Foreclosures 7 – Short Sale Specialists

The H.A.F.A. (Home Affordable Foreclosure Alternatives) program kicks in this coming Monday, April 5th.  As I’ve explained in an earlier post, this legislation attempts to streamline the short sale process, requiring much shorter response times by lenders to both short sale application packages and to offers from prospective buyers on short sale properties.

However, a recent Yahoo Finance article touts some additional features of the program which were entirely new to me.  For instance, the article states “The new program says homeowners with mortgages backed by Fannie Mae or Freddie Mac  must be offered a short sale if they don’t qualify for a HAMP modification, or if they do but missed two straight mortgage payments.”  Note the words “must be offered a short sale”!  The article also states the lender will be “compelled” to accept whatever deficiency that a given short sale represents to the lender (this assumes, of course, that the seller does not possess the funds to make up the deficiency).  So if you owe 200K on your mortgage and the current market value of your home is 150K, then the bank is “compelled” to swallow the 50K difference.  Good for the beleagured seller, bad for the lenders, who are expected to post significant losses as this “mop-up” of bad mortgage assets plays itself out.

And not only is the borrower’s mortgage debt forgiven, but he/she can secure up to $1500 in relocation costs!  Send me down dat debt-free highway, oh beneficent lender man!

IMPORTANT UPDATE: it’s now come to my attention that short sellers can receive up to $3000 in relocation costs, as reported by the government’s “MakingHomeAffordable” website.  The site features an informative YouTube video regarding a borrower’s options and the need to, above all else, avoid a foreclosure.

If this latest Obama administration program really kicks in (unlike the largely under-utilized mortgage modification program), it’s projected that it will add further downward pressure on housing prices, as more homes are dumped on the market.  However, past experience tells me that the current short sale opportunity will only be seized by those homeowners who are research-oriented and inordinately proactive (i.e., a slim minority of all Americans).  So, which type of homeowner are you?  A proactive person capable of effecting positive change for you and your family, or the head-in-the-sand couch potato drifting inexorably toward foreclosure?

Some homeowners who have successfully executed short sales of their properties have been surprised (to say the least!) to receive a 1099C tax form from their former lenders. In essense, whatever dollar amount of “forgiveness” which a short seller has received has been reported to the IRS as income!

Let’s say you owe $200,000 on your mortgage, and the short sale nets $150,000 to your lender. In the eyes of IRS, you have “earned” $50,000! Short sellers need to be fully aware of their responsibility to report the amount of loan forgiven as income, since it’s possible that their lender has sent the IRS a 1099C, but failed to send the same to the borrower.  Failure to report the “income” could result in a costly tax audit.

But here’s the good news– while reporting of loan forgiveness as income is required, most homeowners WILL NOT be liable to pay taxes on this income. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. This applies to debt reduced through short sale, mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure (of course, in the case of foreclosure the borrower faces bigger problems than a potential tax bill, such as a deficiency judgment for the entire amount of debt forgiven). Click here for an IRS explanation of The Mortgage Forgiveness Debt Relief Act and Debt Cancellation.

Some short sellers may still face some tax liability; if the original mortgage was refinanced via a home equity loan, then the tax relief cited above may not be applicable.  Also, loan forgiveness on a home which is not the borrower’s primary residence is exempted either.  In summary, consult your attorney or tax specialist when filing.  For most short sellers, the unexpected “income” generated by short sale debt forgiveness will not be taxable.

“HAFA” (the Home Affordable Foreclosure Alternatives Program) becomes effective on April 10, 2010 and embraces a number of benefits for beleagured homeowners considering a SHORT SALE. Perhaps most important is the protection afforded a borrower against a potential deficiency judgement; specifically HAFA requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed). Bear in mind, however, that HAFA guidelines do not apply to loans owned or guaranteed by Fannie Mae or Freddie Mac.  It does apply to loans whose lenders have executed a HAMP servicer participation agreement.

Another major benefit of the HAFA legislation is the application of various timelines designed to expedite the short sale process.  For instance, once the borrower has requested short sale approval by providing the lender with a Request for Approval of Short Sale form (RASS), a Short Sale Agreement (SSA) and a Hardship Affidavit, the lender then has 30 days to do the following: (1) evaluate the borrower’s eligibility; (2) determine the current value of the Property; (3) establish the minimum net proceeds; and (4) review the title to evaluate subordinate liens.  Provided the borrower meets eligibility conditions, the short sale listing period of 120 days then begins.  During this time the borrower cannot be foreclosed upon.  Additionally, HAFA stipulates that the lender has 10 business days to approve a short sale in which the offer meets or exceeds the minimum net price.  This represents another major step forward for buyers and sellers alike, as lengthy response times have plagued many short sale scenarios in the past. Click here to see additional terms of eligibility, etc.

One year ago the Obama administration committed a whooping 75 billion dollars to assist and incent lenders to modify mortgages of distressed homeowners. While plenty of money was pledged, the actual process by which lenders and borrowers would achieve meaningful modifications to loans remained less clear. A year later, it’s apparent that the pace of mortgage modifications is woefully below expectations with legions of homeowners either hugely frustrated or literally abandoning attempts to complete the modification process. Read the details here.

Certainly, bank bureaucracy can blamed for some of the current mess. However, homeowners who are considering pursuing a modification of their mortgage need to be very clear as to a couple key requirements. First, many homeowners who’ve been thrawted in their attempts to take advantage of the program have failed to fully complete all of the documentation. Second, as of June 1 all homeowners seeking mortgage modification will be required to provide proof of current income. Suffice it to say that if you’re pursuing what’s thus far been a difficult and complex process, at least don’t disqualify youself by virtue of incomplete documentation.

And if you’ve decided that continuing to finance a home that’s dramatically “underwater” just doesn’t make sense, then please contact us to discuss how a short sale may be your best exit strategy.

Akin to the old adage ‘Let The Buyer Beware’, we now must  invoke the new admonition of ‘Let The Short Seller Beware Too’.  A potential pitfall for short sellers and homeowners who opt for foreclosure is now coming to light; specifically, your lender may chase you for the unpaid mortgage money down the road.  This may occur even in the circumstance of a short sale, in which the lender agrees to accept a home sale price that is less than the outstanding mortgage amount. Read the original CNN article.

Recently, both short sellers and homeowners who have been foreclosured upon have been shocked to receive letters from lawyers declaring a deficiency judgment against them.  Some have had to subsequently declare bankruptcy to finally extinguish the debt.  Others who currently unaware of this threat may eventually discover to their chagrin that their negative home equity transaction is still alive and kicking, as their lender (or a collection agency who now owns the debt) has begun demanding repayment.

The above potential pitfall highlights the need for short sellers to work with a firm that specializes in the short sale negotiation and transaction process.  Currently no one can guarantee that a given lender will grant complete debt forgiveness.  However, expert help in the negotiation process should result in a clear definition of the homeowner’s potential liability.  The good news is that given the typical financial hardship which most potential short sellers are facing, the lender cannot realistically expect to ever recover the full debt obligation.  Often times, as little as ten cents on the dollar is all that is required to satisfy the debt.  Working with us and legal counsel that specializes in the short sale process affords you the greatest piece of mind in navigating this unique real estate transaction.  Don’t invite an unpleasant surprise down the road, and don’t allow a lack of knowledge of the short sale process to deny you an opportunity to dramatically reduce your current indebtness.  A well-negotiated short sale is currently one of the best vehicles for negative equity homeowners to employ to remedy their current scenario and begin to move towards positive equity residential living.  Call us for a free consultation, and we’ll be happy to review your options and solutions.