Articles Posted in Short Sales

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If you closed on a short sale in the last five years and did not obtain a waiver of the unpaid balance owed to the first mortgage holder, you are at risk of now being sued for the difference – called a deficiency balance.  This could be for tens or hundreds of thousands of dollars.

Lawsuits for deficiency judgments are likely to pick up in Florida following a recent case which held that the statute of limitations is five years following the short sale rather than the one year after a foreclosure sale.  We were afraid this might happen and we advised our clients during the height of the short sales not to close without a deficiency waiver.

So any short sale that occurred before mid 2012 would be safe, those short sales that closed after mid 2012 are at risk.

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forclosure-vs_-short-sale~s400x400.jpgTraditionally in Florida, doing a short sale rather than allowing a foreclosure sale to occur is considered much better for your credit. Not so much difference in credit score per se, but mostly for future governmental financing when it is time to buy a home again.

You may think who cares, why would I want to buy another home after this disaster? The thing is, seven years is a long time to wait if you change your mind, get married or see a good deal.

Short sellers can qualify for new conventional loans in as little as two years. The same two year period of time that is required following a bankruptcy. Foreclosures though often require a seven year wait for a new mortgage that complies with Fannie Mae or Freddie Mac’s guidelines.

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short sale mix.jpgShort sales are good for a number of reasons:

1) many homes are underwater 50% or more and it could be a decade or more to get in a position of having even a dollar of equity;

2) most short sales will result in a written waiver of deficiency of the unpaid mortgage balance;

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short sale tax.jpgThe late night fiscal cliff tenative workout included a proposed extension of the Mortgage Debt Relief Forgiveness Act for one more year to include 2013! Floridians seeking to short sale their home but weren’t able to get it done prior to the end of 2012 can breathe a sigh of relief. It’ll take a few days, but provided the House approves the Senate’s Bill, it will be full speed ahead for short sales for another year.

Popular blogger Calculated Risk posted the Senate version of the bill (H.R. 8) today.

Expiration of the favorable tax treatment of cancelled debt would create a major headache for homeowners who sell their home short (for less than what is owed). It would also apply to foreclosures and a deed in lieu of foreclosure.

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short-sale seesaw.jpgBloomberg today reports that banks are offering as much as $35,000 to delinquent homeowners to sell their home in a short sale. In doing so, the banks avoid the costly foreclosure process especially when their loan documents are questionable and perhaps fraudulently prepared. I imagine we will be seeing a few of these in Florida, a judicial foreclosure state with particularly well trained and knowledgeable foreclosure defense attorneys.

JP Morgan Chase reportedly is sending out letters to borrowers offering up to $35,000. They are also offering deficiency waivers for the balance.

So open the mail – and ask your lender what move out incentives they are offering for a short sale. Perhaps you have more negotiation strength than you think. But don’t let the mortgage company get a default against you – it will both weaken your position and will allow the foreclosure to proceed against you at a faster pace eliminating your short sale opportunities.

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I speak with many clients in the Tampa Bay, Florida area who have heard of cancelled debt and 1099-C forms but they do not really understand the impact of the taxable events that occur in a short sale. An understanding of how a 1099C works in a short sale is especially important at this time of the year.

Whenever a creditor cancels or forgives debt following a debt settlment, short sale or even a foreclosure, the creditor must report the amount of the cancelled debt to the IRS on a Form 1099-C. Under Section 108 of the IRS Code, the IRS imputes the cancelled debt as additional income to you. So if you make $50,000 in annual salary, but your house was sold at a short sale where the loss to the lender was $100,000 (not an uncommon fact pattern in Florida), you will be deemed to have earned $150,000 that year or the next – depending upon whatever year the lender files the 1099-C.

There are three exceptions to this rule. First, you file bankruptcy prior to the issuance of the 1099-C. If debt is discharged in bankruptcy, it is not attributable to you as income. Even if you receive a 1099-C, you can respond by filing your own Form 982 to remove its taxability because of the bankruptcy.

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short sale.jpgWhen listing and selling a home in a short sale, homeowners should consider including language to limit recovery of any unpaid amounts by the mortgage company (known as the deficiency balance). In Florida, we recommend this limitation be placed in the Purchase and Sale Contract. This way when the lender/bank agrees to the short sale, they are in essence agreeing to the terms of the contract between the buyer and seller. It is no different than if you wrote in “as-is” to limit your liability as to the condition of the property. I’d recommend something like the following be inserted into the contract:

The sale of this property is contingent upon the lender’s acceptance of all sale/purchase contract terms including a complete discharge/forgiveness of debt of any remaining deficiency amounts on the loan. Accordingly, the bank’s acceptance of this short sale agreement will constitute payment in full of both the first and second mortgage notes on this property and represent a waiver of any future lender right to pursue an action and/or judgment against the owners/borrowers to recover any deficiency amounts arising from this short sale transaction.

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Fico 2.bmpFico 1.bmpA lot of our clients in the Tampa Bay area have questions regarding how exactly their credit score will be impacted by a short sale, foreclosure, or a bankruptcy.

A recent article by FICO, Banking Analytics Blog, researched these very questions.

The FICO study focused on three sample consumers with credit scores of 680, 720 and 780. As shown by the charts above, the answer depends a lot on what the existing credit score is. The higher your score is, the longer it appears to fully recover. However, after 18 months of otherwise good credit, this impact may be minimized.

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house on tide.jpgIn Florida, our Tampa Bay area homeowners are faced with a dilemma whether to claim the homestead exemption for their underwater homes. Historically, Florida homeowners have been allowed to keep or exempt $1,000 of personal property in a Chapter 7 bankruptcy. This isn’t much, and many homeowners had to pay the bankruptcy trustee to keep anything in excess of $1,000 per debtor. However, in the past few years, the Florida legislature passed Florida Statute 222.25(4) what is referred to as the “wildcard” exemption which allows an additional $4,000 exemption for personal property when the homeowner is not claiming the homestead exemption. Florida judges have determined that the exemptions can be stacked and now homeowners who do not claim the homestead exemption can keep up to $5,000 in personal property.

This year, the Florida Supreme Court in Osbourne v. Dumoulin, No. SC09-751 ruled that a homeowner can claim the wildcard exemption even though they are keeping their home when it has no equity. Some judges were already ruling in this manner. As a result, many attorneys began to claim the $4,000 wildcard exemption and avoided claiming the home as exempt. Trustees were not interested in the home because it had no equity so there was no need to claim the homestead exemption.

Seeing the profit potential, some companies have begun to contact the Chapter 7 trustees in the Tampa Bay area and offering to buy the bankruptcy estate’s interest in the homes where no homestead exemption is claimed. Their goal is for the approximate $2,000 that they pay the trustee, the real estate firm will then put the house up for a short sale where they make a few bucks, and charge the homeowner rent in the meantime. The homeowner gets blindsided when they intended to keep the home all along.

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extracashpic.jpgIn a new incentive program beginning in late 2010, Chase is purportly offering $10,000 to $20,000 to homeowners who take the effort to short sale their property. The offer includes a waiver of any deficiency balance. But it only applies to loans actually owned by Chase, not just serviced by Chase. An article in the St. Pete Times today discusses the program in more depth. Chase is apparently providing approvals in approximately 35 to 40 days after an offer is made, while most short sales take at least six months to conclude.

This is opposite of a growing trend of banks and servicers refusing to grant deficiency waivers.

Many loans are actually owned by Freddie Mac or Fannie Mae now though. To check if your loan is owned by Fannie Mae or Freddie Mac, go to the Freddie look-up site and Fannie look-up site which provide an instant answer. No guarantees that the sites are accurate although in our experience they usually are accurate (even though the loan documentation may still be up for challenge do to failures and inconsistencies in the paperwork).

One other way to possibly see who purports to own and service your loan is the MERS look up site.

So if your servicer is Chase and you are unable to continue making your house payments and a modification seems out of reach or doesn’t make sense, use the look up sites above to try and identify if Chase is only the servicer, or if they are also the owner of your loan. You can also call Chase directly and ask if Chase owns your loan or if they are merely servicing it for an investor. Ask who the investor is if possible. The more knowledgeable you are, the more you will know what options are available to you.

There are other more exact methods of determing the owner of your loan as well.
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