Arizona, as you know from reading this blog, is an Anti-Deficiency State. That means, in certain situations, when a bank loans money for the purchase of the house, the bank's only collateral (or recourse) is the house itself. In other words, if I borrow $100,000 from the bank to buy a house, and lose it to a foreclosure for only $50,000 - the bank cannot pursue me for the $50,000 I never paid back.
As you also know from reading this blog, the key to having this protection is the loan must be what we call a "purchase money loan" - the loan used to "purchase" the house. One of the most prevalent questions we hear is, well "what if I refinanced my first loan and took out extra money to improve the house, does that count?" Unfortunately, we do not know that answer for sure. The law on the books, as of today, does not give us a definitive answer as to whether a "cash-out refinance," in which the refinanced portion is put back into the house, would still be considered purchase money. That is just another challenge of dealing with these issues - we cannot definitively answer all the burning questions.
But, one thing we/you can do, is complete a short sale of these "cash-out refinanced" loans and ask the lender to waive any deficiency from the refinance. If the lender agrees to do so, then no worries!
Wednesday, July 27, 2011
Sunday, July 17, 2011
Fitting Quote
This evening I stumbled upon a quote that I find most fitting for short sales. Seems like a good answer to the often asked question of "why do short sales work":
"When you owe the bank $1,000 and you're broke, you have a problem. When you owe the bank $1,000,000 and you're broke, the BANK has a problem." (Unknown)
Friday, July 15, 2011
FTC decides not to enforce parts of MARS
Today the FTC has ruled that it will not enforce certain provisions of the MARS rules, specifically ones that apply to licensed real estate agents. There has been much gripe about MARS in the real estate community, because instead of help and protection, the rules created a lot of confusion and unnecessary barriers for the very people who are needed by the distressed sellers and by the banks - the real estate agents who can put together a short sale transaction.
"As a result of the stay on enforcement, these real estate professionals will not have to make several disclosures required by the rule that, in the context of assisting with short sales, could be misleading or confuse consumers," the FTC said in a statement.
Short sales are hard enough as is - we need less barriers to helping distressed borrowers, not more!
HousingWire Article
FTC Press release
"As a result of the stay on enforcement, these real estate professionals will not have to make several disclosures required by the rule that, in the context of assisting with short sales, could be misleading or confuse consumers," the FTC said in a statement.
Short sales are hard enough as is - we need less barriers to helping distressed borrowers, not more!
HousingWire Article
FTC Press release
Tuesday, July 12, 2011
Bank of America Improving Short Sales
Just this past week as I was teaching in San Jose, I had an agent come up to ask a question. He started out by saying "Fortunately, this isn't a BofA short sale ...." I hear this A LOT, and it has everything to do with the fact that BofA used to be THE WORST lender to do short sales with. But a year and a half ago, they really started making an effort to change that. Under the guidance of Matt Vernon (and now Kimberly Dawson), BofA has gone from the worst to being among the best. Starting with transition to Equator (which was not initially well received by the real estate community), moving to simplified process, one by one, BofA appears to really try and do better. The fact remains that BofA left a very bad taste in a lot of people's mouth, and they know that.
Below you will see a press release from today that aims to solve a well known problem of Buyer cancellation forcing a restart of the process and a delay in closing. BofA is now allowing for a backup offer to be submitted, and so long as it matches the previous offer, the process will not be delayed. This is great news for thinly stretched agents and distressed borrowers!
Keep up the great work, BofA!
 | ||||||
| ||||||
|
Thursday, July 7, 2011
Which Banks Are Pursuing the Most Short Sales?
Interesting article in Realtor Magazine (citing Inman, citing the Treasury) about which banks do more short sales. According to their findings, Chase and Wells Fargo. Couple of points on this:
- When we say Chase and Wells Fargo, we also include their acquisitions of troubled banks like WaMu and Wachovia. WaMu committed much fraud and encouraged risky lending - is there any wonder their loans are turning out to be short sales? A HUGE chunk of Wachovia loans was written off when it was acquired (which coincidentally makes them some of the easiest short sales to work). So, of course these lenders are doing a lot of short sales. But what about BofA's acquisition of Countrywide? See #2.
- Once again, we have to remember that real estate is a geographical phenomenon, and generalizing can lead to false conclusions. Countrywide was very active in Arizona, so our personal experience is that most of the short sales we are doing are BofA short sales. To put it simply - to say that all banks work all markets equally is a fallacy. For example, we rarely see US Bank short sales, but they are quite prevalent in Pacific Northwest, due to the fact that USB has a larger presence in that market.
Monday, June 27, 2011
Security Breach: What Should You Do?
Every week it seems like I read something about a security breach, whether it is a bank, government entity, university, or hospital, the possibilities of a breach are endless. Criminals are grabbing sensitive information such as social security numbers to commit fraud. The topic comes up frequently in my classes about credit, people want to know how they can protect themselves if they are part of a security breach.
The standard recommendation is to add a fraud alert to your credit report. This is a notation on the credit report notifying anyone looking at the credit report that there is a chance of identity theft, therefore the identity of the person requesting credit should be scrutinized. I am not a firm believer in relying on a fraud alert as a sound protection from identity theft. The reality is it does not stop anything, but rather it is simply a cautionary notice.
The better approach is to consider a security freeze as a protection because it denies access to your credit report. When a freeze is added to your credit report, all third parties, such as lenders or other companies, whose use is not exempt under law will not be able to access your credit report without your consent (you give them a pin for access). A security freeze is more beneficial than a fraud alert because it actually stops access to your credit report without your permission. It is available to ID theft victims with a police report and non-victims who have no police report for a specific incident, but wish to protect themselves.
You need to go to each credit bureau individually to institute a freeze:
TransUnion: http://www.transunion.com/corporate/personal/fraudIdentityTheft/fraudPrevention/securityFreeze.page#3
Experian:
http://www.experian.com/consumer/security_freeze.html
Equifax:
http://www.equifax.com/cs7/Satellite?c=EFX_Page_C&childpagename=EFX%2FEFX_Page_C%2FGetcreditCP&cid=1182374732430&p=1182374732489&packedargs=locale%3Den_cp&pagename=EFX%2FWrapper#NextSteps
If the links change just go into each credit bureau website and search the term “security freeze.”
The reason I like the security freeze is because if someone has your social security number and tries to apply for credit, a creditor will not be able to access your credit report and therefore credit will likely be denied. You should still check your credit report annually to make sure there are no issues, and the security freeze will not prevent someone from using your credit card if your account number is stolen, so remain on guard and realize the freeze will only prevent new accounts from being opened in your name. Existing accounts are still susceptible.
The security freeze may delay or interfere with the timely approval of any subsequent request or application you make that involves access to your credit report. This includes new loans, credit, mortgages, insurance, rental housing, employment, investments, licenses, cellular phone service, utility service, digital signature service, and extension of credit at point of sale.
Additionally, while your report is frozen, companies that provide consumer data to the credit bureaus will not be allowed to update name, address, social security number and date of birth information on your credit report. If there are any changes made to your name or address while your file is frozen, you must notify the credit bureaus directly so that they can update your personal information.
If you wish to apply for a new credit account or other credit relationship, and the prospective lender or company needs to access your credit report, you will need to get a pin code to give access to your report or remove the security freeze.
As a method of protection the security freeze is a way to lock up your credit report and the cost is generally free if you have a police report or a $5 - $10 onetime fee if you do not. It is not only the best protection, but it is also a very inexpensive protection.
Tuesday, June 21, 2011
June Arizona Housing Update
I am going to repost June housing opinion from our friends at the Cromford Report in it's entirety. Very interesting information. So, why is it, when such good signs abound, are we reading so many doom and gloom stories (like this CR piece)? I believe it is for the same reason we've discussed multiple times on this blog - real estate is talked about as a national trend, whereas in reality it is a local phenomenon. Yes, I believe that the "housing market" in general has a ways to go down. No, I do not believe that Arizona will continue to decline at the pace it has been. Let's remember - we were among the first to go down (starting at the end of 2006), and are among the hardest hit (in the top five biggest pricing declines nationwide). Logically, this also means that we will reach our bottom sooner. Practically, this means that investors and savvy buyers will continue to pick up great deals for years to come, since the general mood about housing will remain dour until the other markets reach their natural correction levels, and start to level off.
Unfortunately, this is still not good news for millions of Arizona homeowners who are hopelessly upside down. I do not believe that we will see sharp and fast pricing increases, and they will remain upside down for years to come, with only solutions remaining what they are today - staying put if they can, or short selling or foreclosing if they cannot afford the house.
Here is the full June housing opinion:
While researching the definition of robo-signers, I came across this partial definition in Investorpedia: “robo-signers assume the paperwork to be correct and sign it automatically, like robots.” This is a perfect description of how I was at my last loan closing. I think I may be a robo-signer.
May’s Sales Activity
Final Thoughts
Unfortunately, this is still not good news for millions of Arizona homeowners who are hopelessly upside down. I do not believe that we will see sharp and fast pricing increases, and they will remain upside down for years to come, with only solutions remaining what they are today - staying put if they can, or short selling or foreclosing if they cannot afford the house.
Here is the full June housing opinion:
A child of five would understand this. Send someone to fetch a child of five.
Groucho Marx
Groucho Marx
While researching the definition of robo-signers, I came across this partial definition in Investorpedia: “robo-signers assume the paperwork to be correct and sign it automatically, like robots.” This is a perfect description of how I was at my last loan closing. I think I may be a robo-signer.
Distressed Inventory Continues Slide
The big news in Maricopa County’s housing market in May continues to be the rapidly declining distressed housing inventory. This decline is not subtle folks; it hits you over the head like a sledge hammer. We define distressed inventory as the number of homes with an active notice combined with the number of bank held properties. On January 1st of this year Maricopa County had 39,724 homes with an active notice and another 18,889 REOs. Our distressed inventory began 2011 at 58,613 homes. At the end of May these numbers had fallen to 27,396 and 18,451 respectively, combined 45,847. In the last five months distressed inventory has fallen on average 2,553 homes per month. During the last two months these declines have continued at an accelerating pace, reducing inventory by 3,704 in April and 4,265 in May. The decline we saw in May was the highest on record indicating the snowball is gaining momentum and heading down hill. Our early June numbers are projecting the same accelerated pace. Simple math tells us that if distressed inventory continues to decline at its current rate, in 10 months it will dry up, but then, that’s merely simple math.
When I present my simple logic, readers and other experts counter with complex math factoring together a Massive Backlog of “Shadow Inventory”, "Robo-Signings", a declining demand as QE2 ends and the ever popular bank conspiracies. Sometimes, I feel like I’m conversing with Hollywood screen writers. Maybe there is a need for Rocky 7. Stallone is going to be 65, maybe it’s time he quit competitive boxing, maybe it’s time for him to leave the ring and get his real estate license. “Yo, Adrian, we’re movin to Phoenix, two warm up bouts with ‘Robo’ and ‘Shadow’, and I think I’ll be able to take down da champ, Russell Shaw. Cut me Mick, I’m going 15.” Boom. Sorry, sometimes I drift.
Since January 1, 2007 Maricopa County has seen 165,385 home foreclosures, a numbing number in anybody’s book. One of the main reasons I believe we’re heading into the home stretch is how far we’ve come. The news links above talk about the same decline in distressed inventory that I just mentioned; only they attribute the decline to massive processing delays. These same articles talk about how foreclosures rose through last summer, and then began their decline in September when the robo-signings scandal broke. Information Market numbers tell a slightly different story, a short-lived Bank of America moratorium in November and December briefly lowered foreclosures. In January foreclosure numbers picked back up resuming their steady and consistent flow. In May, Maricopa County saw 4,206 homes sold at auction with 1 in 3 being purchased by investors, leaving only 2,800 reverting to the lender. So, at the end of the day while our detractors have similar numbers, their explanation as to where we are and where we’re headed is completely different. Since January 1, 2007, Maricopa County has seen 165,385 homes removed from the “bad mortgage” file leading loan delinquencies to their inevitable decline.
I believe the decline we’re seeing in new notices runs parallel to the report of Jay Brinkman, the chief economist of the Mortgage Bankers Association, where in he states, "Of particular importance is that the drop in the percentage of loans 90 days or more past due was driven by improving numbers for loans originated between 2005 and 2007. These are the loans that drove the mortgage market collapse and now represent about 31 percent of loans outstanding but 65 percent of the loans seriously delinquent. Given that loans originated during this period are now past the point where loans normally default, and that loans originated since then generally have better credit quality, mortgage performance should continue to improve.”
The Wall Street Journal article would disagree, arguing that banks have decided to slow the foreclosure process while they perfect their procedures, in turn stabilizing property prices while minimizing losses and legal issues. There are two points in the WSJ which I have difficulty grasping. First, I find it hard to believe that the banks would foreclose on 165,000 homes in Maricopa County and just now realize they have a problem with declining home values. Second, why would you be concerned about robo-signings and legal issues when many of your current foreclosures are strategic defaults? How can there be vast legal issues when the majority of home owners facing foreclose, are saying in Henny Youngman fashion: “Take my house-please”. Why would the banks conduct a more thorough review when the party with the “alleged” claim is mailing in the keys? I may be wrong, and the Wall Street Journal article may be right; but in life, I’ve always found the simplest explanation is usually the best.
The following graph compares the number of homes with an active foreclosure notice on March 1, 2010 to homes with an active notice on June 1, 2011 by origination date.
May’s Sales Activity
Case-Shiller, announced the dreaded double dip in home pricing in its May 31st report. In response to the report, David Blizter, chairman of the S&P index committee reportedly said, “Home prices continue on their downward spiral with no relief in sight.” In response to Mr. Blizter’s statement the Maricopa County housing market immediately responded the next day by registering its 6th consecutive month with a resale median home price of $115,000 while quoting Mark Twain, “The reports of my death are greatly exaggerated.”
May’s Sales Summary
Final Thoughts
There has been a lot of speculation in a series of recent articles regarding the purchase of a home in Scottsdale by one Sarah Palin. Questions swirl, is she running for President? Is she making a run for John Kyl’s seat? One article even questioned whether or not she has title issues. In a recent Huffington Post article, Massachusetts Register of Deeds John O’Brien and Forensic Mortgage Fraud Examiner Marie McDonnell gave this opinion, “the title to Sarah Palin’s new home in Scottsdale is clouded by robo-signers.” They even published a copyright protected "McDonnell's Mortgage Map" exploring the property’s chain of title in depth. Ms. McDonnell, what were you thinking? Not once in your report do you mention the “livery of seisen” ceremony. Did it take place or not? What was symbolically passed? A token cactus? A clump of dirt? Was the cactus of native variety? Was the soil clayish and high in alkaline content? Ms. McDonnell, these are the rudimentary tenets of common law, the Normans are not pleased. I drifted again, didn’t I? The simple explanation is probably best. I’m certain Ms. Palin’s local attorney required title insurance, and I’m also certain our local title experts are confident in their $1,700,000 guarantee. In parting, the speculation as to why the home was purchased, I’m going with Scottsdale is a good investment opportunity and a great reprieve from Alaska’s frigid temperatures.
Cheers,
Tom Ruff
Tom Ruff
Friday, June 17, 2011
Debtors can end up being on the receiving end of an abandonment.
What if the bankruptcy trustee abandons your property back to you?
Bankruptcy and insolvency may cause debt cancellation income to be nontaxable to the debtor, but bankruptcy can cause tax problems for an individual if the court allows or orders the trustee to abandon property under 11 USC 554.
If a property is of no value, or a potential burden to the bankruptcy estate (by virtue of tax on built-in gain for example), the court may authorize or order the property’s abandonment. If the debtor subsequently voluntarily (eg. short sale) or involuntarily (trustee’s sale) transfers title to the property, a taxable gain to the debtor may occur.
Discharge of debt income is excludable under IRC Sec. 108 to the estate and to the debtor while in a bankruptcy proceeding, but gain from the sale is generally not. If a property is sold by the estate, any potential tax would generally be an administrative expense of the estate. However if the property were to be abandoned to the debtor, then the debtor assumes the cost basis of the property subject to any reductions in basis by virtue of the debt discharge. Some practitioners believe that abandonment may be made to the secured party, rather than the debtor, in which case the debtor may be insulated from the tax consequences of a future transfer. The transfer of property between a bankruptcy estate and the debtor is non-taxable under IRC Sec. 1398. This section refers to a “termination of the estate,” but most practitioners believe it would also apply to an abandonment.
Depending on the other tax attributes of the debtor, the basis of the property abandoned might not be reduced, as the ordering rules of IRC Sec. 108 require net operating losses, capital losses, and other attributes to be reduced first, unless an election is made. There is also a limit to the reduction of basis under IRC Sec. 1017, where generally the basis of assets cannot be reduced below the aggregate of the taxpayer’s liabilities immediately after discharge.
Because any deficiency relating to the debt secured by the abandoned property is discharged, all debt secured by the property now becomes non-recourse. While some practitioners believe that the tax law should be changed, the current law treats all such transfers of the abandoned property as sales with the selling price equal to the balance of the secured loans, and the cost basis to the debtor equal to his basis before the bankruptcy reduced by any required reductions due to debt forgiveness.
If the property qualifies as a primary residence for two out of the last five years, the gain upon sale, trustee’s sale, deed in lieu, may be excluded up to $500,000 for a married person under IRC Sec. 121. If the property does not qualify as a primary residence, other losses, carryover losses, or other tax attributes (although possibly reduced by debt forgiveness) may lessen the tax burden to the debtor.
In Private Letter Ruling 8918016 (no precedent), the IRS in a pre-BAPCPA 1989 ruling, stated that an underwater farm abandoned to the taxpayer in a Chapter 7 proceeding, retained the tax basis of the property in the hands of the estate reduced by adjustments for debt forgiveness. The ruling went on to state that the abandonment of the farm to the taxpayer lifted the stay on foreclosure, and that the unsecured deficiency claim was discharged, leaving the lender’s lien against the property as a nonrecourse claim. A subsequent foreclosure would cause the taxpayer to recognize gain equal to the balance of the mortgage over the basis of the property.
In Tax Court Memo Decision 2000-82, the issue was addressed as to whether an abandonment was the equivalent of granting relief from the automatic stay. The Tax Court cited conflicting decisions as to whether property was necessarily removed from the bankruptcy estate upon the lifting of the stay. At the time of the Tax Court’s decision, it deferred to the Ninth Circuit’s 1987 decision in Wilson v. Enters, Inc. (822 F.2d 859), that relief from stay as to petitioner’s residence was an abandonment whereby the property reverted to petitioner, resulting in the petitioner, not the bankruptcy estate, having to account for the tax effects of the property’s foreclosure.
Based on the possibilities above, I would suggest that if your attorney believes it likely that a property will be abandoned by the bankruptcy trustee, a tax projection be prepared estimating the tax consequences of the property’s transfer, pre-petition versus post-petition, in order to minimize the tax penalty to the debtor.
Bankruptcy and insolvency may cause debt cancellation income to be nontaxable to the debtor, but bankruptcy can cause tax problems for an individual if the court allows or orders the trustee to abandon property under 11 USC 554.
If a property is of no value, or a potential burden to the bankruptcy estate (by virtue of tax on built-in gain for example), the court may authorize or order the property’s abandonment. If the debtor subsequently voluntarily (eg. short sale) or involuntarily (trustee’s sale) transfers title to the property, a taxable gain to the debtor may occur.
Discharge of debt income is excludable under IRC Sec. 108 to the estate and to the debtor while in a bankruptcy proceeding, but gain from the sale is generally not. If a property is sold by the estate, any potential tax would generally be an administrative expense of the estate. However if the property were to be abandoned to the debtor, then the debtor assumes the cost basis of the property subject to any reductions in basis by virtue of the debt discharge. Some practitioners believe that abandonment may be made to the secured party, rather than the debtor, in which case the debtor may be insulated from the tax consequences of a future transfer. The transfer of property between a bankruptcy estate and the debtor is non-taxable under IRC Sec. 1398. This section refers to a “termination of the estate,” but most practitioners believe it would also apply to an abandonment.
Depending on the other tax attributes of the debtor, the basis of the property abandoned might not be reduced, as the ordering rules of IRC Sec. 108 require net operating losses, capital losses, and other attributes to be reduced first, unless an election is made. There is also a limit to the reduction of basis under IRC Sec. 1017, where generally the basis of assets cannot be reduced below the aggregate of the taxpayer’s liabilities immediately after discharge.
Because any deficiency relating to the debt secured by the abandoned property is discharged, all debt secured by the property now becomes non-recourse. While some practitioners believe that the tax law should be changed, the current law treats all such transfers of the abandoned property as sales with the selling price equal to the balance of the secured loans, and the cost basis to the debtor equal to his basis before the bankruptcy reduced by any required reductions due to debt forgiveness.
If the property qualifies as a primary residence for two out of the last five years, the gain upon sale, trustee’s sale, deed in lieu, may be excluded up to $500,000 for a married person under IRC Sec. 121. If the property does not qualify as a primary residence, other losses, carryover losses, or other tax attributes (although possibly reduced by debt forgiveness) may lessen the tax burden to the debtor.
In Private Letter Ruling 8918016 (no precedent), the IRS in a pre-BAPCPA 1989 ruling, stated that an underwater farm abandoned to the taxpayer in a Chapter 7 proceeding, retained the tax basis of the property in the hands of the estate reduced by adjustments for debt forgiveness. The ruling went on to state that the abandonment of the farm to the taxpayer lifted the stay on foreclosure, and that the unsecured deficiency claim was discharged, leaving the lender’s lien against the property as a nonrecourse claim. A subsequent foreclosure would cause the taxpayer to recognize gain equal to the balance of the mortgage over the basis of the property.
In Tax Court Memo Decision 2000-82, the issue was addressed as to whether an abandonment was the equivalent of granting relief from the automatic stay. The Tax Court cited conflicting decisions as to whether property was necessarily removed from the bankruptcy estate upon the lifting of the stay. At the time of the Tax Court’s decision, it deferred to the Ninth Circuit’s 1987 decision in Wilson v. Enters, Inc. (822 F.2d 859), that relief from stay as to petitioner’s residence was an abandonment whereby the property reverted to petitioner, resulting in the petitioner, not the bankruptcy estate, having to account for the tax effects of the property’s foreclosure.
Based on the possibilities above, I would suggest that if your attorney believes it likely that a property will be abandoned by the bankruptcy trustee, a tax projection be prepared estimating the tax consequences of the property’s transfer, pre-petition versus post-petition, in order to minimize the tax penalty to the debtor.
Thursday, June 9, 2011
Free Rent? Private Stimulus? Thinking double over the short sale solutions.
There is a concept in professional negotiations called "Thinking Double." In common terms, it's what we would call "walking in somebody else's shoes," and basically it means that you should always try to see the situation from the other party's perspective to get a better vantage point over the situation, and to know how to best negotiate. In this post, I will briefly try to think double about the short sale solution to a default borrower, and try to see the situation from the bank perspective.
A few months back my friend and colleague Ray Mathoda posted a very insightful blog post which referenced a WSJ article that claimed that 492 is "the number of days since the average borrower in foreclosure last made a mortgage payment." Today, there is an article from CNN Money that claims:
Nationwide, it takes an average of 565 days to foreclose on borrowers in default from their first missed payments to the final auction. In New York, the average is 800 days and in Florida, where the "robo-signing" issue is particularly combative, it's 807.
So, let's try to see this from the bank perspective (and I use the term "bank" to mean servicer and investor, whose self interest should be aligned in this matter). This number means two years of not collecting payments, possibly paying vacancy insurance, all the while moving the file between various departments and paying to service it. This is a money loosing proposition if I have ever seen one!
Now, let's take a look at the alternative side - short sales, long and drawn out as they may seem, average 180 days list to close for our team. Tracking a few other top producing teams in the Phoenix Valley, this numbers seems to be consistent. Meaning, some are faster, some are slower - but 180 is a common average. So, going the short sale route reduces the number of days that a bank has to carry a non performing asset by 314%! Couple that with the fact that a short sale typically nets the bank more money (up to 30% more according to Mortgage Banker's Association), and you have a solution that is very hard to beat, when it comes to dollars and cents.
Much more can be said on this topic, but if there has ever been a motivation for the banks to improve their short sale solutions - this is IT. After all, the bank is not in business of offering rent free living and personal stimulus to distressed borrowers, but in business of maximizing profits and minimizing losses for their investors.
Quick note on reversing the vantage points once again, and looking at it from the distressed borrowers perspective. What is their incentive to do a short sale? First of all, not all foreclosures take a long time. As Murphy's Law dictates, in my experience those homeowners who are banking on a drawn out process, usually get their notice of default served right away, and their process moves fast. Those who hope to "get it over with" quickly, however, frequently get stuck in the quagmire of bank's process, and their foreclosure magically gets pushed out and out and out. So, making the process more predictable would certainly go a long way in tapping into the self interest of the distressed borrower.
One more point - if we look at what the government HAFA program is trying to accomplish - we are talking about even shorter and MORE predictable timelines! And there is the moving cost incentive to the distressed borrower ($3,000), and there is the financial incentive to the bank.
There IS a better way - we just need to truly want to implement it.
The Implications of Receiving a Form 1099-C
After completing a short-sale, it is common for the seller to receive a Form 1099-C from the lender or lenders who received less than the balance owed on their secured notes. The form will show the amount of debt cancellation from the transaction, which may result in taxable income to the seller/borrower.
While it is normally preferable to pay tax on the debt canceled rather than be forced to actually pay the debt, the two are not always mutually exclusive when it comes to the issuance of a 1099-C. In other words it may be possible for a lender to issue a 1099-C for cancellation of debt resulting from a short-sale, while still pursuing the borrower for the deficiency.
The problem lies with the IRS regulations directing the lender when it should issue a Form 1099-C. While in most instances the lender cancels the debt, then issues a Form 1099-C by the following January to the debtor. However the regulations may require the issuance of a 1099-C if a payment has not been received during a testing period and certain other conditions are met. The current testing period is 36 months, but that could change in the future.
If the borrower includes the 1099-C amount in his income, then is forced to pay the debt at a later date, the statute of limitations may have expired to amend the return and receive a refund of the related tax.
Borrowers who have received a 1099-C, but have no additional agreements binding the lender’s ability to collect on the note, should consult with an attorney in order to determine if the lender has a reservation of rights or other legal means to collect on the note. Arizona has case law relating to this issue as do other states, but there is no simple rubric to follow in determining the outcome of this issue in Arizona.
I would hope that future 1099-C forms will include language stating whether the lender is legally discharging the debt or merely issuing the form based on IRS regulations and thus reserving the right to enforce collection of the obligation.
While it is normally preferable to pay tax on the debt canceled rather than be forced to actually pay the debt, the two are not always mutually exclusive when it comes to the issuance of a 1099-C. In other words it may be possible for a lender to issue a 1099-C for cancellation of debt resulting from a short-sale, while still pursuing the borrower for the deficiency.
The problem lies with the IRS regulations directing the lender when it should issue a Form 1099-C. While in most instances the lender cancels the debt, then issues a Form 1099-C by the following January to the debtor. However the regulations may require the issuance of a 1099-C if a payment has not been received during a testing period and certain other conditions are met. The current testing period is 36 months, but that could change in the future.
If the borrower includes the 1099-C amount in his income, then is forced to pay the debt at a later date, the statute of limitations may have expired to amend the return and receive a refund of the related tax.
Borrowers who have received a 1099-C, but have no additional agreements binding the lender’s ability to collect on the note, should consult with an attorney in order to determine if the lender has a reservation of rights or other legal means to collect on the note. Arizona has case law relating to this issue as do other states, but there is no simple rubric to follow in determining the outcome of this issue in Arizona.
I would hope that future 1099-C forms will include language stating whether the lender is legally discharging the debt or merely issuing the form based on IRS regulations and thus reserving the right to enforce collection of the obligation.
Wednesday, June 8, 2011
What Your Accountant Will Need For a Tax Analysis
Whether it is a short sale, trustee's sale or other conveyance of your underwater property, your accountant and attorney will need many of the items below in order to calculate the tax effects of the transfer. The calculation can be fairly simple or extremely complex depending on the circumstances. It will likely save you money to have this information assembled before you discuss taxes with your advisor.
A. Lot size, description, and location of the property.
B. How the property was titled, and the parties to the related notes.
C. Dates of property use and changes of use.
D. Cost of the property and improvements, and adjusted basis after tax depreciation.
E. How the property was financed, and possibly refinanced, and use of proceeds.
F. Determine if the loans were VA, FHA, HUD, conventional, or carryback notes.
G. Determine if the terms of the note or federal/state law limits borrower’s liability.
H. Nature of property in hands of owner (primary residence, second home, rental, non-rental, investment property, or inventory).
I. Determine if there was waste committed by the owner, or fraud used to obtain financing.
J. Terms of conveyance of the distressed property.
K. Lien priority of secured lenders.
L. Determine if the property owner is or will be filing for bankruptcy protection.
M. Determine statute of limitations on enforcement of obligations.
N. Value of borrower’s assets and liabilities immediately before all planned conveyances.
O. Determine the other taxable income and deductions of the debtor for the period in question, including carryovers of suspended losses, net operating losses, and capital losses.
P. Obtain copies of any 1099-C and 1099-A forms issued in relation to the loans.
A. Lot size, description, and location of the property.
B. How the property was titled, and the parties to the related notes.
C. Dates of property use and changes of use.
D. Cost of the property and improvements, and adjusted basis after tax depreciation.
E. How the property was financed, and possibly refinanced, and use of proceeds.
F. Determine if the loans were VA, FHA, HUD, conventional, or carryback notes.
G. Determine if the terms of the note or federal/state law limits borrower’s liability.
H. Nature of property in hands of owner (primary residence, second home, rental, non-rental, investment property, or inventory).
I. Determine if there was waste committed by the owner, or fraud used to obtain financing.
J. Terms of conveyance of the distressed property.
K. Lien priority of secured lenders.
L. Determine if the property owner is or will be filing for bankruptcy protection.
M. Determine statute of limitations on enforcement of obligations.
N. Value of borrower’s assets and liabilities immediately before all planned conveyances.
O. Determine the other taxable income and deductions of the debtor for the period in question, including carryovers of suspended losses, net operating losses, and capital losses.
P. Obtain copies of any 1099-C and 1099-A forms issued in relation to the loans.
Monday, June 6, 2011
Should FEDs get more involved to help housing?
Good God, I hope not.
According to a Moody's analyst, the Fed Govt should do more to help underwater borrowers. Read the article here. The rationale employed is that the government can help offer more refinance solutions to involve principle reduction in order to prevent people from strategically defaulting.
This quest by some in Washington to "keep borrowers in their home at all cost" is killing the market and the economy. "Too Big To Fail" has been waiting to make it's debut on the homeowner front. Think about it... the bail out failed, the stimulus failed, loan mods (HAMP) failed... so is it that government just had the formula wrong? Did they just bail out the wrong side (industry instead of consumers)? I think not. Rather, it was their involvement to begin with that created false hope and an elongated (and inevitable) homeowner default. It is the Federal policies that gave lenders an alternative to negotiating settlements with the borrowers.
Left to their own, lenders and borrowers have enough mutual interest in working out a solution, including principle reduction, and if it does not work, there is always a short sale. My point is simple, the Fed Govt should divest itself and allow the market to work its way toward recovery. It will be faster and cheaper in the end.
According to a Moody's analyst, the Fed Govt should do more to help underwater borrowers. Read the article here. The rationale employed is that the government can help offer more refinance solutions to involve principle reduction in order to prevent people from strategically defaulting.
This quest by some in Washington to "keep borrowers in their home at all cost" is killing the market and the economy. "Too Big To Fail" has been waiting to make it's debut on the homeowner front. Think about it... the bail out failed, the stimulus failed, loan mods (HAMP) failed... so is it that government just had the formula wrong? Did they just bail out the wrong side (industry instead of consumers)? I think not. Rather, it was their involvement to begin with that created false hope and an elongated (and inevitable) homeowner default. It is the Federal policies that gave lenders an alternative to negotiating settlements with the borrowers.
Left to their own, lenders and borrowers have enough mutual interest in working out a solution, including principle reduction, and if it does not work, there is always a short sale. My point is simple, the Fed Govt should divest itself and allow the market to work its way toward recovery. It will be faster and cheaper in the end.
Saturday, June 4, 2011
Bank of America branch - FORECLOSED!
Full disclosure: This story has nothing to do with Arizona or short sales, but in a very large sense, it is a very telling story about our market, our industry and our times. So, so, so painfully telling ... anyway, click here to read about the Florida couple who foreclosed on a Bank of America branch.
Thursday, June 2, 2011
Credit Reports Used in Employment Background Checks
A few weeks ago I was teaching a finance class at the Ohio State University when a scenario came up that I knew I would need to write about on this forum. A student had applied for an internship for the summer, the hiring manager said he was the top candidate and there were just formalities such as a background check before a final decision would be made. The student signed an authorization form allowing the employer to do a consumer report on him. Within a few days the hiring manager called and told the student that the position was filled by a different candidate. As he was telling the story in class I knew where it was going, I have heard a similar story every academic quarter since 2006 when I first started as a guest lecturer at OSU. The student checked his credit report and found a medical collection for $168. Did he owe the money? Yes. Was it his responsibility to pay it? Yes. Should he have checked his credit report before applying for a job? Absolutely!
A 2009 survey by the Society of Human Resource Management showed 60% of employers conduct credit checks of potential employees. This is an increase from 2006 in which only 42% of employers were doing credit checks.
Not all job candidates go through a credit check, of those organizations surveyed only 13% do credit checks on all employees. 47% surveyed conduct credit checks on specific positions. Positions in a financial or fiduciary responsibility go through a credit check 91% of the time, while senior executive positions are checked 46% of the time, and positions with access to highly confidential employee information are checked 34% of the time. Medical debt is generally not considered during the hiring process according to the poll, but medical collections are open to scrutiny. A foreclosure is only part of the hiring decision in 11% of those surveyed. 87% of those surveyed allow job candidates the opportunity to explain the results of the credit report, depending on the circumstances. 57% initiate a credit report after making a contingent offer, 30% perform the credit check after the interview.
Employers may be considering many things, such as the likelihood to be more tempted to steal based on delinquent accounts or a high debt-to-income ratio based on the debt present on the credit report. Other considerations:
• On the job errors
• Longer lunch breaks to take care of personal problems
• Requesting paycheck advances
• Attempting to borrow money from co-workers
• Frequent personal phone calls or incoming collection calls
• Absenteeism, attitude, enthusiasm, etc.
How employers gauge the credit issues in terms of a hiring decision:
• Outstanding judgments 64%
• Collection accounts 49%
• High debt-to-income 18%
• Foreclosure 11%
• Medical debt 1%
My advice is to review your credit report, make sure it is correct, and always have an explanation for anything derogatory focusing on:
• Why the derogatory event occurred
• Why the derogatory event was out of your control (job loss, medical issue, etc.)
• Why the derogatory event is out of character based on the big picture of your credit and is unlikely to happen again
Friday, May 27, 2011
HAFA Meeting Update
Yesterday I sat through a HAFA Update meeting with representatives from the US Treasury and the staff of Arizona Association of Realtors. The Treasury staffers are on tour of five hardest hit states, and are meeting with the local Realtor associations to get feedback on the program and to answer questions.
As I have stated elsewhere, I have been a HAFA believer ever since my friend and colleague Ray Mathoda (of AssetPlan USA) helped me to wrap my mind around the intent of the program. The intent is indeed good, but the devil, as they say, is in the execution. Undeniably there are issues with execution, but the purpose of this post is not to replay the sad song that you hear all over the internet, but to post my personal takeaways on the meeting. Here they are:
In conclusion, I appreciate the work that has been put into this program thus far, and can say that we try to qualify each distressed seller that comes our way for HAFA first, before attempting a proprietary program from the servicer. In the end, I do not believe that HAFA is going to be the final solution to the short sale dilemma, but I do believe that the impact of it will remain felt, and that in the end it will be remembered as a good thing and a benefit for the distressed borrowers who need to short sell their house.
You can read more about the program here.
As I have stated elsewhere, I have been a HAFA believer ever since my friend and colleague Ray Mathoda (of AssetPlan USA) helped me to wrap my mind around the intent of the program. The intent is indeed good, but the devil, as they say, is in the execution. Undeniably there are issues with execution, but the purpose of this post is not to replay the sad song that you hear all over the internet, but to post my personal takeaways on the meeting. Here they are:
- Whether or not the program is successful, one of the intentions for it was to lead the industry by example, and we are already seeing results of this. Full forgiveness of deficiency on 1st loan balance is much more commonplace than it was before HAFA (this is a requirement for HAFA transactions).
- The "trust issue" is still a huge factor to overcome. The distressed borrowers do not trust the lenders, and they do not trust the government, instead choosing to trust the real estate professionals or attorneys (who will represent them exclusively). This makes any kind of public outreach difficult, since a message coming from the lender or the government is not perceived to be as credible, and the real estate agent or an attorney cannot get the contact information of the distressed borrower due to privacy reasons. Be on the lookout for a new PSA campaign from the Treasury this summer.
- The borrower who is going through the HAFA program has the right to escalate their file if they believe that the servicer is not adhering to program guidelines. This can be done by calling 1-888-995-HOPE and asking for MHA Help Line (call center is actually in Peoria, AZ). The agent also has ways to escalate, as seen on the HMPAdmin.com website. Email is generally more effective. The Treasury is actively enforcing the program guidelines, and is following up on each complaint submitted through the proper channels.
- Valuation reconciliation (valuation dispute) procedures is a common source of frustration, and they are evaluating the creation of a standard procedure for it, which would allow the agent and the borrower to dispute the value presented by the servicers and ask for a correction (provided that they can show support).
- If the borrower's house is listed, and they submit the documentation for a HAFA short sale after they receive the offer (what is call the reactive vs the proactive approach), they do not have to be delinquent on their payments, so long as they can prove "imminent default."
In conclusion, I appreciate the work that has been put into this program thus far, and can say that we try to qualify each distressed seller that comes our way for HAFA first, before attempting a proprietary program from the servicer. In the end, I do not believe that HAFA is going to be the final solution to the short sale dilemma, but I do believe that the impact of it will remain felt, and that in the end it will be remembered as a good thing and a benefit for the distressed borrowers who need to short sell their house.
You can read more about the program here.
Saturday, May 21, 2011
Negotiate Now or Later!
If a homeowner, who is underwater and considering his or her options, has a home encumbered by two loans, exploring a short sale is likely the best option.
To over simplify, I am talking about the homeowner who borrowed money to purchase their house and, then, when times were good, took out a second loan - an equity line. And, unfortunately, whether they used that equity line to improve the house, pay down debt or, like me, buy other property, that homeowner has a problem. The problem the homeowner has is, while the first loan may have protections under Arizona's Anti-Deficiency laws (meaning the bank cannot pursue the homeowner if the homeowner defaults and does not pay the debt owed), the second, the line of credit, does not come with those same protections.
Well, the benefit of attempting a short sale in this situation is that the homeowner will have an opportunity, during the short sale, to negotiate the debt on the second. To explain, the short sale is a traditional sale in one sense - someone will offer to buy that property. The question is whether the lenders will accept that offer, given that it will be less than owed on the property. Well, in a classic two loan short sale, the offer will come in, usually less than what is owed on the first loan. The first lender, in turn, will, if the offer is within reason and fair value, agree to accept that offer to release its rights in the property. But, that does not end it. What about the second?
For the second to cooperate, the first lender will usually offer the second a portion of the purchase offer (usually between $2,000 and $5,000). Typically, the second will accept the $2,000 to $5,000 from the first and agree this amount is sufficient to release its lien rights in the property. Whew, glad that is over! It is not.
Even if the second agrees to waive its lien rights in the property, the homeowner still needs to be released from the debt (the promissory note rights). Every loan has two crucial pieces of paper. The first is a Deed of Trust - the lien agains the property that gives the lender the right to force a sale of the property if there is a default on the loan. The second is a promissory note - the note we all signed telling our lender we would pay them back for the loan.
That is where the short sale negotiation process comes in. During the offer, acceptance, review period, the short sale negotiator will work with the second loan and attempt to have that lender accept the contribution from the first for a complete release of debt and/or if that is not acceptable, negotiate acceptable terms (e.g., the seller/borrower contributes some additional monies - but less than full amount owed - and/or agrees to some other terms). Regardless, the goal of the short sale is to negotiate with the second to resolve any and all debt obligations, ideally for less than is owed.
On the other hand, if the borrower/seller does not go through this process and just allows the house to proceed to foreclosure/trustee sale, that will eliminate any debt obligations to the first lender. It will not, however, extinguish the debt owed to the second. And, now, instead of negotiating with that secnd lender in the context of a short sale, with a contribution from the first lender, the borrower will be negotiating with the second lender after being sued on the promissory note and in Court. That will require lawyers, become more adversarial and create further headaches.
So, when I say negotiate now or later, I mean one can negotiate in the friendly confines of a short sale, or in the unfriendly confines of a lawsuit, but, a negotiation will happen with those seconds!
To over simplify, I am talking about the homeowner who borrowed money to purchase their house and, then, when times were good, took out a second loan - an equity line. And, unfortunately, whether they used that equity line to improve the house, pay down debt or, like me, buy other property, that homeowner has a problem. The problem the homeowner has is, while the first loan may have protections under Arizona's Anti-Deficiency laws (meaning the bank cannot pursue the homeowner if the homeowner defaults and does not pay the debt owed), the second, the line of credit, does not come with those same protections.
Well, the benefit of attempting a short sale in this situation is that the homeowner will have an opportunity, during the short sale, to negotiate the debt on the second. To explain, the short sale is a traditional sale in one sense - someone will offer to buy that property. The question is whether the lenders will accept that offer, given that it will be less than owed on the property. Well, in a classic two loan short sale, the offer will come in, usually less than what is owed on the first loan. The first lender, in turn, will, if the offer is within reason and fair value, agree to accept that offer to release its rights in the property. But, that does not end it. What about the second?
For the second to cooperate, the first lender will usually offer the second a portion of the purchase offer (usually between $2,000 and $5,000). Typically, the second will accept the $2,000 to $5,000 from the first and agree this amount is sufficient to release its lien rights in the property. Whew, glad that is over! It is not.
Even if the second agrees to waive its lien rights in the property, the homeowner still needs to be released from the debt (the promissory note rights). Every loan has two crucial pieces of paper. The first is a Deed of Trust - the lien agains the property that gives the lender the right to force a sale of the property if there is a default on the loan. The second is a promissory note - the note we all signed telling our lender we would pay them back for the loan.
That is where the short sale negotiation process comes in. During the offer, acceptance, review period, the short sale negotiator will work with the second loan and attempt to have that lender accept the contribution from the first for a complete release of debt and/or if that is not acceptable, negotiate acceptable terms (e.g., the seller/borrower contributes some additional monies - but less than full amount owed - and/or agrees to some other terms). Regardless, the goal of the short sale is to negotiate with the second to resolve any and all debt obligations, ideally for less than is owed.
On the other hand, if the borrower/seller does not go through this process and just allows the house to proceed to foreclosure/trustee sale, that will eliminate any debt obligations to the first lender. It will not, however, extinguish the debt owed to the second. And, now, instead of negotiating with that secnd lender in the context of a short sale, with a contribution from the first lender, the borrower will be negotiating with the second lender after being sued on the promissory note and in Court. That will require lawyers, become more adversarial and create further headaches.
So, when I say negotiate now or later, I mean one can negotiate in the friendly confines of a short sale, or in the unfriendly confines of a lawsuit, but, a negotiation will happen with those seconds!
Friday, May 20, 2011
Short Selling: Investor Style
According to a White Paper circulated by American Home Mortgage Servicing, a new effort is mounting to allow the short sale of distressed notes out of mortgage backed securities (MBS). This move would allow about $200 Billion of distressed and underwater notes to be sold in block to new investors at a discount. This is similar to what a homeowner would do in a property short sale, but this time it is the investors who are selling short. There are many moving parts to this idea, including application of recent changes to accounting rules and the need for support from the Treasury. However, the benefits are far and wide with the liquidation of these toxic assets to other investors who could then offer modifications or short sales to the home owner that results in a gain to the new investor. Does that sound right? In the accounting world... I guess?
I'm not an accountant, and perhaps other contributors could shed a bit more light on this concept. From a simple read and initial digest of the idea, I think there is much hope here for the help to housing. Read the full story on Housing Wire for yourself and feel free to comment.
I'm not an accountant, and perhaps other contributors could shed a bit more light on this concept. From a simple read and initial digest of the idea, I think there is much hope here for the help to housing. Read the full story on Housing Wire for yourself and feel free to comment.
Are You a Qualified Seller?
Before you decide to list your property for sale, you must first determine if a short sale is right for you. In other words, is this truly the best option for you at this time? To get to this answer, it is important to know the WHY behind your decision to go through with a short sale. No one else can conclude this but you. The reasons for someone doing a short sale can be many – avoiding the stigma of a foreclosure, credit preservation, ability to negotiate deficiency demands with the bank prior to foreclosure, neighborhood preservation, etc ... but the specific reasons are yours alone.
In addition to knowing why you want to do a short sale, it is also important to understand what other options are available to you in your particular situation. Other options may be renting your home, settling or consolidating other debt, getting a second job, working a loan modification with your lender, filing bankruptcy, or letting the home go to foreclosure. It is important to understand ALL options available to you, in order to make the right decision.
While there are many resources for each of those options available on the internet, we strongly recommend that you have a conversation with a local professional experienced in each of the fields (attorneys, accountants, HUD counselors, bank counselors, etc). A true professional immersed in their field will have all the right resources, and can recommend other reputable professionals to you. Please remember that a real estate professional is not qualified to provide you legal, financial/tax or credit advice, so it is important that you get your questions in these areas addressed as well.
Some common options many sellers evaluate are “Short Sale vs. Foreclosure,” or “Short Sale vs. Staying,” or “Short Sale vs. Renting.” The most frequent scenario we encounter is the “Short Sale vs. Foreclosure” decision. It is important to understand that ultimately this is exactly how your bank will view your short sale as well – an alternative to foreclosure. And remember, once you have stopped making payments on your loan you are on a path to foreclosure.
During a short sale the bank will ask about the nature of your hardship, and ask to see supporting documents (to include, but not limited to, recent bank statement, tax return, paycheck stubs, etc). Hardship is a very relative concept, but the most common definition that we use is that something has changed, and you are no longer able to keep making the payments to the bank. Does this describe you? Are you able to avoid foreclosure through another means? Or is a short sale your best option?
Wednesday, May 18, 2011
Bankruptcy Versus Debt Settlement
Here is an email question I received today:
Patrick, I attended your class last year in Worthington, Ohio and have purchased your book.
I have a client who has about $70,000 in credit card debt. They are planning to file bankruptcy but don't want to lose their home or their retirement accounts. I suggested they use a non-profit credit association company to work out a payment plan and pay their debt. I recommended Consumer Credit Counseling Service in Columbus who you mentioned in your book. I don't want to lead them down the wrong path as I am not a financial advisor. You implied in your book and class that bankruptcy might be the best route for their credit.
What is your suggestion?
There are many things they should consider, here is my short list off the top of my head:
- They likely can keep their retirement accounts in a bankruptcy; the statutes in most states give retirement accounts an exemption from creditors. The list of exemptions will be in your state codes/statutes, the legislative websites have great search features for locating the information.
- They can reaffirm their mortgage and as long as they continue to make the payments they can keep the house with the permission of the court. This decision needs to be weighed carefully, I am aware of many people who reaffirmed their mortgage and lost the house a year later without bankruptcy protection.
- People who go through bankruptcy will generally have better credit within 2 - 3 years, whereas people in credit counseling repayment programs can be in bad credit shape for 3 – 5 years.
- Through bankruptcy (Chapter 7) they may be able to discharge the entire $70,000 balance, depending on if they qualify based on their income.
- A bankruptcy is a permanent public record, but falls off the credit report within 10 years, they could buy a house again within two years of a Chapter 7 bankruptcy.
- Credit counseling is not part of the permanent public record and will fall off the credit report in 7 years generally (this is the way to go if they have political aspirations). There are circumstances where it makes sense to go through CCC instead of bankruptcy, generally for smaller amounts; $70,000 is not a small amount.
- A major consideration is tax consequence when it comes to debt settlement, if they owe $70,000 in credit card debt and settle for half, they are possibly going to be taxed for $35,000, depending on their tax bracket this could be a shock. An important thing for consumers to realize is that even if they do not qualify for a Chapter 7 discharge, going the Chapter 13 route may turn out better than settling through a non-profit. For example, let’s say the non-profit gets the creditors to settle for half, but the court may order that the creditors will receive ten cents on the dollar. Bankruptcy can be superior even from a settlement standpoint.
- With debt settlement through CCC the consumer does not lose any assets, with a Chapter 7 bankruptcy the debtor would lose any non-exempt assets (personal property, stocks, savings, etc.). In a bankruptcy the non-exempt assets are auctioned off, I go to these auctions frequently. Many times the debtors will go to the auction and bid on their own stuff, which is allowed. Last year I purchased $2,300 worth of framed art for $80, the assets were from an art gallery that went under. The possibility of losing personal property is a major factor in making the decision to go the bankruptcy route, especially if the debtor has cherished keepsakes that would have to go to auction to pay creditors. It is a good idea to sit down with an experienced bankruptcy attorney for an exemption planning session to plan out the bankruptcy thoroughly.
If given the choice between a payment plan and discharging the debt it is almost always a better idea to discharge the debt. At the point of discharge the credit begins to heal, whereas with a repayment plan the damage continues until the account is settled and closed out. It is also important to realize that there are specific laws and procedures for bankruptcy, plus there is oversight. In the world of credit counseling there is no schooling, there is no licensing, there is no bar exam to ensure proficiency, it is a wide open wild west of sorts. I do believe there is a place for credit counseling, as long as the organization sticks to budgeting and interpreting the credit report. An excellent measure of whether a credit counseling agency is trustworthy is if they are HUD approved. I have worked with HUD approved counseling agencies for a number of years and have found NeighborWorks organizations to be the best all around.
As soon as credit counseling crosses into a repayment plan this is where I start to feel shivers up my spine. There is a thing called the sharing rule, which allows a debt settlement/credit counseling company to receive a commission/cut of the amount they can get the consumer to pay to the creditor. I feel this is an outrageous breach of fiduciary duty at the highest level. My second major issue is that many consumers drop out of the repayment program and file for bankruptcy ultimately any way.
This is just some food for thought, being in a position of choosing between bankruptcy and debt settlement is not an easy position to be in. Given the circumstances I think they should consult with a bankruptcy attorney to inquire about their eligibility. I feel strongly about this because I see many credit reports where if someone had just filed bankruptcy they would be fine today, but instead they dabbled with settlement and it prolonged the damage.
Hope this helps!
Monday, May 9, 2011
H.R. 1498 - Cracking the Short Sale Whip?
So, H.R. 1498 has been introduced: "Prompt Decision for Qualification of Short Sale Act of 2011". Kudos to Congressman Rooney of Florida for drafting this bill that proposes an amendment to Chapter 2 of the Truth in Lending Act. Read the text of the Bill here.
Essentially, the flow of the legislation says this...
But here is the real reason to wonder if this legislation has teeth... HAFA (the Government Short Sale program) requirements are already in place and seems to have even more stringent policies, requiring the servicer to provide the short sale applicant an answer in only 30 days. Even though H.R. 1498 has consequences that "bind" the servicer with an automatic approval if they can't get an answer in 45 days, HAFA should be sufficient in standardizing the process and getting banks to conform without these changes. Well, at least that seems logical, right?
Remember, one of the basic elements in negotiating a deal is the "value creation". Can a bank approve a short sale in less than 45 days? 30 days? 15? I tell you, banks can approve a short sale in 15 minutes, if it is the right deal for them to make. The effort to standardize the short sale process and add teeth to try and get banks to conform is a good effort. However, at the end of the day banks don't need time, they need to know that this is the best deal they are going to get. It is not a time problem. It is not a word problem. It is a math problem.
In my opinion, the weight that needs to be brought forth to give incentive to the bank is simply this... if the net gain from short selling a home (before foreclosure) is greater than the net gain from selling after foreclosure, banks should be required to approve the short sale. Am I being over-simplistic? Perhaps. But I'm not sure the current proposals will yield the results that legislators are thinking.
Essentially, the flow of the legislation says this...
- If mortgagor submits to the servicer a written request for a short sale...
- and all information required by the servicer is included...
- and the mortgagor does not receive from the servicer before a 45-day period...
- a written notification of whether such a request has been approved...
- or, has been approved subject to specified changes...
- or, that additional information is required...
- such request shall be considered to have been approved by the servicer.
But here is the real reason to wonder if this legislation has teeth... HAFA (the Government Short Sale program) requirements are already in place and seems to have even more stringent policies, requiring the servicer to provide the short sale applicant an answer in only 30 days. Even though H.R. 1498 has consequences that "bind" the servicer with an automatic approval if they can't get an answer in 45 days, HAFA should be sufficient in standardizing the process and getting banks to conform without these changes. Well, at least that seems logical, right?
Remember, one of the basic elements in negotiating a deal is the "value creation". Can a bank approve a short sale in less than 45 days? 30 days? 15? I tell you, banks can approve a short sale in 15 minutes, if it is the right deal for them to make. The effort to standardize the short sale process and add teeth to try and get banks to conform is a good effort. However, at the end of the day banks don't need time, they need to know that this is the best deal they are going to get. It is not a time problem. It is not a word problem. It is a math problem.
In my opinion, the weight that needs to be brought forth to give incentive to the bank is simply this... if the net gain from short selling a home (before foreclosure) is greater than the net gain from selling after foreclosure, banks should be required to approve the short sale. Am I being over-simplistic? Perhaps. But I'm not sure the current proposals will yield the results that legislators are thinking.
Subscribe to:
Posts (Atom)