Saturday, April 30, 2011

Reasons to Save Copies of Your Credit Report

In my last posting I mentioned saving copies of your credit report. The reason it is imperative to save copies of your credit report by printing them out is because the credit report is not a static document. It is completely variable, a liquid document, it is only as good as the information currently reported, so things can change. The information contained in a credit report is the information reported by the creditor, there is no formal verification process by the three credit bureaus (Experian, TransUnion, and Equifax). Which means it is up to the consumer to keep tabs for incorrect information and any changes that result in discrepancies.

Since the credit report is only as good as the information being reported at this moment, saving your old credit reports will give you solid documentation as to the dates of occurrence for anything negative. The reason these dates are so critical is because it is tied to your recovery period. The more time that passes the less impact negative items have. Think of it this way:

Most negative items come off the credit report entirely after seven years (one exception is Chapter 7 bankruptcy, which is 10 years) because of the Fair Credit Reporting Act. Seven years breaks down to seven 12-month periods, think of the first 12-month period as the worst for the credit, but once it passes we start to see more improvement. Generally after 2 to 3 years the credit scores are at or above average after a major financial hardship. Each 12-month period that passes is in the rearview mirror, we are improving until the negative event is completely gone, finished, no trace or reference of the short sale on the credit report. This applies to any type of derogatory account falling under the seven year rule.

The problem is manipulation of the credit report. The FTC went after NCO Group for reporting collection accounts using later-than-actual delinquency dates. In changing the date of delinquency it could cause a debt to be reported beyond the seven year limit allowed. For example, if the original debt was reported delinquent in 12/08 and changed to 12/10 it would extend the reporting of the debt for another two years beyond what is legally allowed. To settle the charges NCO Group had to pay $1,500,000. According to NCO Group it had obtained bad information about the age of the debts from a creditor. NCO Group is no small operation, it is one of the largest debt collectors out there, presumably with good systems, but mistakes do happen. What if it wasn’t a mistake, what if it was just an attempt to plague debtors longer in an attempt to negotiate a settlement of the defaulted amount? When situations such as this arise, it shows us why it is important to save paperwork and keep copies of your past credit reports. You may have to prove dates are being reported incorrectly at some point. It is impossible to know what the future holds and what issues may come about. I will post more about the bad debt market soon.

Any documentation you receive regarding debts should be saved as an important document. You never know when you will need to prove something down the road. Since the power of reporting is in the hands of the creditor, it is a smart move to be able to back up any future disputes you may have to make.

In summary:

1. Save your credit reports because they are not static, they are a liquid document that can be manipulated, and can be prone to mistakes.
2. Save all documentation received regarding debts, especially debts going into default, the more documentation you have of dates the better just in case you need it in the future for disputing.

Tuesday, April 26, 2011

Short Sale Taxation Factors

A complicated mix of factors affects the taxation of short sales.

Our federal tax code defines how short sales are taxed; however, the federal tax law predicates its application on certain state law determinations as well as other non-tax federal law issues. In the area of short sale taxation, the accountant must often look to the taxpayer’s legal counsel for assumptions addressing Arizona’s real property statutes and cases, Arizona contract law, federal loan regulations, and other areas. This information is needed before the accountant can confront the more direct task of correctly interpreting the sometimes imprecise tax law itself. The fact that the term “short sale” is a fairly recent addition to IRS publications, does not portend well for detailed guidance on the subject.

Generally speaking, an accountant may be required to bifurcate the short sale in to a sale followed by a debt forgiveness calculation, unless the borrower is not personally liable on the note. The issue of whether the borrower is personally liable on the note is generally the most significant factor affecting the homeowner’s economic outcome (both tax and non-tax). This recourse or nonrecourse status requires very different accounting treatment, and sometimes is not easily discernable. For this reason, accountants are sometimes requested to analyze a transaction using both assumptions, in order to more adequately prepare a client for potential outcomes.

In addition to the determination of the recourse/nonrecourse nature of a debt, the timing of such status will generally affect the tax outcome. It is not unusual for a note secured by a deed of trust to change status from recourse to nonrecourse, or vice-versa. This change can result from an agreement, a trustee’s sale, the statute of limitations, bankruptcy, federal/state statutes, or other actions taken by either the lender or the borrower.

Guidance in all areas of law affecting the economic outcome of a short sale to the seller will be forthcoming. It is important to stay in contact with your accountant, lawyer, and real estate professional during the short sale process.

Monday, April 25, 2011

What About My Credit?

A few weeks ago I was invited to Las Vegas to speak about credit at the “Resources for Recovery” event presented by the Nevada Foreclosure Prevention Task Force, Federal Reserve Bank of San Francisco, and Office of the Comptroller of the Currency. It was a training event for the housing counselors who deal on a daily basis with people who have lost or are in the process of losing their home. Many of these folks assist with the national Homeowner’s HOPE Hotline (888-995-HOPE), so I wanted to make the most of my one hour presentation because they needed a plan of action for people facing financial turmoil.

If purchasing a home is the largest single purchase an individual will make, facing the prospect of losing a home is likely the most stressful and agonizing financial situation a person is likely to encounter. The nice thing about this blog is that I am not limited to a one hour presentation; this is a weekly engagement at the minimum.

Here are some initial thoughts when it comes to credit and losing a home:

• What is the likelihood I will be sued? This is the number one critical item to wrap your head around first. I always say worry about you liability first and your credit second. I am going to refer to my fellow blogger Dax Watson to focus on this area of liability.

• The silver lining: nothing bad on the credit report will last forever. The Fair Credit Reporting Act limits how long derogatory information can remain on the credit report. No matter what the advertisements on the radio and television may say, nothing is forever, although scenarios vary and some are more extreme than others. It may be necessary to look at bankruptcy as an option, although in some cases bankruptcy may not be necessary. The “B” word is not favorable to most consumers, although the reality is that it is an efficient means to cleaning up the problems of financial disarray in a very specific and legal manner without leaving the door open to future liability from present circumstances.

• Save your credit reports forever so that you have a record of dates as to when negative accounts should be coming off of the credit report. Do not assume you should save financial documents for only 7 years; we have that drilled into our heads because of IRS audit time frames. You never know when past debt issues will be resurrected and you will need to defend yourself with documentation. Preferably a consumer will have printed physical copies of their credit report before, during, and after the housing crisis.

• Review the credit report to see how your accounts are reporting, is everything correct? Are dates and balances correct? There are numerous websites offering free credit reports, but they come with a catch. There is only one government mandated website available to U.S. consumers for a free “no strings attached” credit report ( This site does not include a credit score with the credit report, long story short, that is how the legislation went through in 2005 when the Fair Credit Reporting Act was changed to allow the free report. It is worth noting that the three major credit bureaus (Experian, Equifax, and TransUnion) will sell you a credit score, however, if it is called VantageScore do not waste your money. The only score that matters in the mortgage lending industry is the FICO score created by Fair Isaac. In 1995 Fannie Mae approved the FICO score to be used in approving mortgages; no other score has been approved for the mortgage industry. Paying for the VantageScore, which is a product of the credit bureaus, is not only a waste of money, but it can give you an incorrect assessment of your credit score. The VantageScore can be 100+ points higher than the FICO score, so you may think you have a 700 score, but a lender may pull a 600 score when they pull the FICO score. You can purchase your FICO score through the credit bureaus or on (note: currently Experian and FICO are entangled in a legal battle and therefore a consumer will not be able to purchase the Experian FICO score until the dispute is resolved, only a lender or third-party subscriber has access to this score currently). Your best method to getting a FICO score is to have your lender pull it, then there is no question it is the right one. When in the rebuilding process knowing the credit score is not that important, focus on the contents of the credit report and making sure the information is correct.

To summarize:

1. Worry about liability first
2. Worry about credit second
3. Print out a physical copy of your credit report and file it away with you important documents, save it forever, debt sometimes has a way of creeping back whether legally or not. I have way more to touch on this subject in a later post.
4. Review and understand the contents of your credit report. I have several future posts regarding this subject.

Until next time, focus on the present and future, do not dwell on the past. One of my favorite authors, Larry Winget, says:

“Focus on what you need to do right now. Too much time is spent worrying about what happened in the past or fretting about what might happen in the future. The past is just that: passed. It has passed you by and is over, so move on. The future probably isn’t going to be as bad as you imagine it to be. Focus on the present. It is all you have really got to work with”.

Short Sale Manifesto

In October 2010 I had the honor of being invited to be a panelists at the annual National Association of Realtors conference in New Orleans. The topic of our session was the HAFA Program, and I shared the stage with Laurie Maggiano of the US Treasury and JK Huey of Wells Fargo. We each got to make about a 15 minute presentation and then we took some questions.

As I was working on my presentation, I really tried to write something that was reflective of the true temperature of the real estate market and to make points about how and why I think HAFA can be helpful. In the process, I came up with something that I called the Short Sale Manifesto. To me, it is a call for collaboration in the spirit of win - win. I had a few people come up to me afterward to tell me that the Manifesto really resonated with them, so I thought I would share it here again, for the sake of everyone who wasn't there.

Here is the text of the Short Sale Manifesto:

We call for honesty, openness and professionalism.  Short sales are not an invention of the borrowers, nor of the real estate community. They were created by the lending community (servicers and investors), as means of minimizing their losses by selling the property prior to foreclosure and not incurring the costs associated with a foreclosure. As such, we believe that all short sale transactions need to be handled in a professional manner, actively working toward a mutually acceptable outcome, with transparency and ethical integrity being the foundation upon which all parties build trust.

And if you are interested, you can see the videos of both the panelist presentations and the Q&A session afterward here:

NAR HAFA Panel with Jeff Lischer

Live Q & A's on HAFA

Saturday, April 23, 2011

The year was 2007...

Ah, how I remember those easier times for short sale transactions. What? "Easier"? Yes, in fact. I am writing my inaugural post to a blog that was started in 2007 and it is cause for reflection. The past four years have been a blur in some ways, but one thing is crystal clear, short sales in 2007 were a whole lot easier. OK, I know that a lapse of time can tend to result in a lapse of memory, but in this case I am pretty sure that my recollection of the past is fairly accurate.

What does this trip down memory lane have to do with reality? Especially since it is 2011 and short sales are anything but easy. Well, it is an exercise of perspective for the sake of encouragement. It is a tool, of sorts, to help alter ones expectation about the future. Short sales are going to be with us in the Arizona market for many, many years to come, and we are just at the beginning. In 2007 there were only a handful of short sales and most people thought of short selling stocks in association with this new term du jour. In 2011 everybody knows what short sales are, and most have the same reflux at just a mention of the words.

So where's the encouragement? As I said, we are just getting started. As in any social experiment, there must be cycles to go through. We must ebb and flow with iterations and reiterations. We must have private enterprise with solutions, government involvement that kills private enterprise, government incentives to codify and standardize processes and procedures, and then a whole new wave of private enterprise that operates according to some statute to protect consumers. Are we there yet? Not quite.

It has only been 4 years and by most indicators, the housing market is not "recovering". And even if it were to be deemed recovered tomorrow, that does not instantly fix the value problem with a record number of homes that, while not in foreclosure, are seriously under water. Based on historical average appreciation trends, homes in Arizona will not recover lost value from the declining years for a decade or more. Anybody who needs to sell in the couse of value recovery will not be able to without bringing cash to close or settling with their creditor in the form of a short sale.

Because we are just getting started, it is important to settle in and alter your expectation. Buyers, Sellers, Agents, Lenders and anybody else in this housing market, short sales will get easier again, don't despair. It is a market condition, and like any industry it will work itself out through endeavoring individuals, businesses and institutions who patiently persevere... just about the time that the market shifts again. For now, press on for the long road ahead.

Thursday, April 21, 2011


I have been practicing real estate law for twelve years. In doing so, I have been fortunate enough to represent many of the largest real estate companies in the State of Arizona and have been on the ground floor of every market turn, swing, move, you name it, during that time. As such, I can state with all honesty that this current market, with the challenge that most of us face in that we owe more money on our homes than they are worth, is the most legally difficult market to navigate that I have witnessed.

What do I mean by that? Well, Arizona is one of roughly a dozen states that provides protections for borrowers of money used to purchase a home. This is known as Arizona's Anti-Deficiency protections and simply put, mandates that a bank's sole recourse for default on a purchase money loan is to force the sale of the collateral - the house.

Now, the intricacies from there can be somewhat complex. First, what is a purchase money loan? Well, it is what it sounds like, the loan used to purchase the home. Second, does this protection extend to all types of property? No, it only extends to single or double family residences, on two and half acres or less of land, that have a completed structure on it and that has been utilized as a dwelling. Third, what if the home owner has multiple loans, including a second line of credit? Well, that is where it can get complex, but, simply put, pure lines of credit, that were not used to purchase a home, will not have protections. In other words, if that type of loan is not repaid, the bank could pursue the borrower for the debt.

From there, other questions abound, such as how are refinanced loans treated, how are loans used to improve the property treated, etc. etc. The bottom line is that every home owner's personal situation is unique and will need to be explored. That is why working with qualified professionals is so important. It is also why examining these issues early on is vital.

Ideally, most homeowners will be candidates for short sales or, if not, know the ramifications of allowing a property to go through a Foreclosure or Trustee Sale process. Further, ideally, any issues with the lenders (e.g., a line of credit lender) can be addressed during a short sale negotiation. To explain, often times debts owed, that are not protected under the deficiency laws, can be negotiated and reduced during the short sale process.

The great news is that there are protections. That is of utmost importance! The challenges are knowing when and where those protections apply and knowing how to take advantage of those protections.

Be on the look out for additional postings as we takle challenge by challenge.

Monday, April 18, 2011

Buying a Short Sale

Most short sale discussions are Seller-centric, by the nature of the bulk of the work (listing, negotiation, settlement, consequences) being on the Seller side of the transaction. And yet, it takes two to tango. A short sale is not a sale, until is a Buyer who is willing to make an offer on the property is procured.  This is a brief discussion of the Buyer side of the transaction, and perhaps most importantly on the Buyer expectations needed to make this transaction a success.

Buyers looking to purchase a short sale property may be looking for a deal, the right house (or preferably a combination of both). While a short sale is a real estate transaction, there are many differences that the Buyer needs to be aware of in order to be certain that this is a road they want to venture down. The most important difference is the uncertainty of when a property will close. While it is true that all parties may be working toward a common goal in earnest, there are never any guarantees that a short sale property will close. Another aspect of the short sale transaction is the unpredictable timeline of the transaction. While there may be some guidance available on this (prior experience, specific timelines acquired from the bank), generally the timeline is rather “soft.” This means that a Buyer who has a specific need to be in a property quickly, is probably best advised to look at other available options.  

The price the property will finally close is another unknown. Generally the bank will not offer any information on the price they are willing to accept, instead calling for the highest and best offer that the market can bring. A skilled Listing Agent will market the property in a way that is logical and convincing of their earnest effort to procure such an offer. Here it is important to understand that any offer brought before the bank will be evaluated relative to current market values and responded to accordingly. If the offer is deemed too low, the bank may want to counter offer the Buyer to a value that is acceptable to them. It is therefore important that the Buyer and their Agent study the market and have good reasons behind the price they are offering on a house – reasons that can in turn be shared with the Seller and eventually the bank. Frequently the bank’s counter offer is acceptable to the Buyer, who may have not offered their highest and best (or are persuaded by the bank’s reasons for a counter offer), and another price can be mutually arrived upon. Again, a skilled Buyer’s Agent will represent their Client’s best interest in this situation, but being able to look at the market values and interact with the Lender’s position, mindful of the Buyer’s wants and needs.

Friday, April 15, 2011

AZ Short Sale Experts blog starting up again

After being dormant for almost four years, the Arizona Short Sale Experts blog is starting back up. But don't hold it against us ... we've been too busy helping hundreds of Arizona homeowners with short sale transactions!

And yet, it became painfully apparent to me this week that more good information is still needed. I was on the phone with a VERY frustrated homeowner who was getting conflicting information from all over the place, and didn't know what to do. Sometimes, too much information is really a bad thing, especially when the source of the information is questionable and unproven.

So, this marks the re-launch of Arizona Short Sale Experts blog, with a few new contributors in the mix. We will talk about all things short sale, with a specific focus on Arizona. Each of these professionals is a true expert in the field, with a proven record and a great reputation.

Introducing the team:

Randy Kutz - Co-owner of AZ Short Sale Experts LLC and the Phoenix Heritage Real Estate Group (HomeSmart)
Greg Markov - Co-owner of AZ Short Sale Experts LLC and the Phoenix Heritage Real Estate Group (HomeSmart)
Robert Marsh - CPA, Robert B. Marsh, PC 
Patrick Ritchie - Credit Expert, Author of the Credit Road Map
Amy Swaney - Certified Mortgage Banker, Citywide Home Loans 
Dax Watson - Real Estate Attorney, Mack, Drucker & Watson