by Calculated Risk on 7/10/2009 04:53:00 PM

From the San Francisco Business Times: Sellers owe balances after short sales (ht Michael, SocketSite)

The rising tide of “short sales” by troubled home owners facing foreclosure is prompting lenders to become more aggressive in their attempts to pursue former homeowners for their loan losses in a short sale. In a short sale, a house is sold, with a lender’s approval, for an amount that won’t pay off the mortgages on the property.

Often, the troubled home owner assumes the loss will be eaten by the lender. But Bank of America and Chase have quietly added language in their short-sale agreements that require the borrower to sign a promissory note for the shortfall.

A spokesman for the American Bankers Association said this week that he wasn’t aware of the practice, suggesting how little attention has been paid so far to collection of these notes from troubled borrowers.

BofA says its intention is to protect investors holding the mortgages.

This is nothing new. Zach Fox (when he was still at the NC Times) reported in April: Lawyers say lenders set stage to collect on 'short sales'

Lenders appear to be inserting language into short sale contracts that allow them to sue for any "deficiency," or the amount lost by a bank by selling a home for less than the mortgage ---- opening the door to collection agencies and court judgments that can run into the hundreds of thousands of dollars for some North County homeowners.
...
One real estate agent who specializes in short sales, Chris Mackey of Carmel Valley, said about 50 percent of the short sale contracts he has seen include the language before he requests its removal. Banks generally have removed the language, he said.

... the North County Times obtained a short sale contract issued by Countrywide Financial Corp ... The contract warned the homeowner, who owned a house in El Cajon, that Countrywide "may pursue a deficiency judgment for the difference in the payment received and the total balance due ... "

It sounds like the banks will remove the language if asked. I'd suggest having a lawyer review the contract, and make sure "all loans are extinguished and debts forgiven".