Avoid Foreclosure with a Short sale

Bills.com Team
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Highlights


  • Review ways to avoid foreclosure that require you to sell your home.
  • Examine the government program that helps you avoid foreclosure.
  • Understand the impact of a short sale on your credit.
4.5
/5.0
(12 Votes)

A short sale or deed-in-lieu of foreclosure can help you avoid foreclosure.

If you have mortgage problems, you may take every reasonable step to stay in your home and find out that nothing you tried worked. As tough a decision as it can be, you may decide that selling your home is the best available choice. Start off by researching the value of your home.

If your home is worth more than what you owe on it, you have greater flexibility than if you owe more than your home is worth. If you have equity in your home, selling your home and moving into a less expensive home, either a home your purchase or rent, will lower your monthly costs and reduce your financial stress.

If you must sell your home when your home is worth less than what you owe on it, different problems arise. Your goal is to avoid foreclosure. When you are upside-down on your mortgage and want to sell your home, you can’t sell your home without your lender’s permission. Speak to them at the first sign that you are having problems with you mortgage. You may think that you have no option but to sell your home, but speaking with your lender may offer you other solutions.

If you are not able to work out any other solution, then you have two main options, as short sale or a deed-in-lieu of foreclosure (DIL). Both of these options are preferable to a foreclosure. They do less damage to your credit rating. In both cases, you may be left with a deficiency balance, leaving you with both a debt to deal with and possible tax implications.

Short Sale and DIL Requirements

Though this list may not be exhaustive and other lenders may have slightly different criteria, Bank of America, one of the largest lenders in the US, requires the following:

  • You are experiencing a hardship, such as a job loss, medical emergency, or divorce
  • You are upside-down on your mortgage
  • You are unable to stay current on your mortgage payments
  • You were unable to modify your loan

Short Sale

The first option is a short sale. A short sale is when you sell your home and your lender agrees to accept less than you owe on the balance of your loan. Generally speaking, your lender will only approve a short sale if you are behind on your mortgage payments or can show you will be unable to continue making your payments . In order to be approved for a short sale, you will have to provide your mortgage lender's loss mitigation team with documentation of your income and assets, so they can verify that you have a financial hardship and that you truly cannot afford the home.

You need to receive permission from your mortgage lender agree ahead of time, in order for the short sale to proceed. It is a waste of time for you to put your home on the market until you, or your attorney, have spoken with your lender company's loss mitigation department to discuss proceeding with a short sale. Many lenders will authorize short sales in an attempt to prevent property from falling into foreclosure; however, some lenders will not allow short sales to proceed.

You want to get as high a price as you can in the short sale for two reasons. One is so that your lender will approve the short sale. If you do not sell it for a price your lender feels is fair, your lender can stop the sale from going through. A second reason is so you can pay off as much of your mortgage balance as possible. When you sell your home for less than you owe, you are left with a deficiency balance, the difference between what you owe and what the home sells for. Your lender may forgive the deficiency balance or it can reserve the right to collect it from you.

Deed in Lieu of Foreclosure

The second option is a deed-in-lieu of foreclosure (DIL). In a deed in lieu of foreclosure, you give the property to your lender voluntarily, in exchange for the lender canceling the loan. The item transferred is the deed to the property. The lender promises not to initiate foreclosure proceedings or to terminate any foreclosure proceedings already underway. The lender may or may not agree to forgive any deficiency balance resulting from the sale of the property.

The key issue in a deed in lieu of foreclosure is whether the lender is willing to forgive the deficiency balance. Read your contract carefully, to see how the deficiency balance issue is handled. If the document is unclear, take it to an attorney with experience in property law. An attorney’s time is not cheap, but will be a bargain compared to signing an agreement you do not understand. Don’t leave yourself vulnerable to receiving the unpleasant surprise of a large, unexpected debt.

Government Programs

If your lender participates in the Making Home Affordable (MHA) program, then your lender is bound by the program guidelines and deadlines. If your lender is not part of the MHA program, it still may have chosen to participate in the program, in which case it is also bound by the program guidelines. Many lenders have chosen to do so. There is no requirement that you must participate in a HAFA short sale or DIL, but the guidelines and deadlines benefit most home owners, so they may help you.

Homes Affordable Foreclosure Alternatives (HAFA)

The MHA short sale and DIL program is called Home Affordable Foreclosure Alternatives Program (HAFA). Under HAFA, participating lenders must forgive the deficiency balance for DILs and short sales. To qualify for the HAFA program, you must meet all the following eligibility requirements of the government HAMP (Home Affordable Modifications Program):

  1. Your loan must be serviced by a lender who participates in the HAMP program
  2. Your home must be your primary residence
  3. You are having trouble paying your mortgage
  4. Your current mortgage was taken out before January 1st 2009
  5. Your home value is less than $729,750
  6. Your current mortgage payment, including your property taxes and homeowner’s insurance must be more than 31% of your income.

HAFA alternatives are available to all HAMP-eligible borrowers who:

  • Do not qualify for a HAMP Trial Period Plan
  • Do not successfully complete a HAMP Trial Period Plan
  • Miss at least two consecutive payment during a HAMP modification
  • Request a short sale or deed-in-lieu.

HAFA is complex with numerous guidelines set by the Treasury Dept. These guidelines do not apply to loans by Fannie Mae, Freddie Mac, FHA or VA because these programs have their own short-sale programs that vary from HAFA.

HAFA provides incentives to mortgage lenders, sellers, and other lien holders. There are deadlines that the mortgage lender and other lien holders have to follow, to provide timely progress on the sale of the property. HAFA simplifies and streamlines the short sale and DIL process, by providing a standard process flow, minimum performance timeframes, and standard documentation.

Summary

Make sure to review all your options, if you feel that you must sell your home to get from under your mortgage. Consider speaking with an attorney that specializes in real estate or property issues. Be careful of any firm that offers to save your home. There are dishonest companies that look to prey on you, when you are in the vulnerable situation of having to sell your home. Don’t sign any contract without having a competent third party review it.

There may not be an ideal solution to the problems you face. However, there is a difference between the choices available to you. You may be choosing between a decent solution, a poor solution, or a terrible one. Take the time to educate yourself, so you can implement the best possible solution for you and your family.

4.5
/5.0
(12 Votes)

42 Comments

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  • 35x35
    Jun, 2012
    J.
    Hi Bill one year ago I sold my house in short-sale. I still have good credit. no balance owed on home. credit score (676). Do I have to wait 7 years to purchase another home, that what I was told by a lender.
    0 Votes

    • 35x35
      Jun, 2012
      Bill
      Fannie Mae will buy loans from applicants who had a short sale more than two years ago. I do not know the rule for Freddie Mac. For non-conforming loans (not Freddie or Fannie), the investor will make up their own rules. I doubt you will have to wait 7 years. Contact a different loan officer at a different originator, which will probably have a different rule.

      One thought: Loan origination is now more difficult and time consuming than before. As a consequence, loan officers work harder to earn less. The originator you talked to may have heard about your recent short sale and rather than work to find a loan for you, he or she made up a ridiculous but plausible-sounding rule to get you out of their office to spend time on an easier, and hence more profitable loan.
      1 Votes

  • 35x35
    Apr, 2012
    S
    Bought a townhouse in Boise in July 2007 (If only I'd waited ONE MONTH!!!) for $138,000. The House is now only worth $72,000. Four other houses in 8, have short-saled ($66,000 to $89,000 ea). I still owe $130,000 on the loan. Considering strategic foreclosure as payments are not a problem. I want to take advantage of the 2012 tax exemption for short-sale/foreclosure. I need to move so my daughter can attend a certain school and I plan on renting. Due to the cost of the other homes in the area, I feel I am pouring my $58,000 difference down the drain and into a banks pocket, and I will receive NO equity. Mortgage is $988 a month, but rentals in the area are going for $650 a month, so I wouldn't be saving anything if I rented. I have been told by YouWalkAway.com that a short-sale wouldn't work for me since I cannot document a financial struggle. So am I left with a foreclosure situation by literally just walking away? Given the cost of my mortgage and the homes true value, this is a LOUSY investment.
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      Consult with a local lawyer who has foreclosure experience, and not a Web site (including Bills.com), for personalized legal advice. Strategic default is a big step, and has a large potential liability if the deficiency balance is the expected result of a foreclosure. You may be able to take steps to insulate yourself from a deficiency balance or avoid a deficiency balance. Each mortgage servicer has its own short sale rules. Do not assume you are ineligible for a short sale because you are not in financial distress.
      0 Votes

  • 35x35
    Mar, 2012
    dhamal
    I am in California and would like to do a short sale. I have my first loan with BOA (5/1 ARM) and 2nd with Green Tree (conventional 30-year balloon loan). Both were used to purchase house. Haven't been refinanced. House is underwater (below the first loan balance). Is 2nd a non recourse loan? If I short sell, can 2nd still try to collect the deficiency balance?
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      In California, purchase-money loans are so-called "no-recourse" loans. A no-recourse loan in one in which the lender may not pursue the borrower if there is a short sale or foreclosure that results in a deficiency balance.

      If both of your loans were used to purchase the property, then they are subject to California's no-recourse/anti-deficiency law. If that is the case, you can walk away from the home and your credit will suffer, but no mortgage debt will follow you. You could use your ability to walk away as leverage to reach some kind of settlement with the lenders that does less harm to your credit. I suggest you make 100% certain your loans are non-recourse before finalizing your strategy.
      0 Votes

  • 35x35
    Jan, 2012
    Gretchen
    Currently, I own two homes. One is our primary residence and the other was supposed to be an investment property. We added an addition onto the home with an equity line. The mortgage of the investment property is with one bank and the equity line is with another. When we finished with the addition, and had the house appraised, it appraised for more than the mortgages. However, in recent years, the housing market has tanked in our area. Currently, we are paying a property manager 10% of rental proceeds, and the rent coming in is less than the mortgage and equity line payment. Also, there seems to be small repairs that add up every month and now it is looking like the septic system is going to need to have major repairs. I cannot afford to make these repairs. How do I get help? I do not even know where to begin to see if foreclosure, short sale, etc. is the best option. Please advise. Thanks.
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      If you problem is a cash flow problem then you can attempt to refinance one or both of your properties. If your property is underwater, then look into the Harp Mortgage program. If you cannot afford the payments, then you should speak with your lender and seek to modify the terms of the loan. If you have to make a short sale, then you will need to speak with the lender. Remember, ifyou have a deficiency balance on your investment property, then you will need to negotiate a payment schedule.
      0 Votes

  • 35x35
    Nov, 2011
    i am a widow and am now in foreclosure. I owe 35000 on my home and it is valued at 13000 but the private mortgage holder will not work with me cause he wants me to sign over property. I asked him if i could rent it to generate income to get caught up and i could add to their rent so it could get caught up quickly. I moved myself and daughter in with a friend and within a month he contacted them and told them he was going to foreclose on me so they do not have to pay rent. I have deposited 1000 into his account and have another 1600 he will not take this. The tenant have not paid rent and will not vacate. I have to take them to court which has been two months. What can i do I feel I have been set up. thank you
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      Your best course of action is to consult with an attorney who has experience in real property or contracts law.
      0 Votes

  • 35x35
    Nov, 2011
    Keith
    Our home (California) is worth about 180K. We owe 260K on the first and 40K on a second. We are current on both loans. We have refinanced since the original purchase. We are now retired and taking a 72t distribution from our respective IRAs that were funded from each of our 401k plans and lump sum distributions from our employer pensions. We had planned to sell our home by now but obviously, the underwater condition prevents that. We want to negotiate a short sale with the 1st lender but feel that the 2nd lender will not cooperate. Is a DIL a better option? We cannot continue to draw these large amounts from our IRAs and still fund our remaining retirement years.
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      You will need the cooperation of the lenders in order to do a short sale or a deed-in-lieu. Be aware of the tax consequences of either of these plans as well as your possible responsibility for the remaining deficiency balances. For more information read Bills.com article about a deed in lieu of foreclosure vs a short sale.
      0 Votes

  • 35x35
    Nov, 2011
    Paul
    Currently my wife and I have a home that is worth 99,000 but owe 127k. Only my wife's name is on the mortgage but both of us are on the deed. The problem isn't the payments or affording the home, the problem is losing 30k on a 100k house. We need to move to get our young children into a better school system and get out of a fastly deteriorating neighborhood. I'd rather do a strategic default, go the short sale route and impact my wife's credit. I can then use my income and credit to go out and by our new house in just my name. What are some of the potential pitfalls of this? Will my name being on the deed/title have any impact? The monthly payment is over 30% of my wife's monthly income but not when you combine ours. Can a lender look at my income even though I am not on the deed? If they cant use my income to prove its not over 31% what are the options then? thanks for the help.
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      Let us say Spouse A owns a home and has a mortgage in his or her name alone. If Spouse B has a strong credit score, a long employment history, and a low debt-to-income ratio, he or she can buy his or her own property, too.

      Your concern about your name appearing on the title is a red herring — a false issue. Your name on the title does not give the lender any right to pursue you for an action relating to the mortgage. If my reassurance does not satisfy you, ask a lawyer to file a quit claim deed for you to sign over whatever rights you have to your home to your spouse. By doing so you will have no connection to the property.

      My advice? Download a Uniform Residential Loan Application (Form 1003), complete it using only your income and credit to see where you stand with your income only, and start shopping for a mortgage.
      0 Votes

  • 35x35
    Nov, 2011
    vanessa
    i live in illnois and am losing my home. I tried a government program to help me keep my home and have done everything they have asked me to do and they are still taking the home. I even tried making payments while i could and they told me to hold the money i know owe like 12k and have no way to pay it now i am on unemployement and want to pay off the balance owed to keep my home i have lived here for 12yrs how can i save my home and what would be my best option i am also wondering if i will owe any money if the house sells for less than i owe and what happens to the extra money if it sells for more than what is remaining on my mortgage
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      You mentioned Illinois. See the Bills.com resource Mortgage Foreclosure in Illinois to learn about your options, rights, and liabilities as an Illinois resident. Please ask any follow-up questions you may have on that page.
      0 Votes

  • 35x35
    Oct, 2011
    tammy
    my mortgage was discharged almost 3 years ago in chapter 7. if i short sale will this show on my credit? also will i be able to get a new fha loan? normally you have to wait at least 3 years after a short sale, but if it was discharged and doesnt show on credit...how will anyone know a short sale was done. fyi there are a couple late payments, but nothing being reported as it simply shows dicharged in bankruptcy.
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      Consult with your bankruptcy lawyer, or a lawyer who has real property or contracts experience to review your exact circumstances. Homeowners with a home loan discharged in a chapter 7 have no personal liability for their loans. That explains why the loan disappeared from your credit report following the chapter 7 discharge. In other words, homeowners can quit the property in question without liability. In your case, a short sale contract may obligate you to the deficiency balance, which is not in your financial interest.

      Regarding an FHA loan, if it has been three years since your BK discharged, the fact that you have a BK on your credit report will not be enough to disqualify you. FHA rules require that a BK be discharged for at least 24 months. If you meet the standard FHA loan requirements, you should be able to get an FHA loan.
      0 Votes

  • 35x35
    Oct, 2011
    Lou
    I am 63 years old, sick and retired on disability. Current on mortgage but had to contact Chase about hardship DIL because of imminent default due to high anticipated medical expenses and nursing care, I can't afford to pay mortgage or maintain home anymore. Bank told me to list house for short sale and after 90 days if it did not sale, I would then be considered for DIL. The house is underwater for about $50,000 and Fannie Mae is the investor. I don't want to lose my credit rating but next month I will not have the money to continue paying. Don't want to just walk away but seems like I will be taking a gamble as to whether or not the DIL will be approved if no one buys my home.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      If you won't be able to make your mortgage payment, because you have to devote your money (understandably) towards your medical needs, then your credit rating is going to suffer.

      It seems that your best option is to try to sell the house and see if your lender will forgive the deficiency balance, based on your medical hardship. If you can't sell the home, even at a reduced price, then a DIL is the next best option.
      0 Votes

  • 35x35
    Oct, 2011
    Steven
    Hello Bill, I have 2 mortgage loans. First loan balance $440000 and $110000 on second. The current value of the house is around $340000. I applied for loan modification for my first loan and is now being reviewed by an underwriter. I have not paid for 3 months on my first and 2 months on my second. My question is what are the chances that my 2nd loan initiates the foreclosure? I received a call from them saying they will proceed with the foreclosure if i cannot pay.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      Unfortunately, this is common question lately. See the Bills.com resource Second Mortgage Foreclosure to see a discussion of this issue. In particular, see the reader comments on that page for additional clarification.
      0 Votes

    • 35x35
      Oct, 2011
      Steven
      Hafa will only forgive loan deficiency until 2012? Any chance that this will be extended?
      0 Votes

    • 35x35
      Oct, 2011
      Bill
      When the 2012 deadline was set several years ago, I doubt few legislators believed this would need to be extended. Congress likes to work up to the 11th hour when passing legislation, as several recent examples prove. We can only guess if Congress will extend the deadline, as it appears many will need the relief it provides.
      0 Votes

  • 35x35
    Sep, 2011
    Chuck
    I recently took another job in another state because of how much we owe versus property value we rented the home; however the tenant has become an extreme headache i.e. not paying on time, not taking care of property, I am going to evict the individual but trying to manage a property from a far is extremely difficult. I don't want to go the property management route and it will be impossible for me to sustain my current rent and my home in Illinois. What would you recommend?
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      You have two options: Keep the property or get rid of it. To rid yourself of the property, you can take a negotiated route — short sale or deed in lieu of foreclosure — or allow a foreclosure. Both foreclosure and short sale cause severe damage to a credit score.

      If keeping a high credit score is your paramount concern, then hang onto the property and try to find a better tenant. If your credit score is not on your top-10 list, then negotiate a short sale or allow a foreclosure.
      0 Votes

  • 35x35
    Sep, 2011
    Viki
    My home loan came up due in June with a balloon pymt. We have never missed a payment. We have a 2nd on the house. The house is valued at approx. 40,000 less than what we owe on the 2 loans. Provident would not roll-over the loan due to the 2nd. We have just sold a business and are starting a new one so have no "history" of income with the new business though we do have a "history" of paying with them. Have just listed the house for a short sale but wonder, why don't we just walk away? It will cost us to fix it in order to get the highest sale amount to go toward the 2nd but as I understand, we still lose, no matter what we do. Exhausted, frustrated and not getting simple answers from either lender.
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      Appears you are finding the right answer for your situation without my help. Try to remove your emotional attachment (if any) you have for the property and run the numbers. Look at the total cost of a short sale. Then look at the total cost of a foreclosure. The hit to your credit score for each will be roughly the same, so ignore your credit score as a factor in your decision.
      0 Votes

  • 35x35
    Jun, 2011
    Chris
    I'm tired of paying my mortgage and decided to walk away. My house is in California, I live in it, it was financed by a single mortgage in 2008 and never refinanced. It is severely underwater and paying a much-too-high interest rate. Lawyers reviewed my case and I am protected against deficiency recourse. The medium-sized private bank both services and holds my loan. I dealt with the owner/CEO directly, and demanded a reduction in principal to current value. He refused and said he'd be willing to do a deed in lieue instead, and that he'd be sending me the paperwork asap. (I will of course have a lawyer review everything before taking any action) If I do this deed in lieue, it will have been done without my ever having missed a single payment. My question has to do with the impact to my credit score. Are they obligated to report something to the credit bureaus? What can they report? Must they inform me of what they will report?
    0 Votes

    • 35x35
      Jun, 2011
      Bill
      The only rule the FCRA places on creditors is that any information they send to the consumer credit reporting agencies (the credit bureaus) must be accurate. In theory, because you have zero delinquent payments and resolve the debt with an accord and satisfaction, there should be no impact on your credit score. However, you are asking me to predict the future behavior of a mortgage servicer, which is impossible given their erratic performances the last five years or so. A creditor is under no obligation to ask a consumer's approval before submitting a report to a consumer credit reporting agency. What it reports is something you may consider negotiating.
      0 Votes

    • 35x35
      Oct, 2011
      suzanne
      I'd like to hear how this worked out. Curious if the bank tried to play around, or if they sent the papers and everything went well. If so, has there been a change in FICO scores?
      0 Votes

    • 35x35
      Oct, 2011
      Bill
      See the Bills.com resource Short Sale, Foreclosure & Your Credit Score to learn what impact short sale will have on a homeowner's credit score, and how long it takes to recover.

      Mortgage servicers have a fiduciary responsibility to the investors who put up the money for the home loans, and will try to minimize the amount the investors will lose in a short sale or foreclosure. In other words, mortgage servicers have no hesitation to get away with what they can when closing a short sale.
      0 Votes

  • 35x35
    Jun, 2011
    Crystal
    I am in Phoenix, AZ. I purchased a foreclosure in 2008 for a pretty good deal. However, in the meantime the value has dropped even more. I am considering a short sale for this reason: Moving to another country. Right now my current financial situation is stable. I don't really have a hardship, except for the fact that I will take on roughly 50k in student loans in the near future. My question is: do I have a chance of getting approved for the short sale due to the move that will happen no matter what?
    0 Votes

    • 35x35
      Jun, 2011
      Bill
      There are no universal rules for short sales or deeds in lieu of foreclosure. There is no government standard or law setting the timeline for a short sale. A short sale or deed-in-lieu-of-foreclosure is a voluntary agreement negotiated on a case-by-case basis between the mortgage servicer (which represents the investor in the loan) and the borrower. Therefore, you need to open negotiations with the mortgage servicer to learn the answers to your questions.
      0 Votes

  • 35x35
    Jun, 2011
    jack
    Can a mother short sell her delinquent house to her son?
    0 Votes

    • 35x35
      Jun, 2011
      Bill
      There are no universal rules for short sales. Each mortgage servicer creates their own contract. If the sale is at the market price, then I would see no reason for a mortgage servicer to care whether the transaction is at arm's length. Get the most accurate answer from the mortgage servicer in question.
      0 Votes

    • 35x35
      Sep, 2011
      Kris
      I'm a Realtor in Florida and work very closely with Short Sales. In every single transaction I've worked in the last 3 years, either as a Seller's Agent or Buyer's Agent there's always an Arm's Length Transaction Affidavit. Everybody involved in the transaction has to sign it. We all agree there's no relationship between Seller and Buyer, and Seller will not stay on the property as a Tenant after closing, nor can Seller buy back from Buyer in the future. How does the Seller's Lender enforce the Affidavit? I don't know! But I'm almost certain if they find out that's what you did, you will be charged with committing Real Estate Fraud. If the Seller's Lender wanted to negotiate directly with the Seller to let them stay in their home, they would be doing so. The bottom line is: they are not!
      0 Votes

  • 35x35
    Mar, 2011
    Louise
    I originally financed my home with a Fannie May mortgage. I paid on it for about ten years on time until I got cancer. I had to quit my normal line of work and instead went to work in a health care job that paid me less than half of my normal income with a variable salary. I am wondering if I would qualify for the HAFA short sale program. I have not equity at this time and owe slightly more than what my home is worth.
    0 Votes

    • 35x35
      Mar, 2011
      Bill
      You may qualify, or your mortgage servicer may steer you into a short sale program of its own invention, which may or may not be better for you in your circumstances. Ask your servicer about its short sale options. Before you do, however, do a little research to get an estimate of your property's value. If you are underwater, ask your servicer if it offers a program similar to the FHA's short refinance.
      0 Votes

  • 35x35
    Jan, 2011
    Harald
    It is no longer a requirement under HAFA to have a 31 % income qualification...
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      Excellent point, Harald. In December 2010, the United States Treasury Department revised some of the rules of the HAFA program. Among the changes, mortgage servicers are no longer required to verify a borrower's financial information or determine if the borrower's total monthly mortgage payment exceeds a 31% debt-to-income ratio, although they still must obtain a signed hardship affidavit.
      0 Votes

    • 35x35
      Jul, 2011
      Mary
      Citimortgage told me today they require it.
      0 Votes