Archive for the ‘Foreclosure Avoidance’ Category
Tuesday, October 16th, 2012
It is almost here: the dreaded end of the federal short sale tax breaks, also known as the Mortgage Forgiveness Debt Relief Act. Come December 31, sellers who have not yet closed escrow on their short sales will no longer escape the capital gains tax on the difference between the sales price (of their home via a short sale) and the amount owed on their mortgage…UNLESS the tax breaks are extended. Will this happen, and if not, what will happen to short sales?
First of all, I have to say that I think the tax will be extended. It simply does not make sense at this critical economic time to not extend the tax break. Doing so wreaks all kind of havoc, including surges in foreclosures and bankruptcy filings, which neither the government nor the banks want to see.
Failure to extend the act would undermine everything that is improving in the real estate market and cause us to jump many steps backwards. The fact that an extension has not yet been announced makes people nervous, but due to the Presidential election and other important issues on the proverbial table, I think it has been put on the backburner for a short time.
Lets take a look at the main arguments for not extending the tax break:
1. Too costly. There are some who believe that the law will not be extended, as they feel the alleged $2.7 billion it will cost to do so is not justified due to the deficit. To this I would say it will be a lot more costly if millions of homes go into foreclosure again, as people find they have no other solution and cannot afford to stay in their homes. The lenders will be stuck with tons of inventory that they have to sell, many that will be trashed, and the market will drop again, creating another real estate nightmare. Just when we are coming out of the bad market is not a good time to cause it to dive again.
2. Easy escape for homeowners – ? Another argument in favor of not renewing the tax savings is that doing so encourages people to default on their loans. In other words, if people know they can short sale their homes and walk away without financial ramifications, it makes it easier than staying in a home they cannot afford and trying to make it work. I do not agree with this argument, as I think the stress would just lead to more bankruptcy filings and foreclosures, which in the end is even worse for the lending institutions (not to mention for millions of families).
It remains to be seen what will happen come the end of the year. The bottom line is this: if you are contemplating a short sale and your house is not yet listed on the market, or if your home is listed but you have not yet sent any offers over to your short sale lender, it is a good time to discuss your options with both your agent and a financial adviser, CPA and/or attorney. You must understand your options and what could happen if the law is not extended, because it could effect your decision whether to close your short sale.
If you are in the middle of a short sale and you have obtained or are soon to obtain lender approval, you need to make sure that the lender(s) release you in writing from any financial liability once escrow closes, if it is to close after December 31.
[Note that regardless of when your short sale is closing, you should ALWAYS make sure the lender approval letter has language to this effect...most lenders automatically state such in the approval letters, but if not you need to have your agent or negotiator ask that it be included]. You also need to check your state laws to determine state tax liability with short sales, as laws do vary. For more information about short sales you can visit my website.
Wednesday, October 3rd, 2012
Bank of America announced this week it’s plan to eliminate debt accrued on second lien mortgages for some lucky borrowers – approximately 150,000 lienholders across the country. This is big news for those who are underwater and would like to be able to stay in their homes. The lender says the goal behind the program is to help homeowners stay in their homes and build equity.
If you have a second mortgage that is serviced by B of A, you may soon receive a letter in the mail telling you your second lien can be extinguished. But don’t get too excited – the 150,000 letters are being sent out only to pre-qualified borrowers, and you cannot elect to be in the program. Apparently if you receive a letter your debt will be released within 30 days if you do not opt out of the program.
There is no data on which specific parts of the country may benefit the most, although one article mentioned the inland empire may see quite a few of these releases, as there were many second mortgages in that area and a substantial number of those loans that were issued by Countrywide (which was acquired by Bank of America). There is also no word on how credit may be effected, but if the bank is agreeing to release the debt in full there is a chance there may not be a credit ding…that remains to be seen.
While this is not a solution to preventing foreclosure, it could be a very powerful tool in it’s prevention, and those who are included in the program could really be receiving a life preserver. It is a new start and the chance to stay in a home that otherwise may not have been possible for much longer.
If you are the lucky recipient of one of these letters from B of A, please let me know. I would love to read the letter and understand the terms. You can email it to me at Rachel@LaMarRealEstate.org.
Wednesday, September 19th, 2012
Some of the big lenders are making grievous errors that are costing homeowners, buyers and their agents time, money and much aggravation. The biggest problem is that oftentimes departments claiming to help borrowers do not communicate. Let’s look at an example.
Let’s say a seller is in the middle of a short sale, almost to the approval phase when, to his excitement, he discovers his loan interest rate has reset and lowered – maybe he can actually afford the payments now, and wouldn’t that be great to keep his home! So he calls the loan modification department, and the representative tells him they can help him work it out, but he must cancel his short sale, so together they contact the short sale department and the seller cancels his short sale.
The seller has nothing in writing stating that his loan modification will be granted, and no promises are made. Here is the issue: the loan modification department let the seller cancel the short sale without providing terms and explaining how any agreements will work, including any monetary consequences involved. If the loan modification does not work out in his favor, the seller may have no options left but to foreclose (unless the lender allows another short sale attempt).
The above scenario is frustrating, and as much as it would make me very happy for all the distressed sellers out there to discover there was a way for them to keep their homes, I do not believe that anyone should make a decision without facts, including either a written offer with terms or a written agreement.
The solution here is for the loan modification department and the short sale departments to communicate and change their policy. Sellers should not be required to cancel their short sales until they know whether they will qualify for a loan modification. Even if they do qualify, they may not like nor be able to afford the new payments. Therefore, there should be a holding period for the short sale, where the seller and the loan modification department have to work out a plan. This period should take no longer than 10-14 days. If at the end of that period the seller is not satisfied with the terms offered, s/he should be able to jump back into the short sale.
This is a simple solution that will prevent unnecessary foreclosures…because NO ONE SHOULD MAKE A DECISION WITHOUT LEARNING ALL THE FACTS AND CONSEQUENCES FIRST. I challenge big lenders to do the right thing and truly help distressed borrowers by not pushing them into a corner from which they may not be able to escape.
Monday, July 30th, 2012
If you haven’t heard, the latest “brilliant” (feel the sarcasm) plan proposed by some state officials is for their counties to “take” homes that are in imminent danger of foreclosing. This would be done under the government’s powers of eminent domain.
Eminent domain literally translates as the taking of private property for public use. It allows the government (federal and state, as well as local authorities in many states) to seize your home in order to build things like railroads, utilities, highways or bridges, and is supported under the 5th Amendment. There must be a “public use” involved, and the taking must be accompanied by “just compensation.” It is a rarely used power, and in my lifetime I have seen it used only once. But now officials are simply going too far in trying to apply the rights of eminent domain to prevent foreclosures.
To be fair, the arguments FOR this crazy idea are that such actions will help homeowners and prevent neighborhood blight. Ok, so maybe some homeowners will be “helped” by getting out of a mortgages that are sinking them, but there are other ways to do so – loan modification, short sale, and possibly the new rent back programs some lenders are embracing. Other than that, I do not see how eminent domain will help our housing situation in the slightest, nor should it. Here is why:
1. Definition. Eminent domain does not require the owner’s consent, but does offer monetary compensation. This action is also allowed to be delegated to third parties who will take the property and devote it to public or civic use. The question in taking people’s homes is whether doing so will fit within the definition.
The counties that are proposing using eminent domain (like San Bernadino County in California) to help underwater borrowers would like to delegate the taking to third parties. These parties will likely be private lenders or others who will take over the debt, pay it off, and then put the property to “public” use. What I don’t understand is specifically how they might do this. For example, if there are properties in a residential neighborhood that qualify, it’s not like they can just take the homes and turn them into railroads or highways. There are all kinds of challenges in such situations, not to mention zoning codes. So realistically there are many neighborhoods (I would think the majority of them) that may not truly fit within the definition. We would have to learn more details to fully understand this one.
2. Lawsuits. There is most always a lawsuit with eminent domain – not many property owners are going to peacefully walk away and let the government take their home. If this is to be done on a large scale, it will further congest our overburdened court systems, costing lots of money and time – more for the taxpayers to dish out. The only ones who stand to benefit here are the lawyers.
3. Too much power. Obviously this is a situation subject to LOTS of abuse. And with abuse of power comes more lawsuits, uprisings, and people just plain fed up with the government. Can we really stand for more of that? Not to mention, letting the government become involved in private contracts (a mortgage is a private contract between a homeowner and the lender) creates a plethora of issues.
4. The compensation issue. Under eminent domain statutes the government must pay compensation to the property owner upon the taking of the property. Usually this means the owner will get fair market value. However, in cases where there are loans on the property in excess of fair market value, what will happen? Are we to assume the homeowner will walk away with nothing? We need more information here, but I honestly don’t see how this one will play out. Another point is that the “fair value” will rely on appraisals – what if they are incorrect?
Plain and simple, using eminent domain to “take” homes in order to help the housing problems is a bad idea. Until we get to work by really helping those who qualify for loan modifications, short selling the homes of those who do not, and selling the shadow inventory, along with other possible ideas (like changing the bankruptcy laws so mortgages are treated like other forms of debt), we will continue to see more bad ideas like this one spring up.
Tuesday, April 24th, 2012
There have been many changes happening in the short sale arena, so if you are a buyer considering a short sale, or a seller thinking of selling short, here is the latest news:
New rules in June for lenders. Starting this June, most of the big banks will face new requirements that will hopefully change the length of short sale approvals. Fannie Mae and Freddie Mac have drafted new policies that will require lenders to review and respond to all short sale requests within 30 days of receipt. The lenders will have 60 days after receipt of an offer to make a final decision. If the lender has an offer under review for more than 30 days, it will be required to provide weekly updates. Sounds like good news for short sale buyers and sellers, but will it lead to more short sale rejections if the lenders can’t get it together within the new timelines? Let’s hope not.
End of the year expiration on short sale tax liability still in effect – clock ticking to avoid taxation. I have discussed this in other blogs, but in case you need a reminder the Mortgage Relief Debt Forgiveness Act is set to expire on December 31 of this year. This means that unless it is extended once again all short sales could be subject to federal income taxation after that time. The act, which was created in 2007, allows short sales sellers to avoid federal taxation on the cancelled debt (the difference between the sales price and amount owed on the mortgage). For example, if you have a mortgage of $500,000 and short sell your home for $300,000, you could be liable for federal taxation on the $200,000. If you are considering a short sale, now is the time – contact an experienced short sale agent in your area.
Fastest Short Sale Lenders Report is Out. RealtyTrac recently released a report on which lenders are fastest with short sale timelines. The winner is Fannie Mae/Freddie Mac and FHA. Ally Bank came in second. Bank of America and Wells Fargo were at the bottom of the top 10 list. Read the DS News article to learn more.
Short Sale Surge Predicted for 2012. RealtyTrac released another important report as of late, which outlines the increase in pre-foreclosure sales (namely short sales). The study found a 33% year-over-year increase in these sales; the number in California is higher, at 52%. The downward trend of short sales is no more, and short sales have outnumbered REO (lender-owned property) listings in 12 states, including California. Based on this trend the report, and likely considering the end of the Mortgage Debt Relief Foregiveness Act, 2012 could be a big year for short sales.
Monday, March 5th, 2012
These days it is frustrating to figure out options to avoiding foreclosure. Many homeowners who call me to discuss short selling have similar questions: what are my options. Of course, there are options out there – like refinancing (HARP2 will be able to help some underwater borrowers starting in a few weeks – see previous blog) and short selling.
Lately you may have heard talk about banks selling underwater homes to third parties, allowing the sellers to remain in the home as tenants. This idea is not new, but it has been considered lately as one solution to preventing foreclosures. There are positive and negative elements to establishing a program of this nature.
The positive side: If you are a homeowner the ideal situation for you, if you are underwater and will no longer be able to pay your mortgage, would be to stay in your home. The government agrees, and it wants the banks to sell your home to an investor, keeping you in the property as a long term renter (you still have to qualify as a renter, of course, so no unemployment). Your payments would likely drop substantially, and although you would not longer “own” the home, you would be able to stay there. Sounds good, right?
The not-so-pretty fine print: The problem with the above scenario is twofold: first, we have to consider the effect it may have on the housing market. At what discount will all these homes be sold to the third party investors? It would have to be a big discount, to make sense from an investment perspective. This will devastate neighborhoods, bringing the comparable sold properties down even lower.
But so do short sales and foreclosure, you argue, right? My second point demonstrates another issue…
Allowing homeowners to stay in their homes as renters will make things even worse for housing, because what kind of message does it send? Hey, if you can’t afford your home, you can still live there and just rent it! I can see this becoming a problem, and some homeowners will undoubtedly try to take advantage of it, hurting local markets and neighborhoods even further.
A smarter solution to the housing nightmare is to make the banks approve short sales faster. Although it is so difficult for homeowners to have to short sale their homes, they have an opportunity to start over and get back on their feet, make smart decisions and be homeowners again in the future. I do think that turning the vacant bank-owned inventory into rentals could be a positive spin on things, but I DO NOT think the government should be in the business of renting homes, so for this option to work an investor would have to come in and buy the bank-owned property and rent it out. But of course, this brings us back to the issue of deteriorating prices.
Trying to figure out the best ways to help both distressed owners AND the housing market is tough. I say the banks should bless the short sales and make the process more streamlined, so at least we can get more inventory on and off the market quickly, and get people on their way to healing. What do you think?
Monday, February 13th, 2012
If you have ever considered a short sale, or would like to learn more about how they work, I have the seminar for you…and it’s free! Shortsaleopedia and I have collaborated to hold monthly seminars to help homeowners in San Diego, and the first one is this Wednesday, February 15, from 6:00-8:00 p.m. at the Encinitas Community Center in Encinitas.
I have put together a phenomenal panel of experts – from real estate and credit attorneys to a CPA, short sale bank negotiator, mortgage professional, escrow and title professionals and of course Realtors who specialize and are trained in short sales. We will teach you all about the intricacies and ramifications (legal, credit and tax) of short sales, programs that may be available to help you, and how current and upcoming laws could make your sale easier or more challenging.
Please join me and my wonderful expert panel this Wednesday. You can sign up here: http://shortsaleopedia.com/events/event/event-expert-panel-san-diego-az-2012-02-15/. The Community Center is located at 1140 Oakcrest Park Drive in Encinitas. If you are investigating options for distressed property, this event will be valuable.
Saturday, December 10th, 2011
We have heard news of deed for lease programs rumbling for some time, but Bank of America announced this week that it will begin making them a reality. What this means is that struggling homeowners will be able to turn their deeds over the the bank, and then sign a lease to stay in their homes as renters. There is a lot of controversy over these programs, but lenders are attempting to find ways to avoid more foreclosures and feel this may be one way to do so.
Here’s how the plan would work: the bank would approach troubled homeowners before a foreclosure to see if they would be interested in staying in the home as tenants. The bank would then short sell the home to investors, who would handle the leases. The owners would have less of a credit impact because they would have a short sale instead of a foreclosure, but they would also be able to build up their credit because they would be instant tenants.
Those who are against these programs argue that homeowners, who cannot afford their mortgages any longer, are being rewarded by not having to go through foreclosure and then being able to stay in their homes as renters. [In typical short sales most lenders forbid homeowners to rent back the homes after a short sale because they do not want the homeowner to benefit in any way from the sale.] They are afraid it will encourage many others to do the same.
Those in favor of these programs say that it will prevent so many foreclosures and will help to build the market back up – with less foreclosed properties and vacant properties, values will stop falling. Plus, the lack of vacant homes will strengthen those neighborhoods hard hit by foreclosure.
No matter what side you are on, this is one program that may actually help build the market back up over time, if enough homes can make the cut. It will be interesting to watch and see what happens.
Tuesday, November 29th, 2011
Short sales are a big part of our real estate reality, and they are not going anywhere anytime soon. Although the relief of getting out of a mortgage that can no longer be maintained is usually a blessing for sellers, there is also an added benefit in some cases, of getting a check from the bank at closing.
There are several current programs that offer to pay sellers at the close of escrow on a short sale:
HAFA. The Home Affordable Foreclosure Alternatives program (HAFA) gives qualified sellers up to $3000 at closing. This program applies to both short sales and deeds in lieu of foreclosure. Click here for more information on HAFA and to see the requirements.
Transition Assistance Program (TAP). This is a Calfornia program that nets qualified state homeowners up to $5000 at completion of a short sale or deed in lieu of foreclosure. Click here to check eligibility and get information.
Bank of America Cooperative Short Sale Program. This program is available to any B of A loan holders who are doing a short sale, and provides up to $2500 to those who qualify. The difference between this program and HAFA is that B of A preapproves the home for short sale, including the list price (which could be an issue). A 4 month time frame is given in which the agent must sell the home, and at the end of that time if the home has not sold B of A will issue an automatic deed in lieu of foreclosure (which could be a problem). Speak with your agent if you are not sure about how this program compares to HAFA, as the market time restrictions could be an issue. Contact B of A to get more information on the program.
Chase and Citi Short Sale Programs. Both of these lenders have initiated aggressive programs that pay up to $20,000-35,000. But don’t get too excited just yet…in order to partake of this program you need to receive a letter from one of these banks. This program is not owner-initiated. The banks find those homeowners whom they feel meet standards to successfully qualify. I know of one case here in La Jolla where a homeowner did receive such a letter.
Other bank programs. Some other banks are jumping on the bandwagon and offering their own short sale versions. Wachovia Bank sends letters to sellers asking them to participate in short sales, with a financial incentive at closing (between $3000-5000). Other banks have their own programs and more are sure to follow.
Many lenders are creating their own programs to bypass the HAFA program, as it limits the liability of the banks to collect money. With their own programs, controlling many of the terms of the short sale (like price and time frames), but if you are going to use any bank programs you need to understand these programs. Your agent needs to explain the differences between the bank program and HAFA, so that you can make an informed decision as to which one to choose. As I always say, knowledge is power.
Thursday, November 10th, 2011
Keep Your Home California, a state program that was designed to help homeowners avoid foreclosure, has broadened criteria and may now help you keep your home. The program, which debuted just over a year ago with four ways to help distressed homeowners, will now offer mortgage relief to more state residents.
The original program offered help via payment subsidies, mortgage reinstatements, negative equity reductions and financial assistance to those who must move (cannot afford to stay). Last Spring the program announced it was expanding to include home equity lines of credit, or for those took equity out from a refinance. The program has helped close to 8,000 moderate and low income homeowners who were heading toward loan default.
The new changes include the following:
- Allowing cash-out borrowers to be assisted under all four aspects of the program (this part of the program was proposed last Spring)
- Allowing multiple property borrowers to apply to the program. Those with second homes or those who are on title to another home will not be excluded from the program any longer.
- Extending the mortgage aid for unemployed borrowers to nine months instead of the original six. As defined under the original guidelines, borrowers receiving unemployment benefits are eligible to receive up to $3000 in aid per month.
- Increased reinstatement amount. Under the original program, if you missed one or more mortgage payment you could be eligible to obtain up to $15,000 or 50% of the delinquent amount, whichever is less, in order to reinstate your mortgage and avoid foreclosure. That amount has now been increased to $20,000.
There are still restrictions and qualifications to participate in this program. For more information and to find out if you qualify, visit http://www.keepyourhomecalifornia.org/ or call (888) 954-5337.