Hope for Short Sales in 2013 – Congress is Working to Extend COD Income Tax Exemption

This is not legal advice.  For legal advice, consult an attorney, not a blog.  Furthermore, the post below addresses some BUT NOT ALL issues relating to foreclosure, short sale, etc., and the following analysis is cursory and not complete.  If you face a foreclosure or are considering some alternative, you should obtain legal advice.

US-GreatSeal-Obverse.svgThe Senate Finance Committee recently approved extending the Mortgage Forgiveness Debt Relief Act through 2013.  That’s GREAT news for anybody interested in a short sale here in Washington.  If you’re wondering why…

Generally speaking, the IRS considers as income any forgiven debt (Cancellation of Debt, or COD, income).  For example, if I borrowed $50k from you, that would not be “income” subject to taxation because, while I received $50k from you, I had a corresponding liability to you in the same amount.  But if you then released me from that obligation and forgave that debt, at that moment I would have realized $50k in “income.”  Therefore I would need to report this “income” — the amount of the forgiven debt — on that year’s federal income tax return (and of course pay taxes on it).

In 2007, as the housing crisis was getting underway, Congress passed the Mortgage Forgiveness Debt Relief Act.  This act allows homeowners to avoid COD tax liability on debt that was incurred by the purchase of a principal residence.  In other words, if the property is your principal residence, then you will not face income tax liability on the forgiven debt.

Here in WA, there is debate about the COD tax implications of a non-judicial foreclosure.  The vast majority of foreclosures in this state are of this variety.  In a non-judicial foreclosure, the difference between the funds paid at the foreclosure auction and the amount owed is extinguished as a matter of law.  In other words, following a non-judicial foreclosure, the owner/debtor neither owns the house nor owes any money to the bank, regardless of what was paid for the property at auction.  Accordingly, some — but not all — experts believe that a non-judicial foreclosure does not create COD tax liability.

The Mortgage Forgiveness Debt Relief Act expires December 31 of this year.  Thus, if the act is not extended, effective January 1 any forgiven debt, even on a principal residence, will be considered as income and taxed accordingly by the IRS.  Here in WA, the only possible exemption to this liability is the argument that a non-judicial foreclosure does not create COD tax liability.  Thus, an owner/debtor subjected to foreclosure at least has an argument that he does not have COD tax liability after a non-judicial foreclosure.

But a short sale?  As it stands now, beginning January 1 any owner who sells short and is released from the debt will have to report that forgiven debt as income.  There is no question that debt forgiven as part of an approved short sale is subject to COD tax liability absent the “principal residence” exemption.  In other words, only a confused or misinformed owner/debtor will seek a short sale beginning January 1 given the substantial tax implications.  For example, if your house sells for $300k but you owe $400k, you will have to report $100k as income, resulting in a tax bill of an additional $30k or so (depending on your tax bracket).  Is a successful short sale worth that kind of money owed to the IRS?

But — and getting back to where we stared — good news is on the distant horizon.  Recently, the Senate Finance Committee approved extending the Mortgage Forgiveness Debt Relief Act through 2013.  While admittedly a very small step, it is at least a first step towards exending this income tax exemption.  And absent such an extension, short sales will become far, far less attractive.  If Congress can complete the job — a very big IF — then short sales will remain a viable alternative to foreclosure.  But if Congress sits on its hands and lets the exemption expire, short sales will likely dry up dramatically.  Or at least they should…

When is Foreclosure Right for You? Part 2 of 2

This post is not legal advice. It is a general discussion of SOME of the relevant legal issues surrounding foreclosure. If you are considering or facing foreclosure, you need specific legal advice for your particular situation. Consult an attorney in your area.

In my last post, I discussed the difference between a judicial and a nonjudicial foreclosure, which is one of the two essential issues to understand when considering whether to allow your property to go into foreclosure. The other essential issue concerns the number of mortgages you have on the property.

For many reasons, people often took out a first and a second mortgage when they bought property. Others opened up a home equity line of credit which they then used to pay other bills. In either case, the owner has a first and a second mortgage on the property. Where there are two mortgages, foreclosure creates much greater risk.

First, some background: mortgages, like all other liens, are arranged by seniority. (A “lien” is a legal right to force the sale of particular property to repay a debt, whether on a mortgage, unpaid property taxes, an unpaid contractor’s bill, etc.) As a very general rule, seniority is determined by time; the older the lien (i.e. the longer ago it was created or placed on the property), the greater the seniority. The “first” mortgage (or any other lien) — known as “first position” — will be paid in full by the sale of the property before the second and all subsequent liens are paid. The second will be paid in full before the third and all subsequent liens are paid. The third will be paid in full before the fourth, and so on. So, in a market like this one, the only debtor who has any real chance of being repaid in full is the mortgage or other lien in first position.

Where an owner has two mortgages, one is senior to the other (usually in first and second position on the property). Typically, when an owner stops making payments on these mortgages, the first position mortgage will foreclose. By foreclosing, the first position mortgage (under authority created by the deed of trust) forces the sale of the property and the proceeds (after payment of costs) are used to satisfy the debt. If there are any remaining funds (very unlikely in today’s market), they are applied to the second position mortgage and then to the remaining liens in order of priority.

Now, here is the important part: foreclosure extinguishes the debt that is being foreclosed, but it does not extinguish the junior debts (such as a second mortgage). So, if the lender forecloses the first mortgage and the proceeds are insufficient to pay the total amount due, the balance is extinguished as a matter of law (with certain tax implications — perhaps the topic of a future post). In other words, even though the debt was not repaid in full, the debtor is off the hook and does not need to pay the difference on the first mortgage.

However, the debt of the second mortgage survives. Admittedly, the second lender can no longer foreclose on the property because the legal right to do is extinguished by the foreclosure of a senior debt. The problem for the owner, though, is that he still owes the money borrowed under the second mortgage. In WA, you have six years in which to sue for breach of contract. The owner/debtor’s failure to make payments on the second mortgage (per the terms of the promissory note) constitutes a breach of contract. So, after foreclosure of the first, the second lender will have six years in which to sue the debtor for the full amount of the debt. The debtor will probably lose that suit. At the end of that process, the lender will have a judgment against the debtor for the full amount of the balance due, plus interest and late fees, plus attorney’s fees and costs incurred by the suit. Judgments are bad (see Part 1).

So, if you’re thinking about foreclosure, you’re taking a very big risk if you have multiple mortgages. You could get a very, very unpleasant surprise five years later. At that point, bankruptcy may be the only viable option.

When is Foreclosure Right for You? Part 1 of 2

This post is not legal advice. It is a general discussion of SOME of the relevant legal issues surrounding foreclosure. If you are considering or facing foreclosure, you need specific legal advice for your particular situation. Consult an attorney in your area.

Practically every day, I get a call from a potential client wondering what to do with a property that is seriously “under water.” A property is under water where the owner owes more on the mortgage(s) than what the property is worth in today’s market. The problem can be compounded by high mortgage payments (in the go-go market of yesteryear, it was not uncommon for someone to buy “more house” than they needed in the hopes of continued double-digit appreciation — the more expensive the asset, the greater the total appreciation). At least once a week, I speak with someone who has mortgage payments of $3000+ per month, where they could rent a suitable place for half that and they owe $50,000+ on the property beyond what it is worth.

So what to do? It’s been the topic of some discussion. One option is to hunker down, bite the bullet, and wait for the market to bounce back. After all, you’ve got to live somewhere. Eventually, the market will start going up and some day you’ll regain equity in the property (equity = value in the property greater than what is owed on it). However, depending on when you bought and what you paid, it may be a loooooooooonnnnng wait…. In the meantime, you’ll keep making those big mortgage payments.

Some people wonder whether they can just walk away from the property and be done with it. The usual plan: Let it go to foreclosure, temporarily ruin your credit, and start saving the difference between rent and the mortgage. To determine whether this is a good idea — or, more accurately, to get an idea as to the risks and benefits of doing so — you must first understand the difference between a judicial foreclosure and a nonjudicial foreclosure. [Author’s Note: This post is written for residents of Washington State. If you live somewhere else, your laws may differ. Yet another reason to consult an attorney.]

First, some background: When you bought the property, you borrowed money from a lender. In doing so, you signed two key documents: a promissory note, and a deed of trust. The promissory note is the legal document that sets forth the debt and the terms of repayment. The deed of trust is a type of deed (a document that transfers title to real property). Under a deed of trust, you transferred title to the property to a trustee, who “owns” the property for the sole purpose of guaranteeing that you repay the debt as set forth by the promissory note. If you fail to pay the debt, the trustee has the power to sell the property without your permission so that the proceeds of the sale can be used to repay the debt.

Now, the two types of foreclosure: A judicial foreclosure is a civil action filed in court by the lender. The lender sues for payment of the debt reflected by the promissory note. The process takes 12+ months and is expensive. At the end of the process, the court will order the sale of the property, the property will be sold at public auction, and the proceeds from that sale (after costs incurred) are applied to the amount owed. If there is a balance remaining on the debt, that difference becomes a judgment against you. This is a “deficiency judgment” because it is a judgment for the deficiency between the amount paid (via the sale) and the amount owed. A “judgment” is a court order requiring a person to pay a specific sum, and if not paid immediately it accrues simple interest at 12% until paid. A judgment expires 10 years after it is entered by the court, but it can easily be renewed for another 10 years. Once a creditor has a judgment, the creditor can use various legal tools to extract payment from the debtor without the debtor’s consent. For example, the creditor can garnish the debtor’s wages (the employer pays a portion of the wages directly to the creditor) or garnish the debtor’s bank account (the bank disburses the funds in the account directly to the creditor). It is safe to say that judgments are bad. So, one should avoid a judicial foreclosure.

The other type of foreclosure is a nonjudicial foreclosure. With this type of foreclosure, the trustee orders the sale of the property under the authority conferred on him or her by the deed of trust. Once again, the proceeds (less costs of sale) are applied to the debt owed under the promissory note. This process is quicker and cheaper than a judicial foreclosure. However, a nonjudicial foreclosure extinguishes the debt set forth in the promissory note, even if the sale does not net enough to repay the debt in full. There is no possible deficiency judgment. Thus, with a nonjudicial foreclosure, the debtor knows that he or she will not owe anything following the foreclosure, regardless of whether or not the lender is repaid in full following the sale.

Obviously, then, foreclosure may make sense if the lender foreclosures nonjudicially, but probably does not make sense if the lender forecloses judicially. Which will happen to you? Unfortunately for debtors, lenders do not advertise in advance which method of foreclosure they intend to use. That said, the vast majority of foreclosures are nonjudicial. A judicial foreclosure would make sense for a lender if the debtor has other assets that can be used to satisfy the deficiency judgment. If the debtor has no other assets, then they are “judgment proof” (a term used to describe someone who simply has no money to satisfy a judgment, thereby discouraging anyone (including a lender) from incurring the costs of a lawsuit). Where the debtor is judgment proof, it makes no sense at all for the lender to incur the costs of obtaining a judgment.

So, if you’re willing to assume the risk of a judicial foreclosure, and/or you have no assets whatsoever such that you are comfortable being judgment proof, then it may make sense to just walk away. [Note: you’ll have a hard time getting credit, finding a landlord, or otherwise living in the modern world if there is an unpaid judgment against you.] However, this is only ONE of the TWO key factors you need to consider. Stay tuned for Part 2.

President Obama’s Foreclosure Rescue Plan: Loan Modification Analysis

Underwater homeowners looking for a bailout from President Obama’s Foreclosure Rescue speech might be wise to think very carefully about all the possible consequences of grabbing the new loan modification offer. The White House press release on the full plan is located here. President Obama’s plan offers homeowners in trouble a helping hand, at the expense of all the other taxpayers who didn’t speculate, but let’s put aside our outrage for now. Instead, let’s look at whether or not the loan modification program is a good decision.

Clearly everyone is in a unique situation but there are some commonalities within the group we’ll call People Seeking Loan Modifications. I am openly stereotyping for the purpose of making this blog article general instead of case study specific. People Seeking Loan Modifications (PSLM) are typically folks who had a certain level of income when they purchased the home, and today that income has been dramatically reduced. Some may be facing a rate increase or a payment recast if negative amortization has pushed the principal balance to, say 115% or 125% LTV. Most purchased at 100% LTV, some decided on interest only loans, or interest only for a set period of time, in order to achieve a lower payment, speculating that future appreciation would bail them out at the next refi. They have two big problems: Negative equity AND an unaffordable payment.  PSLM typically have other consumer debt as well as mortgage debt. When income drops off a cliff, PSLM use credit cards to pay for routine expenses. By only offering a modest rate reduction, I predict that the re-default rate on these new loan modifications will be easily over 50% and I’m being optimistic. A rate reduction only solves half the problem. Their monthly housing expense has been reduced but their other expenses have not gone away. (If When the banks are nationalized it will be a lot easier to offer rate reductions on credit cards and perhaps that will be in the next bailout proposal.) There IS a solution for the typical loan mod seeking homeowner; President Obama wants principal balance cram downs in bankruptcy. Now the homeowner has to make a sacrifice: Trash my credit record for 10 years with a BK in exchange for getting a financial matrix reboot.

The key to whether or not a loan modification under the new program will work rests with the homeowner: What is the homeowner’s income today v. when he/she obtained the mortgage loan? Many of these folks have been laid off, some were living on extended overtime as a regular part of their monthly income, others were commissioned salesmen with flatline commissions during 2008, some had to take mandatory salary reductions, and still others have had NO disruptions in income but were qualified at the teaser rate of an Option ARM. What if the homeowner has no job at all? Does the homeowner get a zero percent interest rate loan? I’m thinking no, so how do we underwrite this loan and make a determination if this loan mod will fail? PSLM are high risk borrowers and re-defaults will likely occur. But the theory goes that if we can slow the foreclosures to the pace of a river instead of a flood, then doing so *might* help stabilize neighborhood home values and prevent even more foreclosures.

The Tim at SB reminds us to consider that when speculation occurs, foreclosures are a natural part of the solution and may not always be a negative, especially when a homeowner is far better off renting a similar home for far less than the (even modified!) mortgage payment. Home values fall and people who can afford to purchase do so. This begs the question: Do modified mortgage payments really help homeowners? The answer is, it depends on the homeowner.

In order to project future performance, it is important to visit past efforts in helping homeowners face foreclosure.  Past performance: FHA Secure: Projected to help 80,000 Actually helped 266. Hope for Homeowners: Projected to help 400,000 actually helped 312. Projections for President Obama’s loan modification program are that it may help 3 to 4 million homeowners. I project it will help far less. Perhaps we’ll break a thousand this time. This new plan appears to be a bailout for the banks, disguised as a bailout for homeowners. Same siren as FHA secure and H4H, she’s just wearing a different dress.

Will this piece of the Foreclosure Rescue package from the President help stabilize falling values? No. Instead, it will just flatten out the cliff diving and extend the pain that much longer.  From CR:

“For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time. This is not so good. The Obama administration doesn’t understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. Back in April 2005 I wrote: “Housing: Speculation is the Key [S]omething akin to speculation is more widespread – homeowners using substantial leverage with escalating financing such as ARMs or interest only loans.” This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.

Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure – prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

Question for Attorneys: Federal Tax Liens & Foreclosures

tax lienCould someone with Foreclosure sale experience answer the question below?  Or, at least discuss the possible outcome?


A homeowner has a Federal Tax lien against the property.  The homeowner is delinquent on their mortgage and it goes to Foreclosure.  At the Foreclosure sale, the property then goes back to the lender because there were no bidders for the home.

1)   Is the Lender required to pay off the Federal Tax lien at Foreclosure or resale of the home?

2)  If the Lender pays off the Federal Tax lien, what recourse does the Lender have against the borrower?

3)  If the Lender pays off the Federal Tax lien,  has the delinquent borrower just handed off their tax burden to the Lender and walked away with no liability?


Is a "short sale" a bargain?

Actual info from recently closed short sales:

1) The owner bought it in September of 2005.  They did so many cashout refinances since time of purchase, that I can’t see what the downpayment was at time of purchase.  They tried to sell it for 30% more than they paid for it exactly two years after they bought it (likely due to a 2 year pre-payment penalty) just a month or so into the weak market of late 2007. They moved out and rented it in December of 07.  Then, while it was tenant occupied, they relisted it for sale in February for $50,000 less than their original attempt of 30% more than they paid for it.  They dropped the price an additional $50,000 two weeks later.  They dropped the price an additional $50,000 three weeks after that.  They dropped the price an additional $50,000 five weeks later.  They dropped the price an additional $50,000 three weeks later and dropped another $50,000 five weeks after that.

So $300,000 in price reductions from 30% more than they paid to an asking price that was 13% less than they paid.  BUT then it bid UP to 7% less than they paid for it 2.5 years before.  It either bid up, OR since by this time it was a short sale, the bank may have held out for $50,000 more than the original offer.  At any rate it closed at 7% less than the owners paid for it at 1.12 X assessed value, BUT that was the highest price ever paid in the neighborhood.  The original asking price was 1.5 times assessed value.

The escrow period was 128 days from the time the seller accepted the offer until it closed.

The kicker? A couple of days after this one closed, the neighbor listed their home at 1.08 times assessed value and $50,000 less than the short sale closed at, and it still hasn’t sold.  So the short sale was not necessarily a good buy.  It might have been if it had closed at or less than the final asking price.  But when it closed for $50,000 more than the final asking price it moved from bargain to not a bargain during negotiations and escrow.

Warning: Sometimes seeing $300,000 in price reductions and “short sale” or “foreclosure” at the end, causes buyers to bid UP a property to where it is no longer a bargain.  While I chose this example at random and worked through the history while doing the post and not in advance, it turned out the way many do.  Buyers bid it up or don’t hold their ground when the bank responds to the offer, and 128 days later…not a bargain.

Let’s do another one:

2) Bought in the summer of 2006 with 100% financing for 1.3 times the 2008 assessed value and for double the price the previous owner paid for it in 2004.  Clue.  This person overpaid for it in 2006 and it had the magic words “granite counters”.  Yesterday someone said to me they were going to buy a granite countertop and stick it out on the grass of a vacant lot and sell it for half a million dollars 🙂

Looks like the person who bought it barely (if ever) lived in it, as it was listed for rent within 3 months of closing in 2006.  Apparently someone in 2006 thought paying double what the previous owner paid in 2004 was “an investment”. After renting it out for a year, the owner tried to sell it in the summer of 2007 (before the market turned) for 11% to 12% more than he paid for it.  No takers and it was re-rented.  They dropped the price $15,000 after 125 days on market.  Three months later…still no takers.

They rented it out again and five months later listed it for 20% less than they paid for it.  (Interesting that they listed it for 12% more than they paid for it and then 20% less than they paid for it, without trying anything in between. An agent (not the agent who had it listed and not the same office) bought it immediately as soon as it was listed for 20% less than the current owners paid for it. The short sale escrow lasted 75 days and it closed at the full asking price of 20% less than the owner paid for it in 2006.  The sold price from the short sale was 1.03 times assessed value.

The kicker? The agent who bought it at the bargain price now has it on market for sale or for rent.  Rent price is $1.58 per square foot. Sale price is 1.17 times assessed value.  Would have been a nicer story if the person who got it for 1.03 times assessed value was going to live in it.  Insider gets the bargain and flips it back out on market for a decent price, but not such a bargain.  At least they’re not asking 1.5 times assessed value, but if a nice young family bought it for the bargain price of 1.03 times assessed value, I would have been happier.

I think I’ll go see it this weekend with one of my clients who is in that price range.  Maybe it will sell for less than 1.10 times assessed value.  Not a screaming deal, but worth taking a peek at it.

Moral of the story? Don’t go to an agent and say “I want to buy a foreclosure property” or “I want to buy a short sale”.  We always shake our heads when people do that.  Instead look at properties you like that are in your price range, and if one of them is a bargain, we’ll know it.  Sometimes it’s the foreclosure or short sale, sometimes it isn’t.

I know of another home that was listed for $1.3 million, sold at foreclosure for $800,000 and went back on market at $1.1 million.  No one’s buying it.  So the question remains on this one and the second example above, was it a bargain?  We won’t know until the people who got the bargain and immediately relisted the homes for sale at a higher price, get an offer that sticks.  What we do know is the bargain on those two gets less every day, since both properties are vacant and the owner is paying the carrying costs.

Foreclosure; Losing the American dream

This is Part One of a series of articles on the foreclosure process.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.

Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral.  Reduced or free legal aid may be available in some states. Ask for a referral from the state bar association or through a LOCAL HUD-Approved Housing Counseling Agency.

Most mortgage loans are not mortgages. Instead, lenders shifted to using a deed of trust type of document in many states. With a mortgage document, a lender would have to use the judicial system for foreclosure which was time consuming and expensive.  With a deed of trust, the lender can take back the asset in a much shorter period of time although that’s arguable in today’s rising foreclosure climate.  Each state will have their own Deed of Trust Act.  Within each state’s Act, there will be a specific timeline that must be followed by the lender.  Moe at LoanSafe provides a basic timeline here.  First the homeowner misses a payment. Late charges are assessed and the lender may begin an effort to contact the homeowner to determine what’s going on. A “notice of default” letter is mailed informing the homeowners that if they do not catch up, the trustee sale will be scheduled.  At this point, the lender hires an attorney to file the public records documents, publish the required notices in local newspapers, and prepares for the auction.  Depending on state law, the homeowner will have a specific number of days before the sale date to bring the loan current and pay all late payments, including interest and penalties, attorneys fees, and trustee fees. After the date of the trustee sale, the homeowner will have a state-specified number of days to vacate the property. A sheriff is usually asked to help with eviction, if needed.

Washington State enacted the Distressed Property Law in June of 2008 which means, among other things, that the homebuyer of a home in foreclosure as well as the Realtors owe the the homeowner the highest duty of good faith and loyalty; fiduciary duties to the homeowner (one-to-four family residence, owner occupied.) Read more about the DPL here.

Securitized lending helped fuel the real estate and mortgage bubble because banks and lenders could package up loans and sell them as pools of Residential Mortgage Backed Securities (RMBS) thereby freeing up more mortgage money to loan.  Before securitized lending, banks would hold the mortgage loans on their books as part of their assets.  A mortgage payment arriving in the mail each month at a bank is considered an asset.  A delinquent loan is considered a non-performing asset. A foreclosed home is considered owned-real estate or Real Estate Owned (REO.) 

At trustee sales during the bubble run-up, there were many get-rich-quick believers with notebooks and cashiers checks bidding on homes that looked like a possible quick flip-for-profit on paper.  The lender was able to score the principal amount of the remaining loan balance plus all the other expenses, the high bidder went away happy, and the homeowner re-entered the housing market as a renter.  Today’s trustee sales are remarkably different.  In most cases, there are no bidders and the home is deeded back to the bank.  REO portfolios at banks are starting to hit the market. An institutional owner is far less emotional about the sales price and far more goal oriented about reducing the price in order to dispose of the asset.  BEFORE the trustee sale, there are options that homeowners weigh.  Repayment plans, forebearance, loan modifications, and short sales are some of the options we’ll discuss in part two.

Many homeowners have reported frustration in working with their loan servicing department towards a workable solution that will allow them to stay in their home.  We will discuss options to avoid foreclosure in part two.  Before we do that, we must first revisit Federal Accounting Standards Board Rule 140 from this article called “Predators are Still Safe”:

many loan servicing agreements prohibit the Servicer from modifying loan agreements entirely, or limit such modifications to no more than 5-10% of a total pool. Further, loan modification may run afoul of FASB rule #140, (2), which says that if a bank alters the terms of a loan it has pooled, it cannot keep the loan off its books. It must repurchase the loan, return it to the books, set aside a reserve for losses, and actively manage it.

The industry asked for and got it.  FASB Rule 140 will be delayed until after Nov 15, 2009, and the murky, opaque waters that make up credit crisis continue to pool around the banks that don’t want to tell us just how many bad loans they’re holding.  Will the TARP plan help banks? Will the involuntary capital injections help banks and anyone seeking credit? Will homeowners get help? It’s hard to say because the only way we can see what banks are holding is when the regulators take over.   What we do know is that homeowners are reporting that it’s becoming excruciatingly difficult to work with their loan servicing department. 

When the industry jumped into subprime lending, we underpriced risk.  We also underpriced the true cost of “servicing” a loan. I’m surprised we’re not reading about meltdowns in the servicing sector. I’m sure those folks are working 80-hour weeks and get yelled at all day long by Realtors.  In the future, we should expect tougher state or federal laws governing mortgage loan servicing (Kary Krismer’s short sale requests must be responded to within 24 hours, phone messages must be returned, and so forth) which will translate into higher bank fees and higher interest rates in the future. Or perhaps now.

Author’s note: Part one of this series was designed to be incredibly basic. So basic as to prompt a reader looking for more detailed help to seek legal counsel.  An attorney licensed in your state is the best person to help you understand the deed of trust act in your state, and all your possible options.

Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding

Quick snap shot of recent Snohomish Co. Notice of Trustee Sales (foreclosure)

Spending time at the Snohomish Co.  excise tax and recording office today afforded me the opportunity to pull some records on current Notice of Trustee Sales recorded from Sept. 1, 2008 to today.   There were more than the 36 in my sample before I became restless and bored with basically the same theme that I knew would play out.

All were purchased within the last 4 yrs, most of the sample from 2006, one in 2008.    One was for $3 million in arrears, another for $1.28 million in arrears and even one at $56,000.00   So, foreclosures are affecting all property types and income strata.

Here’s the tally of when the homes were purchased in my quick sample:

2004: 2

2005: 4

2006: 18

2007: 11

2008: 1

Lenders represented (again no surprise):

WaMu, Countrywide (several), Flagstar, First Franklin, AEGIS, Homecomings, GMAC, Indymac, Everhome Mtg, HSBC, EMC, Wells Fargo, First Horizon (now Metlife), Greenpoint and US. Bank.

Side note: Short sales are taking 60-90 days from the sampling we are closing in our office.  It is UNREALISTIC for agents to expect anything sooner.   If it happens sooner then great, but do not expect quick responses.  On Monday, we received approval/clearance on a short sale from a Purchase & Sale agreement signed around from this past JUNE.

It is not terribly efficient to have borrowers lock in interest rates two months prior to receiving short sale approval.  We are seeing this happen.  The downside for the borrowers in this volatile mortgage market speaks for itself.

Homeowners in Foreclosure Should Hire an Attorney

When I teach the Short Sale class, I say many times during the class that homeowners selling short and homeowners in default should always be directed more than one time to seek legal counsel. Sometimes homeowners in financial distress don’t hear you the first time. Just handing them the agency pamphlet isn’t enough. Attorneys can help homeowners in ways that real estate agents cannot. They will know more about their state’s deed of trust laws and any state-specific anti-predatory lending laws as well as federal residential mortgage lending laws than an average real estate agent, and attorneys will have access to recent case law.

justiceStuck with a bad loan, a Staten Island family fights back
Staten Island Advance

David and Karen Shearon were like many other Staten Islanders stuck with bad loans, collapsing financially under the weight of a crushing mortgage less than a year after buying their first home.

But unlike thousands of others who have entered foreclosure as part of the fallout from the subprime lending crisis — homeowners often embarrassed by their situation and unable to afford legal representation — the Shearons fought back.

A judge recently ruled that the owners of this Westport Lane townhouse in New Springville home were victims of predatory lending.They argued through their attorney that brokers aggressively marketed them a high-cost loan and then pressured them to go through with the closing when they could have qualified for a traditional fixed-rate mortgage.

In what is likely to be a precedent-setting decision in New York, state Supreme Court Justice Joseph J. Maltese agreed with the Shearons, recently telling the bank that it could not foreclose on the couple’s New Springville townhouse and that it may have to pay them damages for their troubles and void the $355,000 mortgage on their Westport Lane home…

Judge Maltese determined the original lender violated banking law by failing to check the Shearons’ income and ability to pay the high-cost loan. He said the lender crossed the line again when it financed the home above the $335,000 sale price, using an additional $19,145 to pay the costs and fees associated with securing the high-cost loan. The Shearons’ $5,000 deposit, meanwhile, was never deducted from the ultimate $355,000 in financing.

“This ultimately left Shearon with negative equity in the property,” the judge wrote.

“The mortgage loans may be unenforceable and the homeowner may be entitled to reimbursement of all prior mortgage loan payments, the fees for obtaining the loans and attorney fees,” Maltese added.

At a hearing Feb. 28, the judge is expected to decide whether the mortgage should be voided and damages granted to the Shearons.

Read the entire story here.

I keep reading comments about how there are not enough regulators to adequately oversee state and federal lending laws. With the mortgage lending meltdown continuing into this election year, we are already seeing more proposed state and federal laws.

Question: Would the threat of having the mortgage voided in the courtroom be a more effective way of bringing some rapid order into the mortgage industry?

An Early Holiday Present

Yesterday, The Mortgage Foregiveness Act of 2007 was passed effectively getting rid of the question, “will I be taxed on a short sale?”

Prior to this action, the forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure was potentially taxable to the borrower. As agents we always have had to warn our clients in short sale positions about the potential of receiving a 1099 from the shorted mortgage lender, thus triggering a potential tax.  In one situation I’m involved in, the potential deficiency is 1 million and the tax hit would have been devastating.

Now however, those owners in that situation, at least until 2009, are having their taxes waived, too (at least up to 35%).  For those in this situation, this is really great news and likely the best holiday present they could hope for.

On their behalf, thank you congress [photopress:applause.jpg,thumb,alignright]