Upside-down borrowers, frustrated with a lack of lender willingness to modify their loans and desperate to keep their homes, often turn to lawyers who promise to stop foreclosures and force lenders to modify loans. But all too often what appears to be a meritorious Complaint gets quickly thrown out by the Courts and the borrower ends up still losing their home… plus thousands of dollars in legal fees. 

Significantly, in these cases the borrower typically requests and is granted a Temporary Restraining Order (TRO) to stop the pending foreclosure sale.  It appears as a quick victory. But a TRO is just a short-term stoppage for approx. two weeks at which point the borrower must convince the court to grant a Preliminary Injunction stopping foreclosure for the entire time it takes to get the case to trial which could be two years or more.  Here is where the lenders are winning the war.

The following analyzes several of the legal arguments raised against the lenders and what has happened in the Courts. The cases cited all originated in California state courts but were decided in the Federal courts. The decisions appear consistent with what is happening in other states. 

1.  I MADE ALL THE TRIAL MODIFICATION PAYMENTS AND GAVE THEM ALL THE DOCUMENTS THEY ASKED FOR. THE COURT SHOULD COMPEL THEM TO MODIFY MY LOAN   -  This argument is often raised as part of a lawsuit to stop a foreclosure from occurring.  The underlying arguments are: 1) the lender did not handle my HAMP modification application properly (Negligence claim); or 2) I met the lender’s or HAMP’s loan mod requirements but the lender denied the modification anyway (Beach of Contract claim) ; or 3) the lender never intended to give me the modification, they just wanted to get my Trial Mod payments (Fraud claim).  Most loan modifications on homes are being done under the government’s Home Affordable Modification Program (HAMP).  Where a borrower doesn’t fit HAMP’s guidelines, many lenders have their own “proprietary” modification programs.  The legal question is whether a borrower can force the lender to modify if they fit within the guidelines.  The courts routinely are saying: “No”.  In January, 2011, in the case of Phipps v Wells Fargo Bank, the Federal Court ruled that a Borrower has no right to sue a lender to force a HAMP modification. Even before this, in the 2009 case of Pantoja v Countrywide Home Loans, the Federal Court ruled that California laws do not impose a duty to modify a mortgagor’s loan.

2.   THE LENDER PROMISED ME THEY WOULD EXTEND THE FORECLOSURE SO I COULD COMPLETE MY MODIFICATION BUT THEY THEN FORECLOSED ANYWAY. THE COURT SHOULD UNWIND THE SALE AND GET MY HOME BACK  - Again the courts are routinely saying: “No”. In the 2010 case of Mehta v Wells Fargo Bank (Fed Ct decison 3/29/2011), the Court ruled: a gratuitous oral promise to postpone a sale is ordinarily unenforceable. Typically the loan agreements require that any modification be in writing and signed by all. Alternatively, the borrower must have proviuded the lender with some “consideration” to which the lender is not otherwise entitled. Merely submitting modification application documents is not consideration nor is it enough to have continued making Trial Mod payments.  Without a written agreement with the lender extending the sale, the foreclosure will not be rescinded.

3.   IF THE LENDER CANNOT PRODUCE THE ORIGINAL PROMISSORY NOTE, THE COURT SHOULD BAR THEM FROM FORECLOSING  -  This “standing” argument has received extensive publicity natonwide, especially concerning the rights of MERS to foreclose.  Although early rulings tended to vary, Courts are more generally ruling in favor of the foreclosing lenders. As stated in Pantoja v Countrywide Home Loans, under California law there is no requirement to produce the original note prior to completing a non-judicial foreclosure (Trustee’s Sale).  A different result could possibly arise in a Judicial Foreclosure although that process is extremely rare in a home foreclosure.  Similarly, the courts agree that MERS has a right to foreclose when MERS is named in the Deed of Trust (which is most often the case).

4.   I WOULD HAVE PAID BUT THE FORECLOSURE NOTICE WAS DEFECTIVE  - California has a “Tender Rule” which requires the borrower to allege and to prove not that they “concievably” could have paid, but it was “plausible” that they would have paid.  Simply put, actual proof of real capacity to pay is needed.  Court rulings are consistent: If you couldn’t pay anyway, a defective notice was not the cause of the foreclosure.

The bottom-line in all of this is to be wary in believing that just because the lender may have mishandled your loan modification, a court will help you out.  At a basic level, a loan is a contract between the lender and borrower in which the lender gives the borrower money in exchange for the borrower promising to repay the loan on the terms in the written agreement.  Courts will generally not interfere in the contractual agreements of parties unless one of the parties breaches the agreements or does some other illegal action.

Obviously the above analysis just touches the surface of where the law is today.  Hundreds and perhaps thousands of cases are moving through the courts as borrowers seek to keep their homes.  In some cases, different courts will reach different rulings from those stated in this Article.  However, it does appear that these decisions are likely to be widely followed.  In fact, just yesterday a Sacramento Superior Court judge denied a Preliminary Injunction after having granted a TRO and allowed the foreclosure to continue. The judge’s legal reasoning cited all of the cases identified above and more. 

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, or if you are considering suing your lender, get competent legal advice in your State immediately so that you can determine your best options.

If you have specific questions about your upside down loans or real estate, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

I’m often asked about whether a Lender would rent back to a debtor after a foreclosure. Generally the answer is no since there may be a new buyer at the foreclosure or, if the lender gets the property back as an REO, they typically want to re-sell it as soon as possible. But this may be possible with a Deed in Lieu of Foreclosure (”DIL”), particularly if the loan is owned by FannieMae (FNMA). 

Unlike a foreclosure which is a forced transfer, a DIL is a voluntary transfer of the title to the property from the lender.  This saves the lender time and money. And it can allow space and communication for negotiations.  If a loan modification or a short sale is not possible, the DIL allows the debtor to get rid of the property while avoiding the deficiency judgment risk and credit damage of a foreclosure.  Here’s how it works:

In late 2009, FNMA started what it calls a “Deed for Lease Program” which combines a DIL with a Lease-back to the occupant for up to 12 months.  The program is targeted for qualifying homeowners who are facing foreclosure but do not qualify for a loan modification.  As stated by FNMA:  “This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities.”   

The basic qualifying requirements are :

1.  It must be a first loan on a 1-4 unit property. The loan cannot be government guaranteed (FHA, VA, HUD, Rural Dev.); Any junior liens must subordinate;

2.  It must be the borrower’s primary residence or their tenant’s primary residence;

3.  The occupant must meet income and payment guidelines (similar to HAMP) and cannot be in bankruptcy or litigation involving the property or the loan.

If the occupant meets the qualifications, FNMA will Lease the property back to the occupant for up to 12 months after completion of the DIL at a market rent not to exceed 31% of the occupant’s monthly gross income.  What is very significant here is that the Lease-back can apply to tenants in the borrower’s rental property.  While we’ve not seen any other lenders offer a similar Deed for Lease program, a request for lease-back could be part of any DIL negotiations.

To learn more about the FNMA Deed for Lease Program, click on these links:

http://www.fanniemae.com/newsreleases/2009/4844.jhtml

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0933.pdf

https://www.efanniemae.com/sf/servicing/d4l/pdf/d4lfaqs.pdf

If you have specific questions about your upside down loans or real estate, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

For the past three years, I’ve been regularly advising upside-down property owners on the challenges, risks, and strategies of dealing with their lenders and upside down loans.  Over 2,000 borrowers and their Realtors have consulted with us to determine what they should do.  As our nation’s economy slowly recovers, some solutions have improved such as lender’s willingness to do short sales while others have gotten worse such as the failure of loan modification programs.  And we’re now defending more and more clients from lender and collection company lawsuits seeking deficiency judgments.

At the request of several clients, we’re providing the following informational links to Outlines that can help owners and Realtors know which questions to ask and learn which way to proceed.

Guide for Upside-Down Property Owners

Outline for Property Owners Seminar

Outline for Realtors Seminar

If you have specific questions about your upside down loans or real estate, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

Across the country, real estate agents are reporting a dramatic increase of lenders rejecting short sales and pushing forward with foreclosures.  This change of practice seems to be most evidence with Bank of America although they certainly are not alone.  In one recent case in Washington reported on KATU.com, the lender (Flagstar) rejected the buyer’s offer as being too low and demanded a higher price. When a new buyer agreed to pay the lender’s price, the lender rejected the deal and foreclosed anyway.  In a similar situation in California, BofA rejected an offer that was substantially higher than comparable sales (realtown.com).  So what is driving this change?  It may be the interaction of several changes. Here’s what may be going on:

1.  Changes at Bank of America - it is no great surprise that BofA’s foreclosure rate would increase. As reported here on Feb. 9, 2011(Changes coming to BofA), this lender has now divided itself in two with one part holding their good loans and banking business, and the other part - called “Legacy Asset Servicing” - holding the bad. And they’ve brought in a veteran forecloser from One West Bank to lead it.  The expectation is that the two year plus lag times which BofA has taken to foreclose will soon disappear as they push to get these bad debts off their books.

2.  Changes at Fannie Mae and Freddie Mac - These government sponsored enterprises (GSE’s) are the actual investors in nearly 90% of all loans being made today.  As the investors, they have the control over whether a short sale offer is accepted or rejected.  Now that the government wants to get out of the lending business (winknews.com), there is a push underway to wind down the enormous amount of bad debt on their books. On February 23rd, Fannie Mae announced what it has called the “STAR” program which will actually rate lender servicers and provide rewards for those who perform timely and fines for those who don’t.  This could mean that lenders that do not foreclose timely will be fined! (see Bob Hertzog blog).

3.  Problems with Broker Price Opinions - The underlying cause of these rejections often is based upon the lender’s unrealistic opinion of the property’s value. When considering a buyer’s short sale offer, the lender has a responsibility to its investor to independently determine the value and for this they generally have their own real estate representative provide a broker price opinion, commonly called a “BPO”. While this should reasonably match up with what a buyer would be offering, it doesn’t always happen.  And sometimes it bears no relationship to reality.  Again and again we hear about lenders rejecting short sales and then opening the foreclosure sale with a bid even less than the short sale buyer would pay.  How can this make sense?  Well, there are some ways:

      (a)  Investor makes more money on a foreclosure - In many cases lenders’ and investors’ risk of loss is less than we might believe: (1)  lenders may have their own mortgage insurance policies in place that pay them only if there is a foreclosure;  (2) lenders may have some access remaining to TARP bailout money to offset bad loan losses; and (3) lenders such as One West who take over failed banks from FDIC may have government guarantees that pay them more if they foreclose (see: One West blog 8/2010).

     (b)  BPO is defective - Just because a bank requests their agent to run a BPO does not assure that it will be accurate.  In today’s marketplace, real estate values vary widely. If the agent does not use comparative properties of the same size, location, and physical condition, the BPO may tell the lender to demand a higher price than a buyer would be willing to pay.  If this happens to you, request a review of the BPO and provide good detail on the subject property and the comps.  A full-blown appraisal would be better but no-one wants to spend the money on this, especially if the lender is not really motivated to short sell.

    (c)  Negotiator Opposition - Even when everything seems right, the Short Sale must still be approved by the lender’s negotiator and this can add an element that has nothing to do with market value.  We recently were involved in a short sale with Chase in which the seller stayed current on their loan to avoid credit damage (he was a banker). The negotiator refused the short sale because, since he was current on the loan he must not have a hardship. She wanted him to pay the entire deficiency even though he had no ability to do so. This short sale eventually succeeded by “appealing upstairs” to a supervisor but it was a battle all the way. 

IN SUMMARY - Overall, there are five generally recognized reasons that Short Sale offers get rejected.  Make sure that the short sale offer you submit satisfies each of these:

      (1)  Price is too low:  Make sure to supply a fully and accurate comparative market analysis or approasal.  Be ready to counter a defective BPO.

      (2)  Short Sale Package Incomplete:  Don’t expect a lender to tale a hit on the deficiency if the Seller has not provided full information required to evaluate a hardship application, including net worth statement.

      (3) Seller does not Qualify:  If the Seller has assets that they can contribute to reduce the deficiency but refuses to do so, the lender may reject the short sale.  Bridging this requires analysis of the impact that a foreclosure could have on the Seller and on the lender.

     (4)  Buyer does not Qualify:  As with any offer, the lender must be reasonably confident that the Buyer will be able to complete the sale so be sure to provide at least a Prequalification Letter with the offer. Also, make sure that this is a third party transaction. If the Buyer is a friend, family member, or business associate of the Seller, it will probably be rejected as being a sham “straw buyer” seeking to stick the lender and then getting the property back to the seller.

      (5)  Bank sold the Loan:  Banks have thousands of loans on their books. Short Sale offers are often submitted to the lender who is receiving the Seller’s loan payments.  But they may only be a servicer if they have sold the loan.  Seek to get confirmation quickly that the lender still owns the loan… they may not know for certain themselves.

Meanwhile, if you have specific questions about your upside down loans or real estate, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

 In that matter, it turned out that the decision maker was the loan’s investor, FNMA.

As any observer of the real estate market knows, property pricing remains in the dumps with most sales being either short sales or foreclosures and REO’s. While the economy in general appears to be recovering, real estate has been lagging behind. 2011 is projected to see increasing foreclosures as lenders clean-out their backlog of defaulted loans. Meanwhile, we’re just starting into dealing with upside down commercial properties. For this reason, many economists project we won’t really turn the corner on real estate recovery until 2014 at the earliest.  So why might this be the best time to buy?  

1.   Properties are Undervalued - As reported in DSNews.com,  based on the latest Case-Shiller home price index, a study by Capital Economics shows that in the fourth quarter of 2010, housing was 21 percent undervalued when compared with disposable income per capital. Looking at data included in the index published by the Federal Housing Finance Agency (FHFA), the firm found that housing in Q4 was 15 percent undervalued as measured against individuals’ disposable income. Capital Economics says its results illustrate “housing is exceptionally undervalued,” and the gap is getting bigger. In its third quarter 2010 report, the research firm pegged the Case-Shiller index readings as 19 percent undervalued and the FHFA index as 14 percent below what would constitute a balanced housing value in relation to income.  This downward pressure on prices will continue as the foreclosures clear out, opening the gap even further.

2.  Financing Remains Very Affordable - On top of low prices, mortgage rates have fallen back a bit in recent weeks, leaving them even further below the 20-year average of 7 percent. Last week marked the third consecutive week that rates have continued to decline. A national survey conducted by Freddie Mac shows that the average 30-year fixed-rate has dropped to 4.87 percent, while the 15-year fixed-rate has slipped to 4.15 percent. When you wrap declining home prices and historically low mortgage rates together, Capital Economics says, “The incredibly favorable affordability and valuation environment is the housing market’s one big positive.”

3.   Government Financial Support May be Ending - As my readers know, the future of FNMA and Freddie Mac is in jeopardy. These Government Sponsored Enterprises (GSE’s) were originally created to provide a funding source for socially desireable but higher risk loans. When started, GSE’s provided funds for 30% of all loans. Today, that number is 90% and steps are being taken in Congress to get government out of the lending business or at least scale it back.  Last week, Freddie Mac published a Memo that starting June 1st, they will no longer purchase loans with loan-to-value ratios of less than 5%.  As these GSE’s retract from the marketplace, interest rates and down-payment requirements are likely to rise making home ownership less achievable.

4.  Buy to Own or Invest, not to Flip - While there will always be opportunities for the knowledgeable and dilligent to make money flipping properties, declining prices and increasing loan costs will shrink the profit margins available as flippers find it harder to re-sell.  In contrast, those who buy for their home or for rental investment will benefit from 1) locking in the profit margin between current prices and actual value; and 2) potentially higher rental values as the ranks of renters swell with people who cannot obtain a loan to buy their own home. 

All of the above factors indicate that right now may be the ideal time to buy real estate, not for quick profit but for the long-term stability and financial growth that real estate has historically provided as a part of your overall financial plans.

If you have specific questions about real estate, investments, or any other legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if youre facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

As readers of my Blog are aware, there has been a legal issue in the nation as to whether MERS, the Mortgage Electronic Registration System, can foreclose on a Deed of Trust if they do not own the Promissory Note. First a little background.  A loan is generally made up of two documents: 1) the Promissory Note in which the borrower promises to repay the lender upon terms set forth in the Note; and 2) the Deed of Trust which gives the lender a security interest in the real property.  If the borrower defaults in payment under the terms of the Note, the lender can take the property based upon a foreclosure power contained in the Deed of Trust. Depending upon the State and the method of foreclosure used, the lender may or may not be able to obtain a court judgment against the borrower for any portion of the loan not paid (deficiency judgment).

During the growth of the real estate bubble from 2000-2008, lenders regularly sold the loans to get money to make more loans. This involved assigning the Note and Deed of Trust to the new owner and recording the assignment of the Deed of Trust.  This process was costing lenders millions of dollars in recording fees. Their solution to avoid this was the creation of a separate entity, MERS, which would be assigned the Deed of Trust but note the Note.  Then, if there was a default, whoever then held the Note would tell MERS to foreclose.  The legal question this raised was whether MERS had any real rights to enforce the loan default terms or were they merely an agent of the actual owner of the loan, ie: the holder of the Note.  This is very important because if MERS is only an agent, they have no legal right (”standing”) to take any action… only the holder of the Note can.  In States where foreclosure can only be done through a legal action (such as Ohio, Florida, and others), foreclosure actions by MERS started getting thrown out of Court when they could not prove that they also owned the Note. 

These early successes gave birth to law firms promoting that they would stop foreclosures by finding the disconnect between MERS and the Note holder.  However, it also started legal argument nationwide on whether this ownership of both the Note and Deed of Trust was required.  In May 2010, the US Bankruptcy Court in California ruled that if MERS did not own the Note, they could not foreclose on the debt (Case of Rickie Walker).  However, that did not settle the dispute.  As reported in DSNews.com , Courts around the country have continued to differ. Last week, a New York judge ruled that MERS cannot foreclose unless they own the Note.  But within days, judges in Kansas and Mass. ruled that ownership was not required. Other Courts, particularly the Minnesota Supreme Court, ruled that MERS could foreclose. On February 18, 2011, California Court of Appeals (4th Dist) ruled that MERS could foreclose (Gomes v Countrywide Home Loans). In that case, MERS was actually named in the Deed of Trust signed by the borrower and had authority to foreclose.  Different facts might bring a different result.

Only rulings by a State’s Supreme Court are binding on all lower courts in a State so it is likely that the dispute will continue.  However, consensus appears to be growing in the Courts around the nation that MERS does not need to own the Note to foreclose on the security.  Perhaps, although not stated, this reflects a judicial attitude that since the borrower has actually defaulted in repaying the debt, they should not be able to use the MERS technicality to avoid the consequences. 

Time will tell how this dispute eventually plays out. In the meantine, we advise that you do not get lured in by advertisements promising they’ll stop foreclosures because MERS doesn’t own the Note.

If you have specific questions about your loan and the lender rights or any other legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if youre facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

Anyone involved in the real estate industry is aware of the processing problems at Bank of America.  Applicants for loan modification get pushed from trial mod to trial mod before being rejected and borrowers in default are often going two years without paying while no foreclosure is started.  Perhaps that will now be changing.

As reported in DSNews.com, Bank of America announced Friday that it has set up a new operational division to deal with problem loans and resolve investors’ mortgage repurchase claims. The newly formed unit, which the company has labeled Legacy Asset Servicing, will service all defaulted loans and discontinued residential mortgage products. It will be led by Terry Laughlin. Laughlin will oversee the bank’s mortgage modification and foreclosure programs, in addition to his existing duties of resolving residential mortgage representation and warranties repurchase claims.  In addition, Laughlin is charged with leading BofA’s borrower outreach program to include more than 400 housing rescue fairs in 2011, building additional homeowner assistance centers in communities across the country, and expanding partnerships with nonprofits.

The decision to establish a new, separate division to handle the company’s problem loans came out of the North Carolina bank’s very recent, and very public, robo-signing quandary, which prompted reviews of hundreds of thousands of case files and a nationwide suspension of all Bank of America foreclosures and REO sales. The bank said in a statement that the issues that came to light in September and October of last year led the company to initiate a “self-assessment of default servicing.”  While the review of the foreclosure process found that the underlying grounds for foreclosure decisions has been accurate, Bank of America implemented a series of improvements – including staffing, customer impact, and quality controls,” the company said.

Barbara Desoer, Bank of America Home Loans president, will continue to oversee the servicing of the company’s more than 12 million mortgage customers who remain current on their accounts, as well as the mortgage origination side of the business.  “This alignment allows two strong executives and their teams to continue to lead the strongest home loans business in the industry, while providing greater focus on resolving legacy mortgage issues,” said Brian Moynihan, BofA’s president and CEO. “We believe this will best serve customers – both those seeking homeownership and those who face mortgage challenges – as well as our shareholders and the communities we serve.”

Bank of America also said Friday that it is exiting the reverse mortgage origination business, citing “competing demands and priorities that require investments and resources be focused on other key areas of our business.”  Bank of America Home Loans will continue to serve the needs of existing reverse mortgage customers and those with loans in process.

Whether any or all of these changes will bring any certainty or predictability to BofA’s handling of loan modifications, short sales, and foreclosures is unclear at this time.  BofA has reported an increase of permanent modifications from November to December yet during that same period people in trial modifications declined.  Until we see any clear guidelines on what to expect when dealing with BofA, we encourage you to act early, connect with a Realtor, and know your options.

If you have specific questions about short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if youre facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

As followers of my Blog know, I have long stated that our current market crash was caused by a lending industry taking advantage of a government deregulation intended to make home ownership available to more Americans. In a classic example of the Law of Unintended Consequences, the deregulation allowed lenders to sell virtually any loan they created regardless of whether or not the borrower was qualified for the loan. This house of cards eventually crashed when original teaser rates re-set and millions of borrowers could no longer afford the loans.

In 2008, Congress created a Commission to investigate the cause of the crash and appointed Sacramentan, Phil Angelides, to head it. In a blistering report that followed 18 months of testimony and fact-gathering, Angelides and his Financial Crisis Inquiry Commission blamed a wide cast of characters for the epic meltdown, including executives of insurance giant AIG and Goldman Sachs and government policymakers like Alan Greenspan, Timothy Geithner and Ben Bernanke. The report said human error created the crisis. The Report blamed mortgage lenders for the flood of risky subprime loans that ignored “a borrower’s ability to pay.” Wall Street investment banks recklessly packaged the loans into toxic securities that exposed the entire financial system to melt down, the report concludes.

The panel held four field hearings, all in communities that were among the hardest hit by the real estate crash: Sacramento, Las Vegas, Bakersfield and Miami. In Sacramento, commissioners heard about the Central Valley’s vulnerability to the housing price bubble. One witness testified that appraisers were pressured by lenders to make inflated appraisals so shaky loans would go through. The final report mentions Sacramento numerous times, noting that housing prices more than doubled in a five-year stretch.

All the while, government watchdogs were asleep. For more than 30 years, lawmakers and presidents bought into the free-market ethic backed by the likes of Greenspan, the former Federal Reserve chairman. “The sentries were not at their posts,” the report said. However, following the release of the report, government officials lost no time in getting to finger-pointing. The crisis commission’s findings were caught up in immediate partisan bickering. While the report was endorsed by the six Democrats on the commission, the four Republicans refused to sign off on its conclusions.

At the press conference introducing the report, Mr. Angelides made no bones about where he stood on this question: This was an avoidable crisis, he said bluntly. As the report puts it, “The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. If only regulators had been willing to regulate; if only Wall Street had done proper due diligence on the mortgages it was securitizing; if only subprime companies had acted more honorably; if only the credit ratings agencies had said no when asked to slap triple-A ratings on subprime junk. If only, if only, if only”.

Now comes the real test of whether our leaders will put back in place the economic regulations necessary to prevent irresponsible lending while not stopping the economic recovery which is just beginning. We need to have a thriving lending system for our nation to continue to grow and prosper. But that lending system owes a duty to us all to act reasonably and responsibly… a duty sadly lacking in causing this market crash.

If you have specific questions about landlord-tenant law in California or about short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if youre facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

It’s now January 2011 and borrowers who may have experienced a short sale or foreclosure in 2010 should be receiving 1099 Misc. Income statements from their lenders.  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 and how this too may be avoided.

“Debt Forgiveness” occurs anytime you don’t have to pay back a debt that you owe someone. In today’s world, that most commonly occurs through a foreclosure or a short sale when a lender or lenders are not paid in full. Unless the lender is pursuing a judgment for the deficiency (which is rare), our IRS Code states that the amount not paid, ie: forgiven, is taxable income to the borrower.  The amount of that income is shown on the 1099 form. This gets filed with your next tax return and, unless you have an exemption, you must pay taxes on the forgiven income. Fortunately there are numerous exemptions that apply that can enable you to avoid this tax. The most common are:

1.    2007 Federal Debt Forgiveness Relief Act - The Act (which has also been adopted in California) provides that there will be NO debt forgiveness tax if (1) the forgiven debt is on your personal residence; (2) the loss occurred between January 1, 2007 and December 31, 2012; and (3) any refinance monies went into the property. There are additional limitations on the amount of debt and how “personal residence” is defined. But this exemption may apply to most homeowners.

2.  Capital Loss Offset for Investment Properties - Many people who have lost or sold an investment property suffer debt forgiveness as a result. But, unlike a personal residence, and investor may claim a “capital loss” for the difference between what they have invested in the property (capital basis) and what the sale or foreclosure price was.  To the extent that the capital loss is greater than the debt forgiveness, the loss can be offset against the forgiveness and the tax may be avoided.

3.  Insolvency - If a person lists all of their liabilities, ie: everything they owe everyone else; and under that lists the fair market value of everything they own; if the liabilities exceed the value then that person is deemed to be “insolvent”. Under the tax law, there is NO debt forgiveness tax if a person is insolvent.  In this downturned economy, a great many people may fit this definition.  More importantly, the Insolvency Exclusion applies to any type of property and is not limited to a time period.

5.   Bankruptcy - a person who filed Bankruptcy is deemed to be insolvent and there is NO debt forgiveness tax.  However, for this to apply, the debt forgiveness must occur in the bankruptcy or after the debt has been discharged, not before.

6.  Purchase Money Debt - In order for there to be debt forgiveness, there must have been personal liability in the first place to be forgiven.  Under California law, debt that is incurred to enable a person to buy a 1-4 unit dwelling for their personal residence is non-recourse debt. There is no personal liability. Therefore, there can be no debt forgiveness tax on purchase money debt.

Obviously, when discussing taxation and tax avoidance, everyone’s particular situation can be different.  This Article is meant to be a general and limited updating on the status of debt forgiveness relief laws and is not to be relied upon for your personal situation.  To determine whether these apply to your situation, you must obtain the advice of a competent accountant or CPA.  Additional information on debt forgiveness tax can be obtained from IRS Publication 4681 “Cancelled Debts, Foreclosures, Repossessions, and Abandonment” (2009) which is available for download at: http://www.irs.gov/pub/irs-pdf/p4681.pdf . This appears to be the most current IRS publication on this topic.

If you have specific questions about your liability in California or about short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.