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.

As the recession has deepened and lengthened, many people who are fully able to afford the payments on their real estate loans on over-encumbered property have decided to walk-away and let the property go to foreclosure. For these people, the long time it would take to reach break-even simply doesn’t make financial sense. This practice has come to be called “Strategic Default”.   While the rights of the affected lenders will still be solely governed by the loan documents, as expected the lending industry is pushing for stronger penalties to curtail Strategic Defaults.

As reported widely on the web, Fannie Mae (”FNMA”), the government-sponsored enterprise that creates the “secondary market” by buying up mortgages, has stated that: “Defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure”.  We had previously reported that both FHA and FNMA were talking 5 years for this practice so we are not surprised at this announcement.

More worrisome is the FHA Reform Act (HR 5072) which was passed by the House of Representatives with nearly unanimous consent and is now being debated in the Senate. The proposed Act contains a provision that would bar strategic defaulters from getting an FHA loan any time in the future!  This Bill was supported of course by the lending lobby, but also by the National Association of Realtors and even by that  champion of the common man, Barney Frank.  Will it pass through the Senate? Almost certainly although it’s final form remains to be seen. While the overall objective of the Act is to save the financially-damaged FHA through raising the costs of mortgage insurance, this provision is obviously targeted at stopping the practice of strategic default. 

What remains unclear despite all the hype is how to define who exactly is a Strategic Defaulter.  While obviously a person with plenty of assets and financial capacity who defaults as a business decision would seem to fit the description, that may be more the exception than the norm. More common is the person, as reported in the Washington Independent http://washingtonindependent.com/88445/strategic-default-penalties-threaten-struggling-homeowners, that suddenly realizes that they have been sinking steadily and if they don’t stop now they’ll lose everything.  Should that person be barred forever?  Of course not. What will most likely come out of this is a recommended process that upside down owners should always follow: First seek modification; then seek short sale; and only last let it go to foreclosure. For the borrower with financial capacity, the outcome may be the same but the process may infuence future borrowing ability.  Of course, if there is actual deficiency liability on the loan, the financially solvent borrower may not want to disclose their assets to the lender through a modification or short sale since this would certainly invite a demand for contribution or even for a judicial foreclosure (in California).

Lastly, there is the very real question of whether targeting strategic defaulters is fair and equitable. The loan being defaulted is a contract between the borrower and the lender that already provides remedies that the lender can take if a borrower defaults.  Both borrower and lender take on the known risks of what will happen on default. Why should government intervene in this contract to give the lenders even more remedies by effectively increasing the borrower’s risks?  Certainly the government has refused to effectively intervene to protect borrowers from the extraordinary risks in the sub-prime loans promoted by the lenders through 2007.  Meanwhile, the HAMP modification program hyped to help homeowners limps along with only 4.5% getting permanent modifications and virtually no-one getting principal reductions. 

Millions have lost their homes with no realistic assistance from the government and now this Act will not only further hurt future borrowers but will once again send a very clear message that as far as Congress is concerned, what’s good for the lenders is good for the country.  If you believe that this provision of the proposed Act should be dropped or changed, be sure to write your State Senator and make your concerns known.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are considering default on your loans, 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.

The feared tidal wave of post-foreclosure lawsuits has begun across the United States as lenders or their collection agencies try to collect unpaid loan balances. This Article will help you understand how to respond if you become subject to such a lawsuit.

1.  What to Expect - a lawsuit is simply a claim by one party (the Plaintiff) against another (the Defendant), which is filed in a court, asking a Judge to Order the Defendant to do something. For example, the lender sues the debtor seeking a Judgment ordering the debtor to pay the remaining debt. In many cases, the Plaintiff will not be the actual lender who made the loan. Collection companies are buying loans from lenders for pennies on the dollar then suing the borrowers for the full amount.  One company, Cohen & Slamowitz in New York, has actually automated the process and is filing 80,000 lawsuits a year!  The lawsuit has two parts: the Summons and the Complaint.  The Complaint states the facts as to why the Plaintiff claims they are entitled to a Judgment against the Defendant. The Summons is the Order for the Defendant to respond to the Complaint within a certain amount of time which varies from State to State. In California it is 30 days.

2.  How to Respond - Plaintiffs hope that Defendants will ignore the Summons and fail to file a response, usually an Answer, within the allowed time. If so, the Plaintiff will quickly get a Default Judgment and can start pursuing the collection by attaching the Defendant’s property and garnishing their wages. This is the worst possible result for a Defendant because it is giving up without a fight.  Instead, upon being served with a Summons and Complaint, the debtor should get together with an Attorney and determine how best to respond.  Often, the first response is attacking the Complaint through a legal process called a Demurrer. There are many grounds for this such as:  (a)  the Plaintiff doesn’t own the loan and therefore has no right to file the lawsuit;  (b) the lawsuit is barred by various laws of the State (in California we have several related “anti-deficiency” laws);  and (c) the Complaint is defective.  At the same time, the attorney will start the Discovery process of compelling the Plaintiff to produce copies of every document they are relying on in filing the lawsuit. While the Demurrer could actually make the lawsuit go away, it generally won’t. What it will do is force the Plaintiff to spend time and money responding which is the last thing they really want to do. So it starts the negotiation for Settlement.  

3.  Settlement Negotiations - At the start of a lawsuit, the Plaintiff wants to collect everything and the Defendant wants to pay nothing. While both sides want to win at trial, only one side will. Settlement eliminates that risk and avoids the heavy financial and emotional costs of lengthy litigation, usually well over a year.  In Sacramento, CA where we are based, 98% of lawsuits will settle before trial. The hard part is reaching an agreement. Inevitably the Plaintiff will feel they got too little and the Defendant will feel they paid too much, but both will agree that the settlement is better than the alternative of continuing in litigation. There is no standard percentage that determines settlement. Rather, it is a complex evaluation of the Plaintiff’s evidence, the Defendant’s defenses and financial capacity, and the likely outcomes. For example, earlier this year a lender sued our client for $280,000 owed on an equity loan after a foreclosure. The Lender settled for $16,000. In several others, Plaintiffs have dismissed the lawsuits when faced with our defenses. And still others go forward.

4.  Going to Trial - If Settlement fails, then at some point the Complaint will go to trial at which time the Judge and/or jury will hear all the testimony and see all the evidence and then determine who wins and who loses. The winner gets a Judgment and can try to collect from the loser.  In lawsuits relating to loans, the biggest risk is the award of attorney fees. Most loan documents allow the winner to be awarded what they spent on attorney fees and legal costs. This can be bigger than the loan amount and it generally is far more than an upside-down debtor could ever afford to pay.

5.  The Role of Bankruptcy - The Bankruptcy laws of the United States are designed to give an insolvent debtor a “fresh start” if there is no way they can pay their debts. While some attorneys would recommend filing Bankruptcy if faced with a lender lawsuit, this is not necessarily the best solution for everyone. For example: First, other than this bad debt, the defendant may have other assets they want to keep; Second, by responding to the lawsuit, the defendant may be able to settle the debt  or avoid it entirely; Third, Bankruptcy will stay on the debtor’s credit for 7-10 years; and Fourth, the defendant may not even qualify for Bankruptcy. So, while it is one solution, Bankruptcy is not always the best solution.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different.  If you are facing a lender lawsuit, do not ignore it. 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.

There’s been a lot of cheering lately for the news that on June 3rd, the California Senate passed SB 1178 that would extend deficiency judgment protection to include refinances. Under existing California law, a homeowner generally has no liability to repay the lender for any deficiency between the value of a foreclosed property and the amount owed to the lender. This “anti-deficiency” law only applies to owner-occupant loans obtained to purchase a 1-4 unit property.  SB 1178 extends this anti-deficiency protection to any refinance of the original purchase money debt.  Whether this protection will include “cash-out refinances” is questionable although I understand that the Bill’s proponent, California Association of Realtors, is seeking that result.

What has gotten lost in all the cheering is the reality that SB 1178 will not go into effect until June 11, 2011. It is intended to stop lenders from bringing deficiency lawsuits against borrowers after that date. Nothing stops lenders from bringing deficiency actions before that date where they would have such a right under current law. In most circumstances, these would be lawsuits brought by “junior” lenders whose security gets wiped out by a senior lender’s foreclosure.  A lot of these are being filed right now.

A lot could change before the final form of this measure gets through the Legislature and is signed by the Governor. Presently the Bill is in House committees and the next hearing will be late this month.  Various challenges and clarifications are being discussed and there is no certainty at this point when or if this Bill will get passed or what a final form will look like.  We’ll keep you informed as it progresses.

Meanwhile, if you are facing a lender lawsuit or if you have specific questions about your liability, 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 rights and responsibilities of lenders in dealing with upside-down loans are governed by State as well as Federal law.  In all cases, lenders must act “in good faith and with fair dealing” and comply with the law. However, in at least two recent actions in California, Wells Fargo appears to indicate that they consider themselves above the law and can do whatever they choose:

1)  A Buyer and Seller entered a Short Sale Agreement to which Wells Fargo consented as long as they completed the sale by May 31st.  Everything went well and the Buyer obtained his financing by mid-May and was ready to close escrow. However, on May 11th, Wells Fargo breached their own short sale consent and foreclosed.  They admitted this was a mistake and, even though a fix was easy because they ended up with the property, they have refused. Their only suggestion was that the Buyer could attempt to buy it when Wells Fargo puts it back on the market.  It apparently doesn’t matter to Wells Fargo that the Buyer loses the money he spent pursuing the purchase; the Agent loses the sale commission they earned; and the Seller suffers greater credit damage with a foreclosure on their record. And of course, Wells Fargo’s own investors will likely lose more in an REO re-sale. The Buyer, Seller, and Agent have now filed suit against Wells Fargo to force them to rescind the foreclosure and honor the Short Sale Agreement and the title to the property has been clouded with a Notice of Pending Action (”Lis Pendens”) stopping any re-sale.  We’ll keep you informed as this progresses.

2.   In another more incredible action, Wells Fargo has actually filed a lawsuit against a Borrower without even foreclosing!  In California (and most States), a lender who makes a loan which is secured by a lien against the real estate must foreclose first before they have any right to pursue any claim against a borrower for a deficiency. This is called the “Security First Rule”. In this case, Wells Fargo made a home equity loan to a property owner which was secured with a Deed of Trust against the property. The owner subsequently defaulted on the loan. But, instead of foreclosing, Wells Fargo filed a lawsuit against the borrower, failed to identify in the suit that the loan was secured with the real estate, and instead have treated this like an unsecured personal loan. When confronted with this breach of California’s real estate laws, Wells Fargo (through their attorney) has refused to dismiss the lawsuit and comply with the law.  While this reaction demonstrates a very troubling arrogance, it is equally troubling that their attorneys would knowingly violate California law.  Sadly, in this case, the property owner cannot afford to challenge Wells Fargo’s actions in Court.

There is no question that these are tough times for lenders as well as borrowers. The lenders created a house of cards by making loans that should never have been made to borrowers who could never have afforded them if they were priced according to economic reality. It could only have worked if real estate prices continued to climb forever. But the real estate economy never works that way. Booms are always followed by busts usually every 6-10 years. The lenders knew this even if the gullible borrowers did not. 

This reality doesn’t excuse borrowers from defaulting even if it was foreseeable. The laws on breach of contract are clear… don’t pay and you’ll be foreclosed. But the borrowers distress certainly doesn’t give the lenders such as Wells Fargo any legal right to disregard the law simply because they think the borrower can’t afford to stop them.  It is exactly this arrogance that has caused Americans to attack Wall Street for its greed and lack of concern for the damage caused to its investors.  In the lending industry, Countrywide paved the way for the economy’s collapse by promoting subprime loans.  Wells Fargo in contrast acted responsibly and maintained their reputation for sound lending. Now however, Wells Fargo’s apparent lack of concern for the law may undermine not only its reputation and further damage its borrowers, but may also promote a broader distrust of the lending industry at a time when trust and credibility are needed most. 

We’ll keep you posted as these and other similar cases move forward. Meanwhile, if you’ve been challenged with a wrongful foreclosure or if you have specific questions about your liability, 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.

As my readers are aware, we’ve been grappling for many months over whether “Personal Residence” means 1) where you live at the time the property is sold or foreclosed; or 2) where you lived for 2 of the past 5 years. Obviously we’d all like the 2nd definition to apply since that would give debt forgiveness tax relief to the many property owners who have rented out their homes or moved. 

I have argued that the 1st definition controls based upon the following statements in the IRS Publication 4681 concerning Cancellation of Debt. In that document, the IRS defines Qualified Personal Residence Indebtedness as: “any mortgage you took out to buy, build, or substantially improve your main home. It also must be secured by your main home. Qualified principal residence indebtedness also includes any debt secured by your main home that you used to refinance a mortgage you took out to buy, build, or substantially improve your main home, but only up to the amount of the old mortgage principal just before the refinancing.”  The IRS then goes on to define “Main Home” as: “the home where you ordinarily live most of the time. You can have only one main home at any one time.”   Given this definition, I do not see how one could identify their Main Home as being anything other than where they live now.  This supports the argument that you must live there to get the debt forgiveness tax relief.    But, that may not be as clear as it sounds.

In a 2007 Publication on the tax impacts of foreclosure, the California Franchise Tax Board defines the taxpayer’s principal residence as “where they have lived for at least two of the past five years”. However, at that point, the FTB was talking about the possible capital gains liability from a foreclosure and for that purpose, the 2 of 5 year Rule does apply.

All of the commentarors on this issue look to U.S. Code Section 121 - Exclusion of Gain from Sale of Principal Residence - which provides: “Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more”.  So, does this only concern Capital Gains Tax or does it include Debt Forgiveness Tax? 

We get some clarity from the language of the actual law: “The Mortgage Forgiveness Debt Relief Act of 2007″ which states at Section 2.5: “principal residence’ has the same meaning as when used in section 121″. ie: the capital gains definition does apply. This was reaffirmed in 2008 when Congress passed the “Emergency Economic Stabilization Act of 2008″ which created the TARP bailout program for banks and extended the operative term of the Debt Relief Act to December 31, 2012. The joint committee report for the EESA states that the meaning of personal residence for purposes of the QPRI exclusion is the same as in Section 121.

So, what should we conclude from all this?  It does appear that the intent of Congress in passing these laws is that a foreclosure is considered to be a “sale” and the definition of “Principal Residence” shall be the 2 of 5 year Rule set forth in U.S. Code Sec. 121, not the Main Home definition that the IRS appears to be using.  It also means that there may remain an ambiguity in the law that has yet to be defined conclusively. Arguably, the IRS could disallow an exclusion from Debt Forgiveness Tax when the debtor was not living in the home at the time of sale.  Will they do so?  We don’t know yet.  What we do know is that if you need the 2 of 5 year definition to apply to you, be sure to get competent advice from an accountant or CPA that you trust and who knows these issues.

If you have specific questions about your liability, short sales, foreclosure, or any legal issues, feel free to contact me 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. Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: /http://www.stevebeede.com/copingwithanupsidedownmortgage

The wave of possible lender lawsuits against borrowers has started, primarily by junior lenders whose seconds (often HELOCS) were wiped out when a senior lender foreclosed.  We presently are representing borrowers in a number of these lawsuits and have already settled several. The most important points to remember if you are served with a lawsuit are: 1) don’t panic and ignore it. Get competent legal counsel in your State to advise you how and when to respond; and 2) almost all such lawsuits will resolve without going to trial.

There are several defenses that can be raised in defense to any lender lawsuit that may reduce or even eliminate their claim. These include:

1. Lender does not own the loan - In order to file a lawsuit against you, the lender must actually “own” the loan, that is they own and have possession of the Promissory Note.  Loans change ownership all the time and it is possible that the lawsuit has been brought by a loan “servicer” or collection company, not the actual owner. If they cannot prove ownership, they do not have “legal standing” to file the lawsuit and they should lose.

2. Loan was predatory - One of the key reasons why we had this market collapse was that from 2000 through 2006, lenders made loans to borrowers who in reality could not afford the loan.  Sometime this was done by misstating income on “stated income” or “no document” loans and often this misstatement was done by the lender, not the borrower. Other times the loan was unrealistic, such as a 1% interest rate on which the borrower qualified for the loan but which jumped up much higher after the first month.  So the buyer only qualified on month one but would never qualify on month two.  Failure was inevitable unless the buyer could quickly flip the property.  If the lender should never have made the loan, they likely will not recover against the borrower in court.

3. Loan was result of fraud - Similar to predatory loans, many borrowers obtained loans through actual fraud where the loan agent altered information supplied by the borrower or made false representations to the borrower such as:  “take this adjustable rate now and we’ll convert it to a fixed rate within a year”. For most borrowers, that loan agent was never to be found within the year, the fixed rate was not obtainable, and the increasing adjustable rate forced the borrower into default.   If the lender’s loan agent defrauded the borrower into getting the loan, they likely will not recover against the borrower in court.

4. Lender failed to do diligence - One of the biggest causes of the market collapse was that the lenders failed to exercise any diligence in checking to make sure the information on the loan application was true, such as checking tax returns and confirming the borrowers employment and income.  The banking deregulation in the late 1990’s created a flood of money in the market for new loans to be made and lenders accepted virtually any application without checking whether the loan was good. The result was billions of dollars of bad loans secured with property that was not worth the debt.   If the lender should never have made the loan, they likely will not recover against the borrower in court.

5. Lender knew the market was inflated in a bubble - The combination of banking deregulation and easy money created a huge increase in demand by possible homeowners and investors which drove up the prices on available properties, often increasing by $10,000 or more in a single month.  Developers rushed in with new subdivisions everywhere trying to fill the demand as competition for homes kept driving prices upwards.  This inflationary bubble was almost entirely fueled by high-risk loans, speculative appraisals, and the lack of real underwriting and diligence by the lenders. It was completely foreseeable to lenders that this bubble would burst but they made the loans anyway because they earned commissions and could sell the loans in the secondary mortgage market.  It was no real surprise to lenders when the borrowers started defaulting in 2005 on the increasingly expensive loans which led to the collapse starting in 2006.  If the lender should never have made the loan, they likely will not recover against the borrower in court.

6. Lender has insurance for the loss - Many of the loans made were 100% of purchase price and even more. Generally, if the loan was for more than 80% of the property value, mortgage insurance (PMI) was required. Although paid for by the borrower, this insurance paid the lender for any loss on a default. The lawsuit may be an attempt by the lender to collect on a loss that they have already recovered on through the insurance. If the lender has already been compensated for any loss, they likely will not recover against the borrower in court.

7.  Lender has been bailed out by the taxpayers - Between 2008 and 2009, Federal bailout monies paid by taxpayers (including the borrower) provided protection for lenders damaged because of loan losses.  Our government guaranteed billions of dollars in lender bad debt, guarantees that we and our children will be paying for years to come. Many consider these bailouts to be a reward for bad business practices instead of the punishment that might be deserved. If the lender has already been compensated for any loss, they likely will not recover against the borrower in court.

How Should You Prepare? - In California, the deadline for a lender to bring a claim against a borrower is four years from the date the borrower defaulted. With hundreds of thousands of borrowers just now in default, these lawsuits will be a constant threat for many years to come.  These may be joined by deficiency lawsuits following short sales to which the same defenses can be raised in addition to several other defenses unique to short sales which I’ll cover in subsequent Blogs.

Before you make any decision concerning your upside-down home or investment property, be certain to get tax and legal advice from qualified professionals in your State who can look at your specific situation and advise you on how these rules apply to you, particularly on how to identify and minimize the risks of a lender lawsuit.  This Article is solely intended to give you an introduction to key legal concerns affecting borrowers today but you should not rely on it to apply to your financial circumstances.

If you have specific questions about your liability, short sales, foreclosure, or any legal issues, feel free to contact me 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. Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/.

As home owners throughout our nation have struggled to either retain their properties or minimize the damage in losing them, they have looked towards a patchwork of government programs for help.  These programs such as Hope for Homeowners, HAMP, and now HAFA have promised a lot but delivered very little results so far.  The one effective relief program has been the Federal Debt Foregiveness Relief Act and comparable State laws which enables homeowners to avoid taxes on the forgiven debt on their principal residence.  No such program has been created to protect investors but… relief from these taxes may be available anyway.

Debt Forgiveness Tax arises anytime a lender is not paid in full on a loan. Typically, this is measured by the lender issuing an IRS 1099 for miscellaneous income showing what was owed and what was paid. You get taxed on the difference as income unless some exemption applies. There are several.

1.  Capital Loss Offset - When you buy a property, your purchase price generally establishes your “taxable basis”, ie: what you invested. This is increased by capital improvements you make, such as a new roof, and it is decreased by your depreciation write off.  For many investors, your taxable basis may be much higher than the current market value and higher still than the amount owed on the property. For example, if you purchased for $500,000 with a $400,000 loan and the property sells or is foreclosed at a price of $250,000 (not uncommon); then you would have a debt forgiveness of $150,000 (amount of loan unpaid in the sale) but you would also have a capital loss of $250,000 (amount invested less sale price).  Accountants are generally in agreement that you can offset the debt forgiveness tax with the capital loss. In this example, the result would be elimination of the debt forgiveness tax and a carry-over remaining capital loss of $100,000 which could be applied against other investment losses. 

2.    IRS Insolvency Exclusion - In my February 19th posting, I wrote about how the Insolvency Exclusion works as detailed in IRS Publication 4681 “Cancelled Debts, Foreclosures, Repossessions, and Abandonments”. http://www.irs.gov/pub/irs-pdf/p4681.pdf.  The important point is that this Exclusion applies equally to homeowners as well as investors.  In short, you list all of your liabilities and below that list all of your assets. If your liabilities are greater than your assets, you are “Insolvent” for debt forgiveness purposes and can avoid the debt forgiveness tax. Many States, including California, have adopted the IRS Exclusion to apply to State debt forgiveness taxes as well.

3.  Bankruptcy - although this is a last resort for owners and investors alike, if a property is lost during the pendency of the Bankruptcy there will be no debt forgiveness tax applied. You cannot use BK to avoid taxes already incurred before the Bankruptcy is filed.

Before you make any decision concerning your upside-down home or investment property, be certain to get tax and legal advice from qualified professionals in your area who can look at your specific situation and advise you on how these rules apply to you.  This Article is solely intended to give you an introduction to what might be available for you but you should not rely on it to apply to your financial circumstances.

If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/.

 has been the investor market

Over the past year, I have posted numerous Articles which in part deal with Debt Forgiveness and the receipt of a 1099 form from a lender.  Now, as we’re seeing lawsuits being filed by some lenders to collect on unpaid debt after foreclosure, borrowers are saying “Wait… they gave me a 1099! Doesn’t that mean the debt is forgiven?” The answer is maybe.

A 1099 is simply a type of IRS form used to report income other than wages, salaries, and tips. The most common forms are:  1099-Misc to report miscellaneous income; 1099-Div to report dividend income; and the 1099-Int to report interest income.  Following foreclosure two different forms of 1099 are used: the 1099-C to report cancelled debt; and the 1099-A to report the acquisition or abandonment of a secured property. It is this last one that causes the confusion and no doubt will be the subject of litigation.

The 1099-A contains several boxes, one of which requires the lender to state whether the borrower was personally liable for the debt or not.  If there is no liability (such as in California with acquisition debt or following the lender’s Trustee Sale), then the unpaid debt amount is forgiven and debt forgiveness tax can be assessed (unless an exclusion applies). This gives the same result as the 1099-C. But… where the 1099-A states that the borrower is personally liable, then the filing of the 1099-A  might not mean debt is forgiven. Rather, it may mean that the lender has only filed the form to designate that an event has occurred and they have not as yet determined whether or not to cancel, ie: forgive, the debt. This is a very confusing result. 

You can learn more about the use of 1099-C and 1099-A on IRS Publication 4681: http://www.irs.gov/pub/irs-pdf/p4681.pdf. For any of you Accountants reading this, if you can shed more light on this, please post a Reply or e-mail me at sjbeede@bpelaw.com.

Watch this Blog for further insight as this issue gains greater clarity. We’re just starting to provide defenses for borrowers sued by wiped out junior lenders and the role of the 1099 may be an important defense argument (as well as the many other defenses that may exist).  Remember, lenders want to try to get paid but they don’t want to throw good money after bad. If there is some recourse, a settlement may be the fastest and most cost-effective result for everyone.

If you’re facing a post-foreclosure lawsuit or have any questions concerning upside-down loans or your rights and obligations concerning real property, foreclosure, or any related issues, please feel free to contact me at stevebeede@bpelaw.com or contact my office at 916 966-2260 for a confidential appointment by phone or in person.

Last week I posted comments on the Home Affordable Foreclosure Alternatives program which is taking effect on April 5th. I was not very complimentary and in fact was pessimistic as to its impacts on the economy. While those negative sentiments may still prove true, I have since then taken a closer look at the program and spoken extensively with lenders, real estate agents, and upside-down borrowers. From this, I must now admit I see a lot to like in HAFA… if the lenders will cooperate.

HAFA has two parts: First an attempted Short Sale and then, if that fails, a Deed in Lieu of Foreclosure.  Since it was designed as an add-on to the Home Affordable Modification Program (HAMP), the particpation requirements are the same: principal residence, first-lien mortgage, serious delinquency, unpaid balance under $729,750, and a mortgage payment over 31 percent of gross income.  If a borrower fails a modification or is denied a modification under HAMP, then they can enter the HAFA program and their lender must participate. 

Short Sale - There are several benefits to pursuing a Short Sale through HAFA compared with doing so outside of the Program: 1) Lenders will pre-approve what will be an acceptable sale price;  2) The Application must be considered within 30 days; 3) Up to $3,000 is provided to satisfy the liens of junior lenders (juniors must release their liens); 4) Borrowers can get $1,500 in moving assistance; 5) Real Estate Agents get commission protection; and most importantly 6) No Deficiency judgment is allowed against the borrower.  These are all very good benefits that will both speed up short sales and improve the market.  The downside is whether lenders will actually cooperate with the HAFA program. They are only compelled to consider the Short Sale Application, they are not compelled to approve it.  Nevertheless, cooperation may grow as lenders realize that it is in their own best interests to get the Short Sales done and remove upside down properties from the market faster.

Deed In Lieu - This is an important addition as well.  Currently, if a short sale fails, the property goes into foreclosure with  all of the negative consequences of credit damage, job impact, and depending upon the State, potential recourse liability.  The HAFA Deed in Lieu program eliminates this.  The 1st lender will accept a Deed transferring ownership of the property to the lender. Any junior lenders must agree to release their liens and any recourse. if this occurs, foreclosure and all of its impacts are avoided.

Will all of the benefits of HAFA work? We’ll all have to wait and see how the Lenders respond.

If you have any questions concerning your rights and obligations concerning real property, foreclosure, or any related issues, please feel free to contact me at sjbeede@bpelaw.com or contact my office at 916 966-2260 for a confidential appointment by phone or in person.