Many Upside Down property owners seek to sell their property and avoid foreclosure through a “Short-Sale”. It’s called this because the amount a Buyer is willing to pay is “short” of enough money to pay off the existing debt. If the sale is to close, the shortage has to be dealt with to get the lender(s) to release their lien on the title.  The whole issue is about who should take the hit on covering the shortage. Typically the Seller/borrower submits a “Hardship Package” to the lender to convince them that the Seller cannot afford to pay the difference. The lender could accept the hardship and agree to eat the difference but more and more, they’re trying to preserve a right to collect the difference from the borrower later.

A year ago, lenders often submitted a “Promissory Note” into the short sale escrow demanding that the borrower agree to repay the difference at a later time. However, in many states (such as California), the lender might be barred from seeking a deficiency if they foreclosed so most borrowers refused to sign. Short sale success rates were running 4-12%.  About 6 months ago, lenders started dropping the Promissory Note demand and instead began putting language in their short sale consent documents stating that they were merely releasing their lien and “reserving their rights” to go after the borrower for any deficiency. Again, depending upon the laws of the particular State, such a reservation may have been unenforceable and meaningless.

Recently, lenders have begun using a consent form that goes beyond the reservation of rights and actually has the borrower sign a document confirming that only the lien is released and that the deficiency will be collectable against the borrower.  This is much closer to the original Promissory Note and may equal an enforceable re-affirmation of the debt. Understandably Seller/borrowers are refusing to sign.  The result is a stand-off. Does the lender really want to foreclose? Agents and Buyers are caught in the middle. 

How should a short sale seller/borrower respond to such a situation?  First, get advice on what recourse the lender realistically has against the borrower if it goes to foreclosure. If there is none, then the borrower has much more leverage in getting the recourse provision dropped. If the lender has recourse or if their are junior lenders that would get recourse from a senior lender’s foreclosure, then the short sale is an excellent forum to negotiate a resolution of all liability.  Remember, just because the lender says they want it all, does not mean they won’t settle for less. 10% of the shortage is not an unusual settlement amount.  If you need help with this analysis, we have a $200 flat fee consultation program that can be done in person or by phone that goes through the analysis and leads to a strategy for the borrower and their real estate broker to use in the negotiation. Call us at 916-966-2260 for more information. If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/

In February, President Obama’s Homeowners Affordability and Stability Plan proposed altering the Bankruptcy Rules to allow Chapter 13 Judges to reduce (”cram-down”) the amount of debt owed as part of a repayment plan. By March 5th, the House of Representatives passed a Bill giving Ch 13BK Judges the authority to modify loans to “affordable” 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 went to the Senate (SB 61) where passage was expected by Easter.

Easter has now come and gone and passage is no closer. Lobbying from the banking industry has met a receptive audience in the Senate and the Bill’s sponsor, Richard Durbin, has backed off from his early strong support. Current negotiations propose limiting such authority to “subprime” loans but even that may go nowhere since Durbin has been unable to gather enough support to pass any such bill. Senator Charles Schumer suggested last week that he might seek to “tack-on” this bill to someother pending legislation to try to get a faster vote. However, many think that even if this watered down bill got through the Senate, the House would then reject it.

As it stands now, action is not likely to occur until after Memorial Day. Public comment remains split between consumer advocates who want relief now and those who say the correction must sun its course to fix the economy. Strong voices are being heard on both sides but not strong enough to put Bankruptcy cram down relief into law.

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.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/

There’s been a lot of activity recently promoting loan modifications while challenging those business that assist owners in obtaining modifications. Here’s the latest.

Mortgage Foreclosure Rescue Scams - While lenders are deciding how to respond to Pres. Obama’s real estate rescue proposals and the Senate procrastinates on Ch 13 BK “cram-down” authority, Fed and state regulators have gone on the attack against loan modification companies that prey on troubled owners by taking money up front but then deliver no results. While certainly there are good and effective modification counsellors out there, separating the real from the scams is extremely difficult. Watch out for these signs: 1) Big Money Up Front - the promises may be only to get your money. Look for pay upon success programs and check references; 2) Bailouts - don’t sign your title over to anyone that promises they’ll cure your default and then sell the property back to you. If it sounds too good to be true, it likely is;  3) Stop Foreclosure ads - many ads promise they’ll stop foreclosure by finding defects in your loan documents.  While an imminent foreclosure may be stopped, it may really be nothing more than a costly delay. Get a second legal opinion if these ads tempt you.   For more information, check out: http://www.fraudguides.com/mortgage-foreclosure-rescue-scam.asp

California Foreclosure Law Changes - As reported by Morrison & Foerster, The California Foreclosure Prevention Act (the “Act”) was enacted by the state Legislature, and signed by Governor Arnold Schwarzenegger on February 20, 2009. The Act, which amends the California Civil Code as it relates to residential mortgage loans, uses a “carrot and stick” approach to advance its stated goal of allowing “additional time for borrowers to work out loan modifications while providing an exemption for mortgage loan servicers that have implemented a “comprehensive loan modification” program. The “stick” is a mandatory 90-day moratorium on home foreclosures applicable to certain first lien mortgages.  New Civil Code Section 2923.52 will add 90 days to the existing 3-month statutory waiting period between the recording of the notice of default and the giving of the notice of sale.  Loans that are covered by the new legislation must meet four conditions: (1) the loan must have been recorded during the January 1, 2003–January 1, 2008 (inclusive) period, and must be secured by residential real property; (2) the loan must be a first mortgage or deed of trust; (3) the borrower must have occupied the property as his/her principal residence at the time the loan became delinquent; and (4) a notice of default must have been recorded against the property.  The “carrot” is an applied-for exception to the 90-day moratorium at new Civil Code Section 2923.53.  To qualify for the exemption as having a “comprehensive loan modification” program”, the program must have four key features.  First, it must be intended to keep borrowers in their homes when the anticipated recovery under the loan modification “exceeds” the anticipated recovery through foreclosure on a “net present value basis.”  Second, the program “targets” a housing-related debt-to-gross-income ratio of 38% or less on an aggregate basis (i.e., based on all of the servicer’s loans under the program; this ratio need not be achieved for each individual loan).  Third, the program includes “some combination” of the following:  (a) reducing the interest rate for at least five years; (b) extending the amortization period up to 40 years from the original date; (c) deferral of some unpaid principal until loan maturity; (d) reducing the principal; (e) compliance with a federally mandated loan modification program (note – the federal program must be mandated, not optional); and (f) “other factors” that the commissioner determines are appropriate.  Fourth, the program seeks to achieve “long-term sustainability” (which is not a defined term) for the borrower.  For the target 38% ratio, the borrower’s housing-related debts include loan principal, interest, property taxes, certain housing-related insurance, and homeowner association fees.  For more information, check out: http://www.mofo.com/news/updates/files/15309.html.

NEED INFORMATION NOW? Download Steve’s audio-seminar and e-book on Coping With Upside Down Loans: http://www.stevebeede.com/copingwithanupsidedownmortgage/ 

NEED LEGAL HELP NOW? If you have questions or concerns about your legal rights and obligations concerning upside down loans or any other real estate or small business questions, feel free to contact Steve Beede at sjbeede@bpelaw.com.

The Federal Debt Forgiveness Relief Act passed in December 2007 enables owner-occupants to avoid the tax on debt that is forgiven by lenders following a short sale, deed in lieu, or foreclosure. The Federal program runs through 2012.  However, California’s similar law ended in 2008 meaning that such debt forgiveness will be taxed in California. You can find out how to claim the exemption for 2008 at http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml

The real question is whether California will follow the Fed’s lead and extend the relief out till 2012.  However, help may be on the way. In January, 2009, Assemblyman Roger Niello introduced AB 111 which would extend the relief out to December 31, 2012. The bill which was amended on March 5th is now moving its way through the state legislature and is with the Committee on Revenue and Taxation. The next hearing is scheduled for April 13th.  You can track its status at http://www.leginfo.ca.gov/cgi-bin/postquery?bill_number=ab_111&sess=CUR&house=B&author=niello. 

If you have questions about coping with upside down loans or issues of debt forgiveness, you can e-mail Steve at:  sjbeede@bpelaw.com