Following a meeting at the White House with President Obama last Friday, top executives of the nation’s biggest banks said that they will work with the administration on its economic recovery plans, but want more specifics. As reported in the Chicago Tribune, Obama’s message was: ”Show some restraint. Show that you get that this is a crisis and everybody has to make sacrifices. They agreed and they recognized it.

Obama invited chief executives from the 15 largest banks to the White House to discuss the economy and other issues. Jamie Dimon of JPMorgan Chase & Co., Vikram Pandit of Citigroup Inc., Ken Lewis of Bank of America Corp., John Stumpf of Wells Fargo & Co., John Koskinen of Freddie Mac and Kenneth Chenault of American Express Co., were among those who attended. Treasury Secretary Timothy Geithner met privately with the CEOs on Thursday night, and sat in on Friday’s meeting. Obama urged the CEOs to deal with their toxic assets. Obama and the executives also discussed the administration’s plan to stem the rise in home foreclosures, its proposal for tighter regulation of the financial industry, executive compensation, the financial bailout program and the “importance of recognizing what the American public is going through in this economic crisis,” White House press secretary Robert Gibbs said.

Friday’s meeting capped a period marked by public outrage and Obama’s sharp language over Wall Street business practices and $165 million in bonuses that financially struggling AIG paid to some employees. Obama last week assailed AIG for “recklessness and greed” in its business practices, but he has since toned down his rhetoric. The administration needs industry cooperation for its economic plans to work.
The president emphasized that Wall Street needs Main Street and Main Street needs Wall Street,” Gibbs told reporters. He said the president stressed “that he had no agenda beyond working to get a solution, the right solution for our financial system and to get it stabilized and working again for the American people.”

With all of the on-going action about rescuing homeowners from foreclosure and rescuing banks from “toxic” assets, little has been heard about the needs of businesses who are being strangled by the unavailability of credit. Today, President Obama came to the rescue.  As reported in the Chicago Tribune, Obama hopes to get credit flowing again to Main Street, not just Wall Street, by authorizing the government to spend up to $15 billion to buy the small-business loans that are now choking community banks and lenders. That, in turn, could allow those banks to start lending money again to small companies to invest, pay bills and stay afloat. Small businesses have created about 70 percent of the new jobs over the past decade, and as their credit lines have dried up, so has their ability to thrive or survive.

Normally, primary bank lenders can issue loans to small businesses and then sell those loans to what’s known as a secondary market of bigger bankers. The sales allow the community lenders to make even more loans and keep the credit cycle going. But that isn’t happening. Skittish investors have been staying away.
So under Obama’s plan, the government will start buying up many of the loans directly, with terms to be worked out as soon as the end of the month. The $15 billion will come from a bailout plan already approved by Congress to rescue the financial sector. Obama aides say the plan will offer fast, direct help.

There was also a political component to all the attention the president gave to small businesses. The White House is aware of the nation’s bailout fatigue; hundreds of billions of taxpayer dollars have gone to prop up financial giants who made poor decisions, while many others who have done no wrong have paid the price.
Pres. Obama made clear to show he was on the side of everyday entrepreneurs. He said small businesses “are the heart of the American economy” and “the heart of the American dream” and the core of “America’s story.”

Most people are aware of the risk of lenders coming after them for a deficiency judgment after a foreclosure and they know how this may be avoided.  But few people understand or appreciate the tax liability that also can occur with any unpaid loan. But there also are times that this is avoidable.

Under our Federal Tax Law, anytime you owe money to someone else and then don’t have to pay it, “debt forgiveness” occurs (unless the lender gifts the debt to you which is not likely). The IRS says if you owed it, you must have had the money to pay it. So, if you got to keep that money, it must be income that they can tax you on.  That’s right, even if you never had this “phantom income”, it is taxable if the lender doesn’t get paid in full whether due to foreclosure, deed in lieu, or even a short-sale.  Although generally the foregiveness is shown by the lender giving you a 1099 tax form, the tax code doesn’t require this.  So, if your home short-sells for $100,000 less than you owed, you now have $100,000 of taxable income….maybe.

In December, 2007, the Federal Government passed The Mortgage Forgiveness Debt Relief Act of 2007 which generally excludes debt forgiveness from taxation if  it occurs on your principal residence from 2007 through 2013 (there are some restrictions).   Many states have adopted similar laws providing the same relief for state taxes. However, California’s similar law ended 12/31/08. We’re awaiting a bill to extend it but with CA’s budget mess, this may not happen soon if at all.

So, they key point is that the Relief only applies on the home you actually live-in. If you rent out your home or leave it vacant and go live somewhere else. Your debt forgiveness relief may be lost and you may be looking at a high income tax bill from the IRS and your state.

If you need further assistance or have legal or real estate questions, feel free to e-mail me at sjbeede@bpelaw.com

On March 5th, the House of Representatives gave a thumbs up to upsidedown homeownes by approving the Bankruptcy reform provision of President Obama’s Real Estate Recovery.  The provision would allow Chapter 13 Bankruptcy judges to “cram-down” loans to affordbale levels by lengthening terms, cutting interest rates and reducing mortgage balances of bankrupt homeowners. It also would permanently increase the FDIC’s coverage of bank deposits to $250,000. The measure passed the House 234-191 and now goes to the Senate.

Needless to say, the bankruptcy provision is opposed by the banking industry and most Republicans, who said it would further destabilize home prices. This makes passage by the Senate more uncertain. Everyone seems to agree that the bill is not perfect although there is a general concensus that something must be done to stem the wave of foreclosures.  Senate consideration will start next week and there is likely to be lots of pressure for revisions.  The bill passed the House narrowly and along party lines. Passage in the Senate will be more difficult.  Not mentioned in the many articles circulating will be just how the Bankruptcy Courts would handle the infux of potentially millions of new Bankruptcy filings. Certainly more staff would be needed and maybe even some expedited screeing process. Right now we’re at the big picture stage but, as with everything, “the devil is in the details”.

Stay tuned for further information. If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com

As you know from my past Articles, a key component of the Obama Real Estate Recovery Plan is getting Congress to approve allowing Bankruptcy Chapter 13 Judges to “cram down” principal amounts on over-encumbered homes to current market values. Congress is debating this as they have been for many months. But there may be some interim help while we wait.

Yesterday while I was in Court assisting a client in a Bankruptcy matter, a lawyer came in on another case and sought to oppose a lender’s request for Relief from Automatic Stay. When someone files Bankruptcy, the filing automatically stops any adverse legal action against the debtor without the BK court’s permission. This lender was seeking that permission so they could complete their foreclosure of the debtor’s home. This is routinely granted since the borrower has no equity.  This time however, the result was different.  The attorney did not have any legally valid reason to oppose the lender’s request. Instead, he asked the Judge to delay ruling on the Lender’s request until the impact of the Obama Plan can be known. The Lender’s attorney did not vigorously object and the Judge actually agreed to delay ruling for 6 weeks. That gives that borrower another month ans a half to stay in their home and provides added incentive for the Lender to agree to a modification. Plus, it is not guaranteed that the stay will be lifted in 6 weeks. The attorneys must come back to court at that point and make any further arguement as to why the Relief from Stay should or should not be granted.

If you are one of the millions out there facing foreclosure, this result in this Bankruptcy court may provide an extra margin of help if other judges are willing to rule the same way.  While I am not at all a fan of Bankruptcy, in certain cases it is a necessary and valuable tool to enable an upside down borrower to get back on their feet.  If you have any other real estate or legal questions, please feel free to contact me at sjbeede@bpelaw.com or through our website at www.bpelaw.com .