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.

As we enter this New Year, our economy remains in serious condition and millions remain in default and uncertain about their housing futures.  Yet in the midst of this mess, there is both Good News and Bad News.

First the Good News - 2011 should see some improvement in the general economy as the damage from the real estate and financial market collapse begins to resolve.  We’re already witnessing climbing values in the stock market and record prices for commodities such as gold and silver.  This may not mean confidence but at least people with money to invest aren’t keeping their money under their pillow.  Interest rates are edging up but are still historically low. Retailers have reported strong sales during the Christmas season and, in general, despite all of the political battles between Republicans and Democrats, consumers are feeling somewhat upbeat.  They’re still in pain but most can feel the healing taking place.

Now the Bad News -  This recession will not be over in 2011, particularly as it affects real estate.  While the economy may be slowly improving, businesses are being slow to expand and so unemployment remains very high.  Without greater certainty of stable employment, people are hesitant about making major purchases such as homes.  This uncertainty is causing economists to predict that California could be looking at another 10-11% drop in housing prices during this year fueled both by high unemployment and enormous State budget deficits. Millions of homeowners still face possible foreclosure as loan modifications remain unavailable to most. Further, the impact of the real estate bubble collapse is expanding:

1) Subprime Loan Borrowers - This was the first phase of damage from the recession. Although most of these sub-prime loans have by now been foreclosed or short-sold, 2011 will see another wave of defaults on those 2006-7 loans with 5 year adjustments.  As these move from interest-only to fully amortized, borrowers could see their loan payments double removing any capacity to pay;

2) Economy Impacted Borrowers - This is the second phase of the recession and it’s where we are today and will likely be for at least another year.  The tough part about a collapsing bubble is that it also causes “collateral damage” to those with good loans.  Millions have lost their jobs, or had cut backs or government furloughs that leave them unable to pay their loans. And with California’s record budget deficits, no-one has any confidence that State spending will improve.  Significantly, many economy-impacted borrowers may have other assets that they could spend to cover their loan deficiencies, but with no end in sight and further value losses predicted, many are finding it wise to “strategically default” rather than disclose their other assets to their lenders as part of a loan modification or short sale application.  For these borrowers, letting a foreclosure occur may make more financial sense.

3) Commercial Borrowers - This is the third phase and the one with the largest economic consequences.  One doesn’t have to look far to see empty store fronts of businesses that have closed terminating their jobs in the process.  Each of these also means a loss of income for the owner of the property and, added together, can cause the property owner to default resulting in a possible loss of all businesses. 2010 saw foreclosures nationwide of shopping centers and office complexes and large manufacturing companies.  Unlike home foreclosures, the failure of commercial loans often involves tens of millions of dollars in debt, loss of hundred or even thousands of jobs, and the loss of tax dollars for communities.  These problems together could bankrupt the lenders and even the communities where the businesses are located.  As a result, we’re now seeing commercial loan workout programs coming together with owners, lenders, accountants, community leaders, and others seeking to find a way to prevent the wide-spread losses that failure would bring.  We’ll likely be working on this area through 2014 and this will be the key in finally turning the corner from recession to real recovery in the real estate market.

Meanwhile, lenders are picking up the pace of foreclosures and filing lawsuits to recover loan deficiencies. In response, borrowers and governments are fighting back.  I’ll cover this in more depth in my next posting along with how you can protect yourself.

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.

As we approach 2011, we look back on three years of economic disaster following the collapse of the real estate bubble. Clearly this bubble was the result of lenders making loans to unqualified borrowers. This increased competition among home buyers drove prices up… until buyers couldn’t afford the payments and the house of cards collapsed.  By 2008, programs such as Hope for Homeowners were calling on lenders to cut principal balances owed on upside-down loans to enable people to keep their homes. But the lenders wouldn’t cut, even after newly elected President Obama offered government help to pay for the cuts. So today we have a woefully unsuccessful loan modification program and foreclosures continue.

As reported in DSNews, foreclosures by Fannie Mae and Freddie Mac are exceeding modifications by more than 2 to 1 and by now we all know about lenders’ rush through foreclosure processing by using “robo-signers”.  Now, some help may be on the way.  The New York Times reported that in October, the Attorneys General from all 50 States signed onto an agreement for an investigation of lender practices. The AGs say that there is an opportunity to fundamentally change the way banks deal with defaulting borrowers so that more people can stay in their homes by modifying their mortgages, and that they will take the time needed. “The large banks say they are doing everything they can to avoid foreclosure, but that is not the reality on the ground,” said Patrick Madigan, an assistant attorney general in Iowa who is a lead figure in the investigation. “The question is, Why?”  

Meanwhile, this month a group of top economists, academic leaders, and influential investors sent a letter to Treasury Secretary Timothy Geithner and the heads of five federal regulatory agencies urging them to take the lead in setting national standards for mortgage loan servicers.  “Widely reported servicer fraud, whether in the foreclosure process or in the systematic assessment of illegal fees against homeowners, is…a serious problem,” the group said in the letter. To protect borrowers and investors alike, the group’s proposed standards would require servicers to provide loan modifications, including principal reductions, to address “reasonably foreseeable default” as long as the homeowner “can make a reasonable payment.” They also argue servicers should be held accountable for lost paperwork on loan modifications and for failing to suspend foreclosure when a homeowner is actively engaged in the loan modification process.

Will all of this activity be productive?  Only time will tell.  Historically, the government has been unwilling to interfere with contracts between lenders and borrowers.  But this “hands-off” approach brought us a real estate crash and a foreclosure mess that has disrupted the lives of millions of Americans with no real effort to solve the problem.  While no doubt any such National Foreclosure Reform will be promoted as helping homeowners, the underlying drive will be to restore security, transparency, and reliability to the financial system so that investors - those persons that put up the money so loans can be made - will regain confidence in the banking system enough to put their money at risk. 

Whether it be to help homeowners or help investors, either way we will all benefit from reforming the  current broken foreclosure system.  Watch here for further updates as this matter progresses. If you are impacted by this foreclosure problem, take the time to write your representatives in Congress and urge them to get behind this push for reform.

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.

It has now been nearly three years since the real estate market began unravelling.  Millions still struggle with over-encumbered properties and loss of income from the recession. Most economist predict that home prices may fall another 11% in 2011, as rising defaults crash with difficult to get purchase financing. Yet there is some good news for the diligent:

1.  Housing prices are really undervalued. Today’s pricing is based on distressed sales. No-one would sell if they had a choice. This means that in reality, housing prices are higher than the sales would indicate. DSNews reports that the analysts at Capitol Economics have concluded that house prices are now 14% to 17% undervalued relative to disposable income per capita.  This is a 30 year high in affordability!

2.  Mortgage Rates remain low.  Although there has been some upward movement, mortgage rates remain between 4.25% and 5%.  My own office manager just refinanced her home for 3.5%!  Incredible financing opportunities.  Qualifying may still remain a challenge. Hopefully the lenders have learned their lesson and will actually require that the borrower have the ability to pay.

3.  Foreclosures are slowing.  Due in part to the Robosigner scam, foreclosure starts have been slowing even though delinquencies remain high. November Notice of Default filings were down 9.3% in California and 31.7% in Washington.  Lenders may be starting to realize that they can recover more for their investors by negotiating than they would get from a foreclosure. 

4.  Junior lenders are more willing to take hits.  The problem in most short sales has not been first lenders; it has been junior lenders (2nds and 3rds) who would have a personal judgment claim against the borrower after a foreclosure. Of course, having a claim and collecting upon it are two very different things. In the past week, our attorneys at BPE law have successfully negotiated a $200,000 release for $17,000; complete releases for $0; $150,000 for $5,000; and we’re completing a $2.2 million commercial loan payoff for no more than $100,000.

So what should this mean to you?  If you’re in default, keep negotiating with your lenders. They may be more accepting of a loan modification or a short sale without recourse or contribution.  And get help from real estate professionals in your community. They speak the language of the lenders.

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.

As recently reported in www.DSNews.com, the ongoing controversy surrounding deficiencies in foreclosure documentation is taking its toll on the housing market as a significant share of home shoppers refused to even look at distressed properties in October, according to an industry study conducted by Campbell Surveys.  Fears of litigation from former owners who lost their homes to robo-signer foreclosures are making REO properties unattractive since legal battles could tie-up the properties for months or even years to come. With foreclosures on the rise, this presents a major problem for lenders who otherwise would get stuck with holding and maintaining unsellable properties.  News reports that major servicers were pulling REO properties off the market, including some already under contract, clearly spooked would-be homebuyers, Campbell Surveys found.  The company’s closely-watched monthly survey found that 14 percent of owner-occupant homebuyers and 6 percent of investors refused to view foreclosed properties in October. This buyer fear was even worse for short sale properties, where 30 percent of owner-occupant shoppers and 20 percent of investors refused to consider short-sale homes.

Not surprisingly, the drop in overall distressed property sales activity helped produce a decline in average prices for short sales, move-in ready REO, and damaged REO in October. This certainly has helped sellers of non-distressed properties which suddenly became more attractive to ready buyers.  This increased demand has pushed their prices higher.

Is there an end in sight? Not soon.  Citigroup, which has adamantly contended that they were not involved in the robo-signer problem, has uncovered some 14,000 defective foreclosure actions.  Core Logic, the company which provided analytical date for the investment industry (www.corelogic.com), indicates that there currently are 4.2 million homes on the market for sale, a 15 month supply. However, beyond this “visible market”, there is a “shadow market” of properties more than 90 days in default, in foreclosure, or REO’s that are not on the market. Core Logic reports that there are 2.1 million more properties. When added together, we actually have a 23 month supply of houses on the market.  Typically a reading of six to seven months is considered normal, so the current total months’ supply is roughly three times the normal rate.  And it may be even more than that. Lender Procesing Services which handles foreclosure processing estimates that there are more than 7 million loans in default! (DS News 11/17/10).  In the aggregate, alanysts are projecting a possible 7% drop in home prices over the next year before the housing market starts to stabilize.

So what should this mean to you?  If you’re in default, keep negotiating with your lenders. They may be more accepting of a loan modification or a short sale without recourse or contribution.  If you’re an REO or short sale buyer, check the documents carefully and make sure the title insurance will protect you from any claims of defective foreclosure actions.

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. 

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.

We awake this November 3rd to a changed political climate nationwide as well as here in California.  Will this bring meaninful change to ease the housing crisis? That is not likely.  What is likely is that this election signals a return to the housing expectations we held before the real estate bubble arose. Hopefully this time either common sense or regualtory control will stop the Wall Street excesses that fueled that bubble. First a little history lesson.

The roots of the housing crisis actually started back in the 1970’s with the evolution of real estate investment gurus such as Robert Allen who’s book Nothing Down started a frenzy for buying real estate that continued to grow. The only constraint was qualifying for loans.  By the 1990’s, a push was on to open the “American Dream” of home ownership to everyone. But, if they couldn’t qualify for a loan, how were they going to buy a home? That was answered in the late 1990’s by Federal deregulation of the financial markets, opening up Fannie Mae and Freddie Mac to buy the loans, and the creation of supposed insurance programs called “credit default swaps”.  Banks now were happy to lend because they could get the high-risk, “subprime loans” off their books and they had a ready supply of money through Wall Street investment firms which packaged these loans as securities and passed them off as safe investments. The problem was hat they were never safe. But, as long as there was a buyer, no-one cared.  So we ended up with the perversity of lenders offering nothing down, no payment required loans, to unemployed people who were destined to fail.  But the loans drove the demand higher and the prices higher and the sales and loan commissions higher, inflating the bubble.  Then came the crash.

By late 2006, loan defaults were increasing as original “teaser” interest rates reset to full payments that buyers could not afford. The bubble was cracking. By 2007, as defaults and foreclosures started skyrocketing, the housing bubble began cracking but this was still lost on Wall Street which did not realize (or had ignored) that these sub-prime loans now made up the majority of their investments. By 2008 however, Wall Street was in a panic as they realized that hundreds of billions of dollars of investments they had sold the American public was backed by worthless loans.  They had no money to operate and no more money to loan to banks to make more loans. The market collapsed and the entire economy was threatened.  In came the U.S. Treasury in 2008 with a series of bailouts and buy-ups to stop the damage. When the dust cleared, many Wall Street investment firms were gone, banks went under, and the American taxpayers were on the hook for 80% of the sub-prime loans which by now were held by Fannie Mae and Freddie Mac.  The only thing left was to clear out the bad loans and that led to the housing and foreclosure mess that we’re still going through today.

So what should we expect going forward?  Here’s my thoughts on this:

1.   Don’t expect help from the Government - preserving bad loans is not on anyone’s agenda and with the increased Republican control nationwide, the push will be to strengthen the economy and provide incentives to create more jobs.

2.  Expect the pace of loan resolutions to increase - While loan modification success has been dismal, Government financial incentives for principal reduction kicked in October 1st and may improve these numbers. But again, preserving bad loans is not on the agenda.  I do expect short sale success to improve as lenders finally seem to be getting it that a sale yeilds a better return for their investors than a foreclosure.  But all those HELOC second loans may get in the way as they demand full recourse or substantial payoffs.  The most likely scenario is that foreclosures will increase as lenders seek to get what they can and move on.  We’re already seeing a faster recording of Default Notices, even by BofA.  Expect this to continue.

3.  Prices are not likely to rise soon - According to the US Census Bureau, in 1900 les than half of people owned their homes. By the start of the housing bubble in 1999, that number had increased to 66.9% and, at it’s bubble peak, the rate reached 69.2% nationwide and much higher in some States.  Today, that ownership number has returned to pre-bubble levels.  Over 18 million homes stand vacant or are in default.  This supply, plus harder-to-get loans, will keep a lid on any upward price pressure for many years. 

4.  Being a Tenant will no longer be a negative - For many of us, our adult lives have been directly influenced by housing promoters and cheap money that made us feel somehow inferior if we rented rather than owned. That is now changing.  As reported by Carrie Bay of DSNews.com,  The housing market is over-subsidized. Homeownership isn’t for everyone…. For decades, America has been “over-housed” and “over-consumed.” Not only is renting gaining ground as the most practical means of housing for a larger number of consumers, but some say it could also be the answer to keeping millions of struggling borrowers in their homes and stabilizing foreclosure-ridden communities.  Stephane Fitch of Forbes claims that the fading American Dream of home ownership is cause to rejoice: “Fact is, when you look at how much it costs to rent versus how much it costs to own housing in big cities across the U.S., you discover that the cost of renting is likely to be lower. Throw in the fact that rental leases only last a year and that in most places they can be broken if the the tenants move to another city in search for a job, and I see a very good case that America is stronger if more of us decline to own homes.”  So as we look forward, perhaps a re-defining of what the American Dream really means will be in order.

We still will have problems to deal with over the next several years as this housing crisis continues. So, if you or your clients are upside down on a loan and facing foreclosure, this is a time to act to seek that modification or complete that short sale.  If you are facing a lender lawsuit, get representation and put up a challenge.

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. 

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.

For many months, we’ve been hearing of Courts throwing out lender lawsuits for judicial foreclosure based upon falsified declarations.  Now many States are jumping in and suspending certain foreclosures.  Here’s the background in what is going on and what to expect in the future.

Each State has its own laws for handling defaulted home loans. For example, California allows both Judicial foreclosures (lawsuit in the courts) and non-judicial foreclosures (non-court Trustee Sale).  Each method has its pros and cons for lenders, but because of the speed and lower cost of Trustee Sales, that is generally used for home foreclosures. However, in California if a lender does do a Trustee Sale, they give up any right to recover a deficiency judgment on the unpaid balance.  It’s different in other States.  23 States only allow Judicial Foreclosure so their foreclosures are always Court supervised. The remaining States allow a choice of either method but only a few bar deficiency judgments after Trustee Sale.  So there are two issues arising in a foreclosure: 1) loss of home; and 2) deficiency judgment risk.

The problem for lenders first arose in the judicial foreclosure States.  As part of their legal filing, the lenders were required to provide a sworn statement as to the truth of the facts claimed in their lawsuit such as that they owned the loan and that the procedures for foreclosure were properly followed.  However, it was discovered that attorneys for the lenders were falsifying the sworn statements and in many cases simply having someone sign the form without any actual knowledge of the facts, so called “robo-signers”.  Presumably the lenders and their attorneys filing thousands of such lawsuits believed that no one would pick up on this and they hoped they could get quick results. They were wrong.  Attorneys for some defendants challenged the lawsuits and the false statements and the Courts have responded by throwing out the lawsuits.

While lawsuits get challenged all the time and typically are corrected, the extent of these falsified Complaints indicated a systemic policy of lenders committing this fraud.  Faced with potentially damning publicity and possible legal sanctions, lenders stated damage control. Last month, GMAC admitted that their employees had falsified foreclosure documents.  Recently, Chase and BofA admitted the same.  Each has stated that they are suspending foreclosures until the problem is fixed. Meanwhile, the States have started to act. on Friday, Connecticut suspended all foreclosures for 60 days.  California’s attorney general has ordered Chase to stop foreclosures or prove the validity of its process.  More are expected to follow as further evidence comes out showing the corruption in the foreclosure process.  However, other lenders such as Wells Fargo have not made any suspension and have recently indicated its intent to increase the pace of foeclosures. This is surprising given indications that Wells Fargo has also filed lawsuits against borrowers without legal merit.

These foreclosure suspensions will give affected upside-down owners some more time but they will not result in loan foregiveness.  The lenders will fix the problem and defaulted loans will eventually be foreclosed unless an alternate resolution is reached.  This means that impacted lenders will likely be much more receptive to a loan modification or short sale without deficiency recourse.  The one step that we do not expect to see is Congress or State legislatures coming to the rescue of homeowners.  They have shown no willingness to date to do anything other than bailout lenders without recourse for the terrible lending practices that drove us into this Recession.

So, if you or your clients are upside down on a loan and facing foreclosure, this is a time to act to seek that modification or complete that short sale.  If you are facing a lender lawsuit, get representation and put up a challenge. The lenders’ hope with these fraudulent lawsuits was that they would win without challenge. I’s up to you to stop them and the Courts may be willing to help.

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. 

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.

One month ago, I wrote about the incredible deal that One West appeared to get when it took over IndyMac from FDIC. http://stevebeede.com/2010/08/are-modifications-or-short-sales-possible-with-onewest-bank/. Most readers agreed that this sweetheart deal seemed improper and led to more foreclosures. Others said that merely because OneWest could possibly make more money by foreclosing rather than by modifying, did not prove they actually did it. Evidence may now be here and OneWest justifies the practice.

One of our clients has been seeking a loan modification on her IndyMac loan (now owned by OneWest). She sought this through the Home Affordable Modification Program (HAMP) set-up by our government to help people keep their homes. She appeared to meet all HAMP requirements: her debt to income was well over 31% (actually 46%) and she had stayed current on her loan.  Yet, she was rejected on the grounds that the “Net Present Value” (NPV) of the deal didn’t warrant modification. When she called IndyMac to challenge the rejection, she was told “The NPV test is an economic loss test that basically is seeing if the modification is better for the investor than foreclosure”.  Further, in her rejection letter she was told that she could request the values which IndyMac used in its NPV calculation. When she requested these values, she was told “There is not anything that can be sent to you”.

A review of the HAMP guidelines on https://www.hmpadmin.com/portal/programs/hamp.html indicates that our client met the criteria.  However, the NPV instructions available on the site appear to leave discretion to the investor whether to participate or not or how to create its NPV values. Thus, while the HAMP guidelines have made for good political soundbites making it sound like modifications were available, the underlying NPV structure gives lenders an out.  OneWest/IndyMac certainly appears to be going through the motions only but without any real intent of modifying.  Given the better results from foreclosure under their FDIC deal, this is understandable but I very much doubt that this is what our government really expected in promoting the HAMP modification program.

So where does HAMP stand now? We have reported that only 4.5% of HAMP applicants get a modification. Other say that the ultimate number may be more like 2-3%.  With most HAMP modifications not including any principal reduction, failure rates are running at 50%.  Meanwhile, there appears to be no pressure on banks to do anything more. As recently reported by Alyssa Katz of Housing Watch: “The illusion that HAMP is helping most troubled borrowers while preventing big losses among banks and investors in mortgage-backed securities is part of what’s stopping Treasury from taking the kind of aggressive action it needs to – namely, reducing principal owed”.  http://www.housingwatch.com/2010/08/03/hamp-program-success-rate-much-lower-than-first-reported/

The bottom line for upside-down borrowers is that a home saving loan modification will remain unlikely. While it is still worth the attempt, owners should be prepared to face the reality of moving on either through a short sale or foreclosure. Although many of these same issues plague short sales (particularly mortgage insurance), most are successful in helping owners avoid foreclosure and potential deficiency liability.

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 having problems communicating with OneWest or Indymac, get competent legal advise in your State immediately so that you can determine your best options. 

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.

Over the past several years, we’ve assisted thousands of property owners in coping with upside down loans. Although very few have gotten actual modifications that made their homes affordable (the lenders and our government won’t go that far), most have used short sales to avoid judgments against their credit that would follow them for years.  Even most people who have gone through foreclosure have avoided the lenders’ deficiency recourse.  But now, many are shocked to discover that, although the lender has no judgment against them, the debt still appears on their credit reports as an unpaid debt. This can block future credit and could possibly used by a collection agency to force a payment that is no longer owed.

When a property is sold in a short sale, agreements are generally made with the lenders in which the unpaid balance is forgiven, ie: there is no deficiency recourse.  Similarly, in California at least, most foreclosures are done through a Trustee Sale process through which the foreclosing lender has no recourse against the debtor for any unpaid balance.  These unpaid amounts are considered “forgiven debt” and the debtor may be taxed on this amount unless they have an exemption such as the 2007 Federal Debt Forgiveness Relief Act, or their accountant determines that they are otherwise exempt: purchase money debt, insolvency, etc.  When this occurs, the debtor’s credit report should show the loan as “settled”; or “paid less than full” or some similar reference… not that anything further is due.  So what do you do if this happens.

First, get your records together to show that the loan deficiency was actually resolved.  This may be the short sale closing documents, particularly the lenders’ short sale consent letters addressing the deficiency (or removing any deficiency language). For a foreclosure, the type of foreclosure used will provide guidenance. In either case, the debtor should receive a 1099 form from each lender. A 1099C indicates that the debt is forgiven but sometimes the lenders use the wrong one.

Second, send a dispute letter to each of the credit bureaus - Experian, TransUnion, and Equifax - and challenge the debt reference. Send this my Certified Mail Return Receipt and keep all your records.  Once the credit reporting agency has received your dispute letter, they are obligated to investigate. According to the Fair Credit Reporting Act, the credit bureaus must take the following steps:

• The credit reporting agencies must resolve consumers’ disputes within 30 days limit, unless you have used the services of annualcreditreport.com, then the bureaus can take up to 45 days.
• In response to consumers’ complaints that documentation in support of their disputes was disregarded, the credit bureaus have to consider and transmit to the furnisher all relevant evidence submitted by the consumer the first time.
• Consumers will receive written notice of the results of the investigation within five days of its completion, including a copy of the amended credit file if it changed based on the dispute.
• Once information is deleted from a credit file, the credit bureaus can not reinsert it unless the entity supplying the information certifies that the item is complete and accurate and the credit bureau notifies the consumer within five days.

All of the big-three agencies are working on making sure that all disputes are handled within 30 days. See http://www.creditinfocenter.com/repair/Repair.shtml#4 for more specific details.

If a lender fails to respond to the credit bureau’s investigation, they may delete the refeence themselves. If not, or if the lender actually refuses to remove the derogatory credit reference, then you may need to initiate legal action against the lender. Reporting a false debt on the debt reporting system is slander and you could have a legal claim against the lender and the reporting credit bureau to both remove the reference and recover damages.

Are these strategies for you?  Every person’s situation is different. The information presented in this Article is not to be taken as legal advice.  If you are facing false credit reports which claim you still owe a forgiven debt, get competent legal advise in your State immediately so that you can determine your best options. 

If you have specific questions about your liability in California or about cleaning your credit report, 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.