Options to Avoid Foreclosure

Options to Avoid Foreclosure

Foreclosure.  It’s a paralyzing event, and certainly one of the biggest misfortunes that can befall someone in their lifetime. It damages credit, and can ruin marriages & livelihoods with ease. If not handled correctly, the negative impact of a Foreclosure can last for decades.  Because this experience is so incapacitating, we thought it would be appropriate to discuss the different options available to someone in this type of situation.

Option #1: Do Nothing. 

-A Foreclosure will complete on the Auction sale date, and the Bank will end up taking possession. The homeowner will be evicted.

-Lien holders may impose deficiency judgments or 1099s for taxes on forgiven debt to the homeowner.  A deficiency judgment is debt, and damages debt/income ratios, as well as the ability to qualify for loans.**Certain homeowners may be Tax exempt; Speak to your CPA.

-“Foreclosure” is recorded on the homeowner’s credit report for ~10 years, and their rating drops significantly. This makes it very difficult to qualify for new credit, and increases interest rates on existing credit accounts.  It will be ~ 4 years before being able to purchase a new house.

Option #2: Catch up on payments.

          -The homeowner must ask their Bank for a “Payoff Statement.”

            -The homeowner must pay 100% of balance.  Partial payments are rejected whilst the Foreclosure is in progress.

Option #3: Forbearance Agreement or Loan Modification.

            -Forbearance: The Bank will ask for 40-50% of arrears and costs up front, with the remainder balance due over the next 9-12 months.  The Forbearance payments are in addition to regular mortgage payments.  The Foreclosure stays pending and occurs if a payment is missed or partial.  **A very high percentage of Forbearances fail, and the Bank keeps what was paid.

            -Loan Modification: The Bank will ask for 40-50% of arrears and costs up front, with the remainder balance due/placed at the end of the loan. Payments may increase due to loan type, and the interest rate will increase due to damaged credit. The Foreclosure stays pending, and occurs if a payment is missed or partial.

Option #4: Deed in Lieu of Foreclosure.

            -The Homeowner voluntarily gives their keys & house to the Bank, in exchange for stopping the Foreclosure proceedings.

-The Homeowner is still exposed to deficiency judgments or 1099 for Taxes, which damages credit similar to a Foreclosure.

-“Deed in Lieu” is just as bad as “Foreclosure” on a credit record.

-A Deed in Lieu of Foreclosure is not possible if there are junior liens attached to Title.

Option #5: Re-Finance

            -Due to missed payments & damaged credit, Banks will typically only offer 60-70% LTV.

Option #6: Sell, working with only a Real Estate Agent

            -The Property must sell for a price significantly more than is owed, in order to pay the mortgage in full.  Additional costs associated with closing are incurred, such as commissions, concessions, settlement fees, recording fees, insurance, Taxes, utility/water bills, & status/transfer fees.

-Most Real Estate Agents don’t specialize in Short Sales, and don’t want to deal with them.

-Very few Real Estate Agents know the loopholes of the Short Sale system.

Option #7: Short Sell, working with Foreclosure Solutions & Real Estate Agent

            -The Bank will sell the property at a discount (short), in order to avoid the expenses associated with foreclosure & property ownership.

-The homeowner & Real Estate Agent receive the benefit of working with a company that specializes in this field, and are experienced in Short Sale negotiations.  This allows the Real Estate Agent to focus on their specialty: Marketing the property for a Buyer.

-Nearly all costs associated with the sale of the Property are covered/paid by the Bank; including commissions, concessions, and Title fees.

-Deficiency Judgments may be negotiated away.

-Replaces “Foreclosure” on the homeowner’s credit record with “Settled Debt,” which is much less damaging. Credit rebuilding can begin sooner.

-NEVER guaranteed, since it is dependent on Lender approval.

Option #8: Foreclosure Deferment.

            -The Homeowner may be eligible to defer the foreclosure auction for 90 days.  They must occupy the property as a principle residence for the 90 days following the “Notice of Election & Demand” filing date.  They must intend on remaining in the residence.

            -The Homeowner will receive a deferment notice from the Bank, and will need to contact a counselor within 20 days.  The Counselor will explain several avenues that the Homeowner may pursue, in order to avoid the foreclosure auction.

Option #9: Bankruptcy.

            -Stalls, but does not stop foreclosure.

            -May help with discharging debts afterwards, if the Short Sale isn’t accepted.

This discussion, and these “options” are merely & solely for informational purposes only. No agent employed by Foreclosure Solutions is an attorney, CPA, or Tax professional. We are not authorized to provide legal or financial advice.  It is highly recommended to seek your own legal & financial advice.

Deficiency Judgment

The Deficiency Judgment

Definitely one of the biggest factors in any Short Sale situation is the Deficiency Judgment. It is such a monumental topic that it deserves its own discussion. 

First off, what is a Deficiency Judgment?  Ballentine’s Law Dictionary describes a deficiency judgment as, “…an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full.”  In other words, a deficiency is the shortfall (difference) between what the Property sells for and what the total loan balance is. An example is a Bank foreclosing on a $100,000 note/mortgage.  In an effort to be outbid, the Bank will bid less than owed (say $80,000), because they do not want the Property.  They will then levy a “deficiency judgment” against the Homeowner, for the remaining $20,000 due.

As a matter of fact, Banks are not in the Real Estate business, but instead in the money business.  They are not interested in Real Estate specifically, and are not watching “market trends.” Their main interest when it comes to Real Estate is how much money they can make, and “Return on Investment” figures. Even when it comes to helping a Homeowner with a delinquent loan, the Bank really is only interested in the most cost effective solution, or the option/avenue that “makes” the most $$.  Especially when the Bank isn’t the owner of the loan itself, it can be argued that they only care about how their own portfolio looks. It can be because of these reasons, among other things, that Deficiency Judgments are levied.  This is not to say that Banks are heartless and run by Scrooges; since they don’t even have to offer any loan workout programs. Instead, it is mentioned merely as information necessary to sufficiently understand Banks, and why they do what they do. 

Not everything is Bank driven though. It is important to note that by and large, Banks are servicing loans on behalf of an Investor, who will dictate servicing guidelines.  Bank of America, for example, services loans for over 500 investors!  Sometimes then, it is the investor who mandates a deficiency judgment be levied, not the Bank.

The whole idea behind levying a deficiency in the first place, is to minimize losses incurred by loan defaults. Historically, deficiency judgments after Foreclosure were rare to see; Banks did not believe it was worth their time.  Among other things, there was not a lot of research available to show recovery rates, or how to identify a “good” candidate for a deficiency. Furthermore, most markets were appreciating pre-2008, so lenders could typically make 100% of their loan back through the REO sale.  Now that the markets have changed though, we are seeing a lot more deficiency judgments appear; in part because of the market crash, but also because of “strategic defaulters.” Freddie Mac defines a strategic defaulter as, “Someone who had the means but chose to go into default, that there were no extenuating circumstances that affected their ability to pay. If you’re choosing not to pay off your mortgage, but you’re paying other bills, we would consider that strategic default.”

In addition to knowing the “whats” & “whys” of Deficiency Judgments, it is also important to understand the “whens;” under what particular circumstances are deficiencies levied?  While there are no specific rules or guidelines, it is generally safe to assume that judgments are levied when someone is delinquent on payments.  This is assumed because Deficiencies arise out of settlement agreements, which usually would only take place during delinquency, e.g. Foreclosure, Short Sale, or Deed in Lieu.  The exact timing though, on how long it takes for the Bank to levy a deficiency will vary from State to State.  Some States have a 3 year Statute of Limitation (AK, DE, NH, etc.), while others have up to 15 years (e.g. KY) to pursue!  Needless to say then, that in some circumstances, lenders will wait up to a decade before suing the Homeowner; plenty of time for the homeowner’s finances to be repaired & maximizing the Bank’s chances to collect.

However, just because a Foreclosure Auction (or Short Sale, or DIL) was completed, does not necessarily mean a deficiency judgment will be levied.  There are many different factors that come into play when a Bank is considering the deficiency, including but not limited to: The property, the homeowner, the investor, the bank, the loan type, the number of liens on title, lien position, amount owed, current market value, etc.   Thankfully though, a short sale makes it possible to avoid the potential deficiency altogether; as long as a good negotiator is involved. Indeed, negotiating the deficiency away is (or should be) one of the short sale company’s top priorities.

One way to avoid the potential deficiency is to ensure the Approval Letter contains this type of verbiage.  It will need to state explicitly that the mortgagee & investor will waive their right to pursue the homeowner for any loan shortfall, and that they will accept the short sale as payment in full.  It is important to note here though, that some loan types & lenders do not need such verbiage included in their approval, since a deficiency waiver is a pre-requirement of the program itself (e.g. FHA).   Even if the deficiency is waived though, there may still be a financial obligation or liability to the property & loan, by way of Taxes.  These potential Taxes are a result of what the IRS considers “Phantom Income.”

            Investopedia.com explains “phantom income” this way; “The creditor essentially ‘pays’ the delinquent borrower the amount of debt forgiven, which is why creditors send Form 1099-C to the borrow showing the amount of ‘income’ that he or she received as forgiven debt.” An example of this in layman’s terms could be a successful Short Sale for $80,000, where there is $100,000 owed.  If the lender agrees to waive the remaining loan balance (deficiency), they could then interpret it to mean they paid 20k to the borrower.  This 20k the bank “paid,” is considered taxable income by the IRS. So any loan shortfall, deficiency, or forgiven debt will still need to be accounted for, regardless of what the Short Sale Approval letter states.

            Is it possible to avoid both the deficiency & tax consequences?  YES.  In 2007, Congress passed “The Mortgage Forgiveness Debt Relief Act,” which exempted certain transactions & homeowners from the tax implications on forgiven debt.  Because there are too many eligibility criteria to list though, we recommend going here (http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-) to find out more on this particular topic.  It warrants noting though, that as of yet, Congress has not extended this Act past 2013; although it is fairly likely.

            The deficiency judgment is a crucial piece of the Short Sale; one which has monumental implications for the Homeowner.  It is absolutely vital that the Short Sale company you are working with understands this topic in minute detail, so that they can sufficiently tackle the obstacle with ease.

The Approval Letter

The Approval Letter

After the long, arduous process of successfully negotiating a Short Sale, the Mortgage Company must issue an Approval letter; which provides the exact terms under which the sale must take place. If any of the terms are not met, the ShortSale cannot be completed.

The Approval letter contains a plethora of information, stipulations, requirements, and is a legally binding document.  Because of this, the importance of understanding what the Homeowner(s) is/are agreeing to cannot be understated.   Furthermore, because of the Legal ramifications & implications, it is highly recommended the Homeowner(s) (and Buyer) seek Legal & Financial counsel prior to signing anything.   **After all, Real Estate agents are NOT Attorneys or Tax professionals. Nevertheless, it is not necessary to have a degree from Stanford or Harvard to be able to sufficiently comprehend the important terms of the Approval letter.

Every Lienholder involved in the ShortSale transaction must issue an Approval letter, and generally speaking, each Lienholder will have a unique Approval letter, with unique formats.  However despite the unique look, Approval letters all say the same thing: that the sale will be approved if certain conditions are met.  Since the 1st Mortgage is the big dog, they will have the most restrictive terms.  Among other things, the 1st’s Approval will dictate ~10 crucial conditions which must be fulfilled (even after the closing).

The first condition/stipulation that the Approval letter will mention, are the Seller & Buyer.  The sale is only approved between the parties named in the Contracts. The names must match exactly, and Buyers cannot be substituted.  If anything changes, the ShortSale will be declined, & negotiations must be restarted.  For example, if the Purchase Contract shows the Buyer with a middle initial, then their middle initial must be included in everything else (Proof of Funds, HUD1, etc.).  The same goes for all other parties to the transaction.  In the same vein as verifying name congruity, is making sure the Property address is correct.  Sometimes the property’s city will vary between different documents, or sometimes the zip codes don’t match, or sometimes the unit # is listed with the building # in front.   All these seemingly insignificant details must not vary in the least.

The next few conditions in the Approval letter to verify are the offer price, required net proceeds, & allowable closing costs.  While there can be no fluctuation in the offer price itself, the net proceeds are allowed to exceed the Bank’s requirement. The allowable closing costs (RE commissions, subordinate lien payoff, HOA payoff, Taxes, title charges, seller incentive) can also differ from the Bank requirements, albeit conversely (cannot exceed).

One may wonder why any of the closing costs or numbers would vary even one iota, when Bank’s are so picky & exact about everything else.  The reason is customarily due to the closing date.  Generally, the Bank will give a 30-45 day window to close in the Approval, so if the closing happens sooner than expected, the numbers can fluctuate (eg. fewer Taxes due).  An important thing to remember is that the Approval numbers are largely based off of the most recent HUD1, so it’s recommended the closing date be scheduled accordingly.

The Approval letter will most likely also mention required cash contributions, or promissory notes from the Seller.  Bank’s will try absolutely everything in their power to recoup as much of their loss as possible; so if the Homeowner has financial ability to do so, the Bank may require them to make a direct cash contribution, or sign a promissory note to complete the short sale.  These two items are negotiable though, and may make the difference between a lien release only, and a full settlement.

Depending on a multitude of factors, including but not limited to offer price, settlement date, length & nature of loan delinquency, loan balance, foreclosure auction date & financial standing, the Banks & lien holders may not agree to provide a full release for the short sale.  If the approval letter does not state specifically that the deficiency is waived, or that the offer/payment is in exchange for full and final satisfaction, it is likely that a deficiency judgment will be levied (post short sale) for the remainder of the loan amount due.  Keep in mind though, that some Banks may not chase the Homeowner for the full remainder, and sometimes they “agree” to not chase at all (despite not waiving their right to do so, keeping deficiency verbiage intact). Deficiency judgment language is one of the most important things to look at, since it is of monumental importance to the Homeowner.  As such, it is highly recommended the Homeowner contact an Attorney to determine 100% the effects of proceeding with the sale.

Finally, the Approval letter & Bank will stipulate several resale terms, such as “anti-flipping,” “sold AS-IS,” that the sale must be an “arm’s length transaction,” and that the Homeowner cannot re-purchase or remain in the home after the sale.  Furthermore, in the event that there are additional proceeds/funds in the deal, the Bank will require that they be forwarded to them, not the Homeowner. Generally speaking, the Homeowner is prohibited from receiving any funds from a ShortSale.

Any incongruities between any of the Contracts, Approval letters, HUDs, Proof of Funds, County records, Bank documents, etc. will result in an immediate decline of the Short Sale.  The extent of the decline will generally depend on the nature of the incongruity.  A new/different Buyer, for example, typically means a 100% decline & start over, so it is imperative the Buyer is legitimate, & fully motivated.

If one knows what to look for in reading/interpreting the Approval letter(s), they can save weeks, if not months of time by correcting the incongruities as they arise; instead of waiting until the last minute.  The bank worker who negotiates the offer is a different worker than the closer, so they may not notice or be aware of certain Investor criteria.  It is a misstep in judgment to “hope” that an incongruity will go unnoticed; the Bank will find out.  We are all human, and we all make mistakes and/or oversights, so it’s always best to play it safe, just in case. 

**Please be advised, neither Foreclosure Solutions, nor any agent employed by Foreclosure Solutions is an Attorney, CPA, or Tax Professional.  As such, we are not authorized to provide legal or financial advice.**

Short Sale Lead Generation

Short Sale Lead Generation

            We have received a fair amount of correspondences lately, from Investors & Agents alike, asking us where we get our Short Sale leads; or better yet, where they can find their own leads! Having been in the same boat, & since lead generation is an ongoing process, we’d like to offer some different strategies & avenues that are available to pursue.

Like any business, we had to start from scratch.   And just like any business, our procedures, strategies, expertise, etc. have all steadily been honed & sharpened as time goes on.  Arguably however, the amount of experience, success, & size of the company, does not really have an effect on the lead itself.  There are no famous Short Sale “brands” or any famous Short Sale “names” one can mention to the Homeowner to secure the lead.  Indeed, most people don’t even know what a Short Sale is!! 

In other words, there is no “easy-button,” and certainly no 100% sure-fire lead generation source.  Finding good leads is difficult and trying! Since we’ve been in the business, we have tried almost everything to find leads.   We’ve placed ads in newspapers & magazines; we’ve set up “bandit” signs; we’ve tried “cold calling;” we’ve created automatic mailing campaigns; we’ve sponsored investor/realtor groups; we’ve taught classes; we’ve posted flyers…  The list goes on and on.

In our experience, probably the top 2 best sources to find ShortSale candidates, is the weekly NED list (obtained through Title Companies, and renav.com).   A few Realtors we work with find their leads exclusively through cold calling, via leads from Renav.  Personally though, we prefer door-knocking off NED lists.  If nothing else, the Homeowner is appreciative that you went out of your way to actually meet them, instead of mailing an impersonal postcard or making an impersonal phone call.

Homeowners in this type of situation are incredibly stressed out, so one of our main goals is to just help calm them down, and let them know that there ARE options available to them, for free.  Just listening to them & their problems can go miles!   We never offer the ShortSale right off the bat, since that may not be the best outcome for the Homeowner; but instead discuss the best possible option first, then work our way down, having the Homeowner come to the conclusion that the ShortSale would be best.

We do not & cannot pressure anyone into using our services or to pursue a ShortSale, so a lot of the time we're just providing information to the Homeowner, letting them know their options & what to expect from the Foreclosure process.  Additionally, we find that a fair amount of these Homeowners are intent on keeping their heads in the sand (hoping it will solve itself), but will end up popping back up months or even years later.  As such, we keep all our potential leads on file & will periodically touch base with them.   **Case in point, we just picked back up with a Homeowner whose lead originally came to us in 2009!

Junior Liens

Junior Liens

Junior liens can pose a serious obstacle in any ShortSale. Depending on the exact particulars, 2nd’s can routinely stall the ShortSale, or make it fail altogether.  Clearly, the juniors are taking the biggest loss % on their loan, so negotiations can be very rough.  Despite their low position on Title, 2nd's realize that they still have a significant amount of power/sway, and their release is 100% required for the sale to go through. 

2^nd’s will typically release their lien (and/or satisfy the loan) for pennies on the dollar, but will fight tooth & nail for the best settlement possible.  Just like the 1^st mortgage, the 2^nd works for their investor, and it is their job to maximize the payment they receive.  Realizing that the 1^st mortgage holder is bound by their investor in terms of junior payoffs, most 2nd’s are flexible and creative with payment options.  They will try absolutely everything & anything to get more $$, including “requiring” the Real Estate Agents to pay out of their own pocket!

There are several different types of Junior liens that can show up on the Property’s Title, and each lien type acts/responds a little differently.  Naturally then, the negotiations & payoffs these Junior’s receive will differ & depend on several factors. By far, the most important factor to consider is who the investor is, and what their ShortSale rules are.

Secured Liens:  A “secured” lien is typically a mortgage lien (2^nd mortgage, HELOC, etc.).  It is customary for the 1^st Mortgage holder to allot a certain percentage of the 2nd’s  UPB (Unpaid Principle Balance) towards their discharge in a ShortSale.  As with everything else in a ShortSale situation, the actual payoff amount offered can/will vary.  For example, if the 2^nd has been discharged through Bankruptcy, the 1^st mortgage will not offer nearly as much as they would otherwise.  This is because the 2^nd is technically not owed anything on their note, and so the only value is the lien itself.  In most situations however, the 2^nd has not been discharged through Bankruptcy; in which case the 1^st will tend to offer 5-10% of the 2^nd’s UPB.  However, sometimes, the 2^nd will not agree to release for “peanuts,” and will require additional funds for their release.  It is the responsibility of the Real Estate Agents to figure out how to supply additional funds to the 2^nd, while still complying with the 1st’s Approval. Some 2nd’s will actually give 2 options for their ShortSale Approval: One is for the lien release only (lower payment), whereas the other option is for a full release (higher payment).  

Non-Secured Liens:  A non-secured lien originates from a non-mortgage.  This could be a lien from credit cards, auto loans, personal loans, attorney liens, collection companies, etc.  Whether the 1^st mortgage will allow any funds towards the discharge of these liens or not, will depend on the investor.  Some investors absolutely will not pay on any “non-secured” liens, and other investors will only allow funds for certain types of “non-secured” liens.   If the 1^st will not pay on “non-secured” liens, it is the responsibility of the RE Agent to figure out how to get them paid, or at least how to get the lien removed from Title.

Tax Liens: Tax liens are exactly that. Taxes. These can originate from personal income Taxes owed, Property Taxes owed, city code violations, etc.   Regardless of their specific nature though, Tax liens cannot be shorted and they must receive their full balance.  This is because Tax liens will always have 1^st priority on Title. In a ShortSale situation then, the 1^st mortgage holder will typically agree to pay these liens, since the liens will need to be paid regardless of the Property’s outcome, for Title to change hands.

HOA Liens: HOA liens are liens imposed by the Homeowner’s Association.  HOA’s are very powerful and difficult to negotiate.  There is no governing agency over the HOA’s, and no substantial rules/laws in place to govern their activities & decisions.  As such, HOA’s essentially have carte blanche to do & say whatever they see fit.  Another hurdle to overcome is recognizing that HOA boards are overwhelmingly composed of people who are not Real Estate saavy, and who may only meet once a month.   There are many factors which go into negotiating with an HOA, so the laws & strategies will vary from State to State. For a more in-depth discussion of HOA’s, check out our Blog from Jan. 4.

Before one can get started with the Juniors, and “go to the races,” it is important to keep in mind that most 2^nd’s will not even open a ShortSale file without knowing the 1^st Mortgage has already approved; so the 1^st Approval letter is usually required prior to beginning negotiations with the Juniors.

**Please be advised, neither Foreclosure Solutions, nor any agent employed by Foreclosure Solutions is an Attorney, CPA, or Tax Professional.  As such, we are not authorized to provide legal or financial advice.

Short Sale Myths

Short Sale Myths

In the Short Sale business, there are a lot of myths and pre-conceived notions floating around about how they work, or how/why someone will or will not qualify.  A lot of industry professionals will say one thing, while other industry professionals will say the opposite! Generally speaking however, there are no easy answers, and there are NEVER any guarantees. Just like snow flakes, each Short Sale is different & unique! 

Throughout the course of our business, we continually encounter similar questions and/or myths from Homeowners and Agents alike; So we figure we might as well publish a few of the more common myths, to help assist with anyone in a similar situation! After all, these keep coming up, so they must be somewhat common assumptions...

Myth #1: Banks would rather Foreclose on the property than pursue a Short Sale.  

NOT TRUE:   Foreclosure auctions are very costly to the Banks, due to Lawyer fees & Court Costs. In addition to this, there is a good chance the Banks will end up buying the property back at auction (since they are working with bogus values), and so they incur additional “winterization” fees, property security fees (boarding windows, etc), & REO agent Fees. So just looking at costs involved for the Bank, a Short Sale is much more desirable, financially speaking, than a Foreclosure auction.

Myth #2: Once an official "Notice of Election and Demand" (NED) is served, the Short Sale is no longer an option.  

NOT TRUE:  So long as there is a valid Short Sale in place, Banks will most likely postpone any looming Foreclosure auction date, in order to allow sufficient time to complete the Short Sale review.  Combine this with Bank’s preference for the Short Sale over Foreclosure auction, most Short Sales actually end up being worked while there is an active Foreclosure in process.  **Foreclosure Auction postponement is NEVER a guarantee.

Myth #3: A Homeowner must be behind in payments for the Bank to even consider the Short Sale.  ONLY true for FHA Loans:  In order to allow a Short Sale, The Federal Housing Administration requires their loan to be at least 30 days delinquent, prior to date of closing.  No other Loan types have this kind of stipulation; so by and large, this myth is FALSE. In fact, one of the main qualifiers for a Short Sale is the borrower's hardship.  So long as there is sufficient evidence to support the future inability to make mortgage payments, the Bank will entertain the Short Sale.

Myth #4: Financial obligations to the property end at Foreclosure Auction.

May or may not be True: Banks are not in the Real Estate business, and so their main concern is the Loan, and their $$. The Bank does not want the property, and they certainly don't want to deal with the additional costs of Auction.  Because of this, it is fairly common to see the Bank sell the property for less than what they’re owed, and pursue the Homeowner for the difference/remainder.  This is also known as a deficiency judgment. Therefore, It’s absolutely pertinent to contact an Attorney, who specializes in the field, to determine any remaining financial liability, after the Foreclosure Auction takes place.

Myth #5: A Short Sale will automatically be denied if the Homeowner was previously denied for a Loan Modification. 

NOT TRUE:  If for no other reason, this myth isn't true because the Short Sale department is completely separate from the Loan Modification department.  They do not have access to each other's systems, and they do not share notes with each other. Furthermore, a Short Sale is fundamentally different than a Loan Modification:  A Short Sale deals with selling the property, while a Loan Modification deals with keeping the property.  These 2 separate departments have separate notes, and each have their own specific review & qualification process. So if a Homeowner was denied for a Loan Modification, they can still apply for a Short Sale.

Of course this list is no where near exhaustive, and as I mentioned earlier, each Short Sale is different & unique. For any specific questions or concerns, please contact us:  noequitynoprob@gmail.com, or 303.359.4731. 

Are Short Sales in Trouble?

Are Short Sales in Trouble?

A recent article by Diana Olick, a Real Estate reporter for CNBC, seems to suggest that Short Sales may be a thing of the past, or at least dwindling back into their pre-2006 numbers.  What's her reasoning, you might ask? For Olick, it all comes down to Taxes.

As you probably already know, the U.S. Congress passed the “Mortgage Forgiveness Debt Relief Act and Debt Cancellation” in 2007, in an effort to help troubled borrowers & advocate Short Sales.  One of the main ideas behind this legislation was to make Mortgage principle reductions tax exempt. So why does this matter, and how does it connect with Short Sales?  Well, successful Short Sales often result in debt forgiveness. Debt forgiveness is, more or less, income.  Income is taxable. 

For example, let's say "Dottie" is Short Selling her home.  Her lender has agreed to the Sale, and is taking a $50,000 loss on their Mortgage.  They have agreed to waive the remaining balance due on the loan, but must report the waiver to the IRS. The IRS interprets this 50k waiver as "phantom" income, which must be taxed. So, the IRS thinks Dottie just "made" $50,000 (She borrows & uses the 50k previously, but now she doesn't owe it anymore), and so Uncle Sam needs his cut.  But, as Rep. McDermott (D-WA) notes, "Collecting federal income tax on a relief intended for struggling homeowners is not only bad policy, but is simply wrong."

The passing of the 2007 Act allowed homeowners short selling their homes, to avoid paying Taxes on any forgiven mortgage debt.  Naturally, this helped Short Sales tremendously, as it limited the financial consequences associated with such a transaction. So what's the problem?  The MFDR act is expiring at the end of this year!! 

National Association of Realtors lobbyist Jamie Gregory says, "Realtors believe if the legislation is not extended, households who are already struggling to pay their mortgages will be further burdened with tens of thousands of dollars in additional taxes that they probably can't afford to pay because the IRS would count the cancelled debt as income."

If the MFDR act is not extended, any cancelled or forgiven mortgage debt would be taxed, regardless of the occupancy status of the property.  Since capital hill is currently entrenched in politics & the presidential election, many believe that such a "necessary" extension will go un-noticed.  

But, if the MFDR act is not extended, will it slow or even kill the Short Sale industry?  Slow, probably. Kill, no. "...getting a tax bill on forgiven debt can be another punch in the gut for families who are already facing financial hardship,” says David Stevens, CEO of the Mortgage Bankers Association.  While this may be painfully true, the fact remains that a % of an amount will always be less than the amount itself.  To put it another way, would you rather pay $10.00, or pay taxes on $10.00?  A Short Sale is still better than the alternative! 

**To read the CNBC article itself, go to http://www.cnbc.com/id/49214903**