It has recently come to our attention that certain lenders are issuing estoppel letters on short sale transactions which contain provisions that may enable the short sale lender to rescind and revoke its agreement to release the mortgage after the closing. The estoppel letter may state that the lender approving the short sale reserves the right to declare the short sale void and refuse to release the mortgage if the lender determines that the property was acquired by means of fraud.

An excerpt from one short sale lender’s estoppel letter reads as follows:

“If the property was acquired by means of fraud, {lender’s name} reserves the right to pursue any and all actions available to it to offset its losses. If it is determined that Seller(s) and/or Buyer(s) participated in any way to the fraud, this short sale will be void, and the Note and Security Instrument will remain in full force and effect.”

Another excerpt from another lender:

“{Lender} has the unlimited right to revoke this short payoff approval within 30 days of receiving purchase documents.”

In other words, if the short sale lender deems any fraud has been perpetrated in the short sale transaction, or possibly an immediate subsequent flip of the property, the short sale lender could refuse to issue a release of the mortgage after the agent has already completed the short sale transaction. And, as you can see from the second excerpt above, some estoppel letters will provide that the short sale lender will review the public records for at least 30 days after the short sale transaction to see if the property was flipped soon after the short sale.

Agents and approved attorneys usually cannot protect themselves from a subsequent flip of the property inasmuch as they would not be in control of whether the buyer will soon resell the property. It is unacceptable for a closing agent to conduct a short sale transaction wherein the lender being paid off reserves the right to back out of its obligation to issue a release of the mortgage after the closing has been completed. Therefore, agents and approved  attorneys have been notified that they are not authorized to close any transaction in which they have received an estoppel letter or other document in which this type of conditional language appears.

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