HOUSING: Buyer sues lender over short sale

In an apparent first, a lawsuit comes from the frustrating type of purchase

By ZACH FOX - Staff Writer | Monday, August 25, 2008 8:14 PM PDT ∞

A North County real estate company has sued a lender for a failed short sale, a transaction that has become increasingly popular while home prices tumble.

Agents and homeowners have bemoaned the unwillingness of banks to negotiate short sales, which are notoriously difficult, fragile transactions because they require lenders on outstanding mortgages to accept a loss by selling the home for less than the balance owed.

The buyer in the stalled short sale, Ribsy Productions, a real estate company based in Solana Beach, filed suit on Friday against Aurora Loan Services, a Littleton, Colo., mortgage lender, for not following through on a short sale. The lawsuit seeks suspension of any foreclosure proceedings on the Arizona property and other reparations.

Though the lawsuit appears to be the first of its kind, legal experts said Monday that it will not set a precedent nor precipitate a rash of lawsuits against stubborn banks.

"I think it would only be fact-specific to this particular situation. Even if the defendant was found liable for not having acted in a more generous manner, I don't see that as likely to affect any group of institutions or borrowers in the future," said Russell Block, a professor of finance at San Diego State University.

Still, the lawsuit represents the aggravation real estate agents, buyers and distressed homeowners have reported when trying to conduct a short sale.

Several real estate agents said that banks have rejected short sale offers, only to foreclose on the property and then sell it for less than they could have received earlier.

"To me, in general, (the lawsuit) speaks to the level of frustration people have in dealing with short sales," said John Woodall, a Vista real estate agent who specializes in foreclosures. He said about 50 percent of all short sale deals fail. "Most everyone is on edge in this market," he said. "There's a lot of skittish, nervous and occasionally angry people in the real estate market. And justifiably so, it's a tough market."

Unlike Block, Woodall said he believes if Ribsy Productions' lawsuit is successful, it could open the door for more lawsuits against lenders for failing to complete short sales.

The Solana Beach company is suing Aurora for breaking a contract and several other charges after the lender did not respond to requests from the buyer, Ribsy Productions, for an approval letter.

"We don't have to prove intent. They have responsibilities on the contract, and they didn't follow through on those obligations," said Ajay Gupta, the lawyer representing Ribsy Productions. "This is a straight breach-of-contract case."

A spokesman for Aurora Loan Services, a division of investment bank Lehman Brothers, declined to comment.

Aurora holds a $587,000 loan on the Tucson, Ariz., home and accepted the short sale offer of $158,000, a 73 percent drop in value, according to the lawsuit.

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at nctimes.com/blogs/minding_your_business.