approval, consider the following practice tips:



  1. Be sure the Seller's hardship reason is viable.
  2. The Seller must generally be able to demonstrate financial hardship and an inability to pay his or her mortgage. Some examples of "acceptable" causes of financial hardship include unemployment, excessive use of credit, illness of borrower, illness in family, death in family, and marital difficulties. The lender is more likely to approve a short sale request if the Seller is able to demonstrate that the financial hardship was caused by an event that was out of the Seller's control, such as unemployment, death of a spouse, or high medical bills due to a serious illness. The lender's evaluation of the hardship claimed by the Seller will be made on a case-by-case basis, and some lenders may be willing to make exceptions to the hardship requirement if it would be in the lender's best interest to approve the short sale.

  5. Highlight the importance of securing a qualified, motivated and flexible Buyer.
  6. Short sales often fail because the Buyer is unable to obtain mortgage financing once the Seller finally obtains short sale approval. To help avoid this problem, require the Buyer to produce written Proof of Funds on bank letterhead, or written Mortgage Pre-approval Letter from a reputable lender. Short sale lenders usually require Proof of Funds or a Mortgage Pre-approval Letter as part of the short sale approval process.

    Short sales also sometimes fail because the Buyer is not motivated or flexible enough to wait for the Seller to obtain short sale approval. Ideally, the Seller's short sale request should involve a Buyer who is committed, motivated, and flexible. When counseling the Seller on whether to accept a Buyer's offer, it is important to weigh those issues. For example, consider the terms of the Buyer's written offer, including any contract contingencies that would permit the Buyer to cancel the contract before short sale approval can be obtained, such as a mortgage contingency provision or short sale payoff contingency, along with any other information that has been disclosed by the Buyer or the Buyer's real estate agent that might give insight on the motivation and flexibility of the Buyer.


  9. Use a Short Sale Contract Addendum, which should contain some key provisions:
    1. Short Sale Payoff Contingency - The contract is contingent upon the successful negotiation with the Seller's lien holders and/or third parties of a payoff amount that is less than the total amount owed. In the event that any of the Seller's lien holders do not approve the short sale, the contract is canceled and earnest money is returned to the Buyer.

    4. Extension of Closing Date - The parties agree to extend the contract closing date until such time as the necessary payoffs and approvals are obtained from all lien holders. This type of provision is also required by many short sale lenders as part of the short sale approval process.

    7. Termination Option - Allows the parties to allocate expenses due to third-party service providers. In the event agreement is not reached by the parties regarding allocation of expenses due third-party service providers, either party may declare the contract null and void. If the short sale payoff contingency is not satisfied within a certain number of days after acceptance, then either party may declare the contract null and void.

    10. Right to Continue to Offer Property for Sale - Allows the Seller to keep the property on the market after the contract is executed in order to increase the Seller's chances of obtaining a short sale approval. In the event that the Seller receives a bona fide offer to purchase from another prospective Buyer, then the Seller is obligated to offer the Buyer the right to purchase the property on the new terms and conditions.

    13. "As-Is" Condition Provision - The contract is for the sale and purchase of the property in "As-Is" condition as of the date of the offer, without representations of any kind, including non-compliance with municipal codes, and further provides that the Seller shall not be obligated to undertake repairs, provide credits to the Buyer, or establish escrows for repairs. Short sale lenders generally do not allow proceeds to be used for repair costs or repair credits to the Buyer. For example, see Short Sale Addendum to Multi-Board Residential Real Estate Contract.
  10. Take steps to accurately identify outstanding liens/judgments recorded against the property and the name of the Seller.
  11. All lien holders must agree to the Seller's short sale request. Therefore, one of the most crucial aspects of the short sale negotiation process is to accurately identify all outstanding liens/judgments recorded against the property and the name of the Seller so you can contact all lien holders at the beginning of the short sale process and include proposed payoff amounts for the junior liens on the preliminary HUD-1 Settlement Statement that will be submitted to the first mortgagee. The best practice to accurately identify outstanding liens/judgments is to do the following:
    1. Ask short sale clients to complete a basic financial information questionnaire, which should list all known mortgages, liens and other debts, in order to have a complete picture of the client's financial situation. For sample forms, see ATG Form #4168: Financial Information and ATG Form #4169: Mortgage/Lien Information.

    4. Title Search - Review a current title search from a reputable title insurance company or search provider, which will show the recorded liens/judgments against the property.
      1. The title search will also reveal judgments and liens recorded against the name of the Seller, which attach to all real property owned by the Seller, even if not recorded against the specific property.

      4. Later date searches should also be conducted periodically during the short sale approval process to update the status of title.
        1. 1. Update status of real estate taxes.

          2. Identify any liens or encumbrances that may appear of record in the "gap" period (period between effective date of previous search and posting date at the county recorder's office as of the effective date of the current search).


    5. Compare financial information questionnaire and title search to identify any discrepancies or differences in lien holder(s) and/or servicer(s).
  12. Review documentation received from Seller, Buyer, or their respective agents for consistency, legibility, errors, and completeness.
  13. Pay special attention to contract dates and signatures. Obtain necessary corrections before submitting documentation to the short sale lender.

  16. Use full name(s) of Seller(s) in the Contract, Riders, Short Sale Addendum, and Disclosures.
    1. Lenders usually require the name(s) of the Seller(s) to match the name(s) of debtor(s) on the promissory note and may ask for corrections if the contract documents contain discrepancies.

    4. Avoid using the term "Owner of Record" or its abbreviation "OOR" in lieu of the name(s) of the Seller(s) in the contract documents; many lenders will not permit use of this term or its abbreviation. If the contract contains this term or its abbreviation, the lender will require the documents to be corrected to show the full name(s) of the Seller(s) and initialed by both parties.
  17. Obtain the most recent financial information possible from the Seller.
    1. Most lenders require financial information submitted by the Seller to be less than sixty (60) days old.

    4. Once financial information becomes stale, lenders require updated financials, which will delay the short sale approval process.
  18. Respond to the short sale lender's documentation requests as quickly as possible.
  19. Short sales fail for many reasons, but often it is because the short sale lender's requests for documentation are not addressed in a timely manner. Treat each request as though it is an emergency. By doing so, the short sale lender will realize that you are committed to compliance, plus you will help the Seller avoid unnecessary delays or other problems.

  22. Ensure Seller will be able to comply with the terms of all payoff letters.
  23. Obtain payoff letters that are current as of the date of the closing. Short sale payoff letters are often very detailed. Review all payoff letters and the HUD-1 in concert to ensure that the Seller is in compliance with the terms of all letters, including payoff amounts required by/allowed to each lien holder in the event that there are subordinate liens. Resolve any inconsistencies in the payoff letters prior to disbursement.

    Short sale approval letters and short sale closing instructions also often contain other conditions that must be addressed prior to disbursement. Be sure the Seller will be able to comply with all payoff conditions. Common examples include:

    1. Restriction on transfer or conveyance of the property within thirty (30) days after the closing. ATG addresses this type of payoff condition by requiring a transfer restriction to be included in the deed to the Buyer and raising a corresponding Schedule B exception in the title commitment, which will appear on the Owner's Policy of Title Insurance.

    4. Cap on real estate tax proration figures. Some lenders cap real estate tax proration figures at 100% of the most recent ascertainable full year tax bill. Adjust tax proration figures on the HUD-1 Settlement Statement accordingly if the contract called for higher amount and seek approval of the reduced amount from Buyer/Buyer's counsel.

    7. Affidavit of Arm's Length Transaction (or Short Sale Addendum including arm's length transaction language) to be signed by the parties and both real estate agents as part of their closing instructions. Send the Affidavit of Arm's Length Transaction (or Short Sale Addendum) to all required signatories in advance of closing to ensure they will be willing to sign it. Ensure that all necessary parties sign the affidavit or short sale addendum prior to closing or that they will be present at closing to sign.

    10. Promissory note or cash contribution from the Seller at closing.

    Contact a title company underwriter for assistance with clearing these issues prior to closing. For added assurance that the Seller is in compliance with the terms of all payoff letters, submit copies of all payoff letters and the HUD-1 to a title company underwriter for approval prior to closing.


  26. Obtain written approval of the HUD-1 Settlement Statement from all Lenders in advance of closing.
  27. To ensure compliance with the terms of the short sale payoff letters, and to avoid delays at closing, submit the HUD-1 to all lenders in advance of closing and obtain written approval of the HUD-1 from all lenders, either by obtaining the HUD-1 signed by the lender, or by e-mail confirming that the HUD-1 as submitted is approved. If the lender later claims that the money was disbursed to the wrong party, the Seller's attorney and settlement agent can then produce the signed HUD-1 to show that the lender signed off on the disbursement. ATG requires written approval of the HUD-1 by the lenders prior to disbursement of the funds, so it is important for attorneys to arrive at closing with the necessary written approval in their possession. Some lenders refuse to sign the HUD-1 under any circumstances. When dealing with such lenders, ATG requests that you note on the HUD-1 the name and phone number of the person who verified the short sale payoff during the closing.





Affidavit of Arm's Length Transaction: The Latest Issue Affecting Short Sales

To approve a short sale, most lenders and servicers require the parties to sign an affidavit certifying that the sale is an arm's length transaction, negotiated by unrelated parties at a price based upon fair market value, that there are no hidden terms or agreements among the parties or their brokers, that neither party will receive any funds or commissions connected with the sale and that there are no agreements, whether written, oral, or implied, that would allow the Seller to remain as a tenant in the property as tenant or to regain ownership of the property at any time after the successful completion of the short sale transaction. This affidavit is designed to combat short sale fraud and is often required as a condition in the short sale payoff letter.

Section B65.40 of the Freddie Mac Servicing Guide also requires servicers to obtain an affidavit of arm's length transaction from the real estate brokers representing any of the parties, as well as the escrow/closing agent performing the closing. The form presented by the servicer to comply with this requirement may be a Freddie Mac Short Sale Addendum or an Affidavit of Arm's Length Transaction. This Freddie Mac guideline is troublesome because it requires that each signatory is fully responsible, regardless of what they know, and it also holds them responsible for the false certifications made by any other party. Various organizations in the real estate and title insurance industries are working with Freddie Mac to draft alternative standards to accomplish the goal of combating short sale fraud, and ATG is closely monitoring the progress of these negotiations. We will keep you posted on the latest developments regarding this issue.

In the meantime, when you are presented with any Affidavit of Arm's Length Transaction or Freddie Mac Short Sale Addendum requiring the signature of ATG as escrow agent, closing agent, settlement agent, title agent, or transaction facilitator, please contact our Underwriting Department at 312.752.1990 for approval of the required affidavit or addendum.







Use ATG for Your Short Sales

Short sales are difficult to complete, the process is inefficient and labor intensive. Let us take care of the administrative tasks involved in obtaining short sale approvals so you can focus on doing what you do best — representing your client. Our experienced Short Sale Coordination professionals perform the following tasks:

  • Work directly with attorneys and their clients to assemble and submit documentation in an efficient and timely manner to persuade the lender to agree to the short sale.

  • Partner with the Seller's attorney to prepare and submit the HUD-1 Settlement Statement.

  • Communicate with lenders and servicers throughout the short sale process — saving the attorney valuable time.

If the short sale is not approved, we charge no fee! Interested? Have questions? Contact us at or 312.752.1190.

NOTE: In October 2011, we revised our Short Sale Coordination Agreement (ATG Form 4164) — which can be found in our Short Sale Coordination Package — to make important changes and improvements to the fee payment paragraph (Paragraph 10). Please discard previous versions of the Short Sale Coordination Package and begin using the revised version immediately.



EDITOR'S NOTE: In the event that this communication is disseminated to the consumer in connection with ATG's Short Sale Coordination Services, the consumer is hereby provided with the following disclosures in compliance with the Mortgage Assistance Relief Services Rule (16 C.F.R. Part 322) promulgated by the Federal Trade Commission:

You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender [or servicer]. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us an amount equal to one percent (1%) of the purchase price, or a minimum of $2,000.00, whichever is greater, for our services. ATG is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.







THE TRUSTED ADVISER is published by Attorneys’ Title Guaranty Fund, Inc., P.O. Box 9136, Champaign, IL 61826-9136. Inquiries may be made directly to Mary Beth McCarthy, Corporate Communications Manager. ATG®, ATG® plus logo, are marks of Attorneys’ Title Guaranty Fund, Inc. and are registered in the U.S. Patent and Trademark Office. The contents of the The Trusted Adviser © Attorneys' Title Guaranty Fund, Inc.

[Last update: 10-28-11]