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 .

WHERE WILL THE MONEY COME FROM…

Breaking News for all people facing foreclosure sale.

President Obama will be rolling out a plan to attack the mortgage crisis next week. His target, we’re told will be slowing rising delinquencies and foreclosures by using $50 billion of the bailout monies. In anticipation, several financial institutions  have said that they will stop foreclosures on owner-occupied properties until they see what’s in the Plan. These Lenders include Fannie Mae and Freddie Mac plus Bank of America, J.P. Morgan, Chase, and Citigroup. Since many of these lenders control other lenders, the scope should be very wide. Since BofA has bought Countrywide, we would expect the stoppage to extend to Countrywide loans as well. Although the Plan will be unvieled next, discussion and shaping will last considerably longer. Accordingly, this hold should last at least until mid-March and in many cases continues a hold started last September. This gives some breathing room and hope to many on the edge of a foreclosure sale.

By:  Keith Dunnagan, Esq. (Washington) and Stephen J. Beede, Esq. (California)
BPE Law Group, Inc.
www.bpelaw.com

All of you in the real estate market are keenly aware of the recession affecting the housing market.  Many of you are probably aware that in June 2008 the California Office of Attorney General filed a lawsuit in Los Angeles County for violations of California’s Business and Professions Code as a result of Countrywide’s predatory lending practices for the past 4 years. As you well know, Countrywide was the chief culprit in the subprime lending debacle that led to artificially high prices for residential properties and foreclosure of a high volume of subprime loans. What many of you may not know is that on October 20, 2008, Countrywide and the State of California settled the AG’s lawsuit by entry of a Stipulated Judgment and Injunction (“Settlement”). This settlement is of particular import as the requirements place a heavy burden on Countrywide. Aside from the 1.7 million dollar attorney’s fees provision, the creation of a nearly 28 million dollar foreclosure relief program for the State of California, and that former CEO Angelo Mozilo and COO David Sambol are still involved with litigation commenced by the California, Countrywide has agreed to a myriad of things that could be of import to you as a borrower, real estate agent, potential seller or potential
buyer.

The first and most important fact to understand is that the Settlement affects both Countrywide Originated loans and loans that Countrywide purchased on the secondary mortgage market. This means that if JP Morgan purchased a mortgage loan covered by the Settlement that was originated by Countrywide, the Settlement would cover the loan even though Countrywide has no stake in the loan. What makes the settlement really interesting is that if JP Morgan would have been the originator and Countrywide purchased the loan on the secondary market and was servicing loan, then the loan would be covered by the terms of the Settlement.

But onto the nitty gritty of the Settlement.  The termination date of the Settlement is June 30, 2012. Therefore, over the next four years Countrywide will be obligated to work with the borrowers of California to attempt to remedy the predatory lending and foreclosure epidemic in California. There are a few requirements that need to be satisfied to be eligible for relief under the Settlement, however, the main element is that the mortgage must be for an owner occupied 1-4 unit residential property. Unfortunately, under the term of this Settlement, real estate investors are not covered. However, they may have remedies under other legal constructs.

At the most basic level the Settlement requires Countrywide to attempt modify loans that are currently in default or likely to be in default at a substantial loss to both Countrywide and now Bank of America which purchase Countrywide earlier this year. The purpose of the Settlement was to require Countrywide to identify loans likely to face default and attempt to modify loans to a more traditional loan or a government backed loan to facilitate home retention.

To accomplish this Countrywide as agreed to multitude of provisions. Countrywide has agreed to not initiate or advance any foreclosure process until a borrower’s ability to modify a loan has been assessed. If a borrower can not qualify for a modified loan, has abandoned the property or has no interest in remaining in the property, there is no obligation for Countrywide to stay any foreclosure action in that instance. However, if an individual is foreclosed upon, they would qualify for assistance from the State under the Foreclosure Relief Program funded by Countrywide. The financial assistance available is fairly small and very limited. More importantly though is the ability to modify an existing loan that is in default. The term affordability equation will be used and refers to a loan not exceeding either 42% or 34% of the borrowers income. The percentage is based upon the nature of the modified loan.
The loans that are specifically targeted as part of this Settlement include Subprime 2,3,5,7 and 10 Hybrid Arms, Pay Option Arms and Subprime First Mortgage Loans. In each case, we are looking to see what the LTV is (loan to market value). You are looking for LTV greater than 75%.

Mortgages with LTV’s less than 75% may not be precluded from protection, but the Settlement is not specifically directed at them. In the case that a borrower is delinquent or seriously delinquent (more than 60 days in arrears) the Settlement is triggered. In the case of Hybrid Arms the following options are available: (1) the borrower can modify their loan into a government backed HOPE or FHA loan, (2) a modification of the loan to restore the initial rate for a period of five years before becoming a traditional ARM loan or (3) a fully amortizing loan subject to the affordability equation which would include a restoration of the introductory rate or lower depending on the current market rates but not lower than 3.5% and after five years the loan would automatically convert to a fixed rate mortgage at whichever is higher the Fannie Rate or the introductory rate, (4) a fully amortizing loan, with a ten year interest only period and then modification to a traditional ARM where the interest rate is no lower than the interest rate floor (between 3.5% and 2.5% depending on circumstances) and capped at the introductory rate.

In the case that the borrower is delinquent or seriously delinquent on a pay option loan the following options are available: (1)  the borrower can modify their loan into a government backed HOPE or FHA loan, (2) a modification to a fully amortizing ARM loan eliminating negative amortization, including an optional ten year interest only payment and reduction of the interest rate to the interest rate floor and capped at 7% and if the borrower owns only one residential property and the LTV is greater than 95% the borrower is eligible for a write down of the principal to an LTV of 95%. Countrywide is not obligated to go any lower than that.
In the case of any other subprime loan, the borrower is eligible for HOPE and FHA modifications as well as the fully amortizing loan identified under (3) of the Hybrid Arm loan modifications.
As part of the loan modification process for qualified mortgages contained in the Settlement Countrywide has agreed to waive all late and delinquency fees, prepayment penalty fees and will not charges to the extent permitted any fees for modification of the loan to government HOPE and FHA loans. Further, if an eligible borrowers who prior to this Settlement modified a loan is still eligible to modifications under the Settlement. Finally, once the modification process has been commenced, Countrywide is obligated to make a the offer to modify an existing loan on average not more than 60 days after identifying the eligible borrower and having received necessary income documentation. Due to the potential that individuals may take advantage of the modification program under the Settlement, in the event an eligible borrower intentionally becomes delinquent to benefit from the program, Countrywide can require intensive full documentation prequalification of a modified loan. The government does not want the legitimate delinquent borrowers ability to modify an unaffordable loan slowed or hampered because of intentional defaults by borrowers that can afford their loan. Further, the pre-qualification would have the effect of possibly eliminating some of the
benefits from modifying including the elimination of a rate reduction for the intentionally defaulting borrower.
Finally, in an effort to ensure compliance, Countrywide is obligated to provide annual reports
to the AG’s office.
There is a lot more to this Settlement and one should consult an attorney before entering into
a modification of an existing loan.  If you have specific questions, feel free to contact us at BPE Law
Group, Inc.   (916) 966-2260 .