Bank of America Violates its Settlement Agreement with the Government

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May 122012
 

A coalition of  State Attorney Generals and several Federal Agencies were investigating and bringing legal action against the nation’s top lenders for Mortgage Loan Servicing Abuses , Bank Fraud, Illegal Foreclosures, Abuses related to Foreclosures and Fraud related to Foreclosures.  In February of 2012, these major banks and lenders reached a settlement that includes penalty payments of over $25 BILLION DOLLARS and corrections to problematic, broken processes that pushed people into foreclosure while working with thier lenders on loan modifications or re-payment terms.  

I have first hand knowledge that Bank of America is not heeding the terms of their settlement.  I help people to keep their homes by guiding them through loan modifications and if the loan mod is not the best strategy for thier financial future, I help them through a short sale.  One of my clients was in the middle of a loan mod with Bank of America, had been accepted, made her 3 trial payments and received her final loan mod package of paperwork and terms.  The paperwork had some errors on it  - specifically her name and address were both incorrect on the final paperwork.  She was on her way to the notary to sign them anyway and she recieved a phone call from BofA telling her to wait for the corrected paperwork. Weeks passed and nothing arrived in the mail.  Next she recieved a notice that SHE had failed to complete the loan mod package and SHE had decided to NOT accept the terms of the loan mod  so her loan mod had been DECLINED.  Numerous calls to her loan mod counselor at BofA were unanswered and her repeated messages to the counselor and her manager were not returned.  Then, she received a Notice of Default and called me in tears to come list the house for a short sale.

I told her she should try to have them correct the paperwork and honor the loan mod.  We wrote to the president’s office at Bank of America and got the attention of someone inside the president’s office.  He investigated internally and found that they had indeed “dropped the ball” and got the loan mod back on track.  My client was told that they would get the corrected paperwork out to her and she waited ….and waited…..again.  On every call, she was told that the paperwork was in process and another month went by.  Next, she got a Foreclosure Sale Notice taped to the door and the Auction date was only 3 weeks away. 

Imagine the sense of betrayal that she felt.  BofA has told her that the loan mod is on track twice, to just be patient, everything is working out fine, the paperwork is in process only to have a notice of default and a notice of sale recorded on the property.  She continued to be told that they would not foreclose while she was in the loan mod program, but thier actions with the notices of defualt and auction publicly said otherwise. With the sale looming just days away, there wasn’t time to short sale and an attorney told her there wasn’t much he could do to stop BofA from foreclosing.  It looked like she was going to have a foreclsoure on her credit history.

I called the contact at the office of the president and left a scathing message accusing BofA of violating the terms of the settlement they had just reached in February by “dual tracking” her loan mod and foreclsure process.  I wrote to the California State Attorney General and Department of Justice to notify them of the continued viloation.  Within 2 business days, the trustee had postponed the foreclsoure sale by 30 days and the representative from BofA called me to answer my concerns and assure me they were working on the loan mod paperwork but there were delays that were being investigated internally.  I told the rep that BofA should take her off the Foreclosure timeline and suspend the foreclosure but they said they don’t do that, they just postpone and postpone in case the mod doesn’t work out….which means they are keeping the foreclosure hammer in a raised hand ready to slam it down. 

This is exactly why Bank of America and the other banks were investigated in the first place.  They haven’t changed their thinking and they haven’t changed their processes.  What they are doing is wrong, they have been told it is wrong and they settled with the Department of Justice paying millions for their wrong actions and they continue to treat people criminally- they have not changed.

 Posted by John Cadman at 6:22 pm

Prepare Your Finances BEFORE You Short Sale

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May 022012
 

During a Short Sale, your credit will suffer.  People ask, “How much will a Short Sale affect my FICO socre?”  The short answer is “A short sale will affect your FICO score between 50-150 points”.  The long answer is, “That depends on a lot of factors”.  Because people have events and bad things happen that force them into short sales – illness, job loss, underemployment, loss of income, divorce, increased expenses, relocation, etc.  sometimes credit damage occurs before they miss mortgage payments and eventually end up in a short sale.  In cases like this, the FICO score drop will be more during a short sale – but not solely because of the short sale.

If you know you are a candidate for a short sale and know that your credit will be damaged if you decide to short sale, you should bulletproof your finances BEFORE you miss payments.  Is it possible to do a short sale without missing a payment? I have heard of successful shoart sales with no missed payments, but have not seen it personally after successfully closing dozens of short sales.  In the cases where homeowners kept payments current, the short sales dragged on for many months.  One of the short sale qualification criteria is “emminent default”.  If the bank thinks they can continue to collect payments from you, they will.  If you have applied for a short sale and continue to make payments, my experience tells me that the banks will ignore the short sale and continue to accept payments as long as you keep sending them.

(1) If you have a credit card with the bank that holds your mortgage, they will lower the credit line, cancel the credit card or raise the interest rate.  Other credit cards may do “credit reviews” periodically and if your agreement with them allows, they may raise the interest rate, lower the credit limit or even cancel the card.  So, if you need credit cards for your job or travel, make sure you have a number of credit cards in banks other than your mortgage holder and be prepared to get a secured credit card.

(2) If you are planning a major purchase, make it while your credit is still good to get the best terms.  For example, if you fall behind on your mortgage payments, buying a car on credit will be much harder.  Or, getting that 6 month free interest deal on appliances may not be available.

(3)Open a bank account in a bank other than your mortgage holder.  This is not to hide assets or income, but it does provide some peace of mind if you are worried that the bank may freeze your account for non-payment of the mortgage.  They are not allowed to do that, but banks don’t always follow the rules.

Nothing in this blog should be relied upon as financial,  tax or legal advice as I am not a tax professional nor am I a lawyer.   But, as a licensed Real Estate Broker in the state of California, I have helped dozens of people through short sales and loan modifications and learned a lot that I am willing to share here in this blog.

 Posted by John Cadman at 7:25 am

Short Sale and Debt Cancellation

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May 022012
 

When you go through a short sale, you need to be aware of the tax consequences, sometimes referred to as “short sale and debt cancellation”.  Under the IRS code, when you have a loan forgiven, they see this as a taxable event.  People going through short sales and foreclosures experienced economic hardship, lost value in their homes which made their loan balances higher than the home values, then lost the home through short sale or foreclosure only to find out that the IRS then wanted them to pay taxes on the loan balance above the value of the home they lost.  That was an unfair burden to millions of former homeowners and tax law was ammended to allow an exemption from tax on debt cancellation on a home loan under certain circumstances.  This exemption is named the “Mortgage Debt Relief Act of 2007″ and currently this exemption expires at the end of 2012.  Here it is in a nutshell:

  1. Principal Residence
  2. Mortgage Restructuring, Foreclosure, Short Sale
  3. Up to $1 Million ($2 Million if filing jointly)
  4. Occurs before 1/1/2013

Debt cancellation after a short sale of a primary residence and debt cancellation after a short sale on an investment property are different.   Since the #1 criteria for this exemption is “Primary Residence”, investment properties and second homes don’t qualify for the exemptions under the Mortgage Debt Relief Act of 2007.  Investors must take into account their cost basis on the property.  If you bought it for more than you are selling it for and will receive debt forgiveness, you may be able to offset the income from the debt forgiveness with the loss on the investment property.  Talk to your accountant as this depends on depreciation and previous years of tax reporting regarding the property.

When you lose the home in foreclosure or through a short sale, your lender will probably send you a 1099-c and notify the IRS that you had a certain amount of the loan forgiven.   Don’t worry, just give this 1099-c to your tax professional and whatever other documents he/she requires and see if you are protected under this exemption for debt relief on your short sale or foreclosure.

 Here is a good resource on the IRS website regarding the Mortgage Debt Relief Act of 2007: http://www.irs.gov/individuals/article/0,,id=179414,00.html

Talk with your tax accountant about how to report debt forgiveness as I am not a tax professional and am not giving any tax advice in this blog.  Nothing in this blog should be relied upon as financial,  tax or legal advice as I am not a tax professional nor am I a lawyer.   But, as a licensed Real Estate Broker in the state of California, I have helped dozens of people through short sales and loan modifications and learned a lot that I am willing to share here in this blog.  Also, I recommend that you read the IRS website and contact them with any questions as each person’s situation is unique. 

 

 Posted by John Cadman at 7:15 am

Short Sale Tax Strategies on Rental Property

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Sep 262011
 

According to my tax gurus, the short sale tax strategies on Rental Property are different than the short sale tax strategies for primary residence.  They tell me that when you sell an investment property and have debt forgiven, you may incur a tax consequence.  To the IRS, debt forgiveness (a  loan you don’t have to pay back) is considered as a gain and taxed as ordinary income. 

So if you have a “gain” from debt forgiveness, figure out what your tax basis is on the property.  If your basis is higher than the short sale price, then the loss may cancel out the gain.  If you bought the house many years ago and refinanced it to pull money out and now that the prices have fallen, decided that short sale was required, you may have a tax consequence that you need to talk with your CPA about.

Here is an example:

Purchased for $300,000 with a 80% loan of $240,000.
Today’s value = $200,000
Costs of sale =     $  18,000
Net to Bank =      $182,000
Debt forgiven = $240,000-182,000 = $58,000

Because you bought the house for $300,000 and sold it for $200,000 and had $18,000 in costs, your LOSS on the house is $118,000 and the GAIN from debt forgiveness is $58,000.  This example is simplified and ignores depreciation, improvements, and other costs of operation but the underlying tax strategy is that the short sale loss wipes out the debt forgiveness gain.

Talk to your accountant because each case is individual and everyone has their own cost basis, depreciation, operational /improvement costs.

 Posted by John Cadman at 6:24 am

Forgiveness of debt, 1099 and Short Sales

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Sep 122011
 

Taxes! After a short sale, isn’t is bad enough you have to lose tens to hundreds of thousands of dollars ? Why should you have to pay taxes on the loss? Good News – my accounting gurus tell me short sellers of a primary residence have an exemption from paying taxes on short sale losses through 2012 on both federal and CA taxes. In California, it is called Mortgage Forgiveness Debt Relief and for the federal, it is  Mortgage Forgiveness Debt Relief Act and Debt Cancellation.   These apply to mortgage forgiveness on primary residence.  I will discuss the tax strategies regarding short sales and rental in the post: “short-sale-tax-strategies-on-rental-property”.

Common scenarios for short sellers are (1) one purchase loan, (2) 2 purchase loans (1st and a 2nd), (3) a purchase money 1st and a HELOC 2nd, and (3) a refinanced first and HELOC 2nd loan.  The different cases are treated differently under the tax codes.  On the Federal IRS website, it explains what is allowable to be exempt as, “….debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes”.  So, in the case of (1) & (2) purchase money loans – that would be “to buy”.  Case (3) -The first loan would be exempt, but maybe – maybe not on the HELOC.  You would have to pass the test of “build or substantially improve”.  You have to be careful when it comes to cash out for purposes other than home improvements.

I am only quoting from the source and am not a tax professional, so of course, I recommend that you consult your tax professional as everyone’s situation is unique.

 Posted by John Cadman at 7:38 pm

Buy Immediately After a Short Sale

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Aug 262011
 

I was skeptical when I heard this was possible, but our office agents have had 2 clients buy homes IMMEDIATELY after a short sale.  And these clients received good interest rates, not some hard money high rates.  Most lender guidelines state that after a short sale, the borrower must wait for 18 months, 2 years or longer before qualifying for another home loan. 

I have had 3 clients buy BEFORE they went into a short sale, so if you want to cash in on the current low prices in the market today but are strapped with an underwater mortgage, ther may be a way for you to buy now or immediately after doing a short sale.  Not everyone will qualify, but it costs nothing to find out if you are one of the lucky ones that could buy a house  today and start building equity and shed your financial portfolio of an upside down crushing mortgage debt.

 Posted by John Cadman at 9:06 am

Short Sale FAQ

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Aug 262011
 

What is a Hardship?
Failure of a business
Relocation for Job
Rise in mortgage payment
Inability to Refinance
Increase in credit card debt
Increase in monthly expenses
Property damage requiring extensive repairs
Recent Unemployment or Reduction of Income
Divorce or Separation
Death of a Spouse
Disability
Inability to work due to poor health
Unforeseen medical bills
Bankruptcy

Does being “Upside Down” qualify as a Hardship?
No. A mortgage balance higher than the property value does not automatically qualify as a hardship. See above for examples of hardships.

What is a Real Estate Short Sale?
A short sale occurs when you sell a home that is worth LESS than what you owe on your mortgage. Your lender must allow the sale and agree to the lower payoff proceeds.   A short sale is an alternative to foreclosure for homeowners experiencing a hardship and saves banks the expense and hassle of the foreclosure process.

What are the benefits of a short sale?
Short sales can be a beneficial alternative to foreclosure:
* Substantially less credit damage than foreclosure.
* Your credit can recover in about 1/2 the time to qualify to buy another house with a short sale rather than a foreclosure.
* No up front costs with a short sale.
* All fees and closing costs, broker commissions and escrow fees are covered by the lender.
* You may be able to negotiate away deficiencies during a short sale that would follow you after a foreclosure.

What are the advantages of a short sale vs. a foreclosure?
The main advantage of a short sale is preventing foreclosure.

Short sales are considerably less damaging on credit ratings than foreclosures.  Foreclosures can remain on your credit report for 7 to 10 years. Lending guidelines state that you must wait 3 years or more before you may re-qualify for a home loan.  Short sales may report on your credit for up to 3 to 5 years however, are noted as “pre-foreclosure in redemption” and are spared the more harmful “debt discharged due to foreclosure” marks.  Individuals have successfully recovered from a short sale and re-qualified for a decent home loan within 18 months – 2 years.

What is my potential liability after completing a short sale?
Short Sale allows you to sell your property for less than the outstanding mortgage debt.  You may think that you are liable for the difference when actually it can be written off as a forgiveness of debt by the lender.  Under the Mortgage Cancellation Tax Relief Act of 2007 (H.R. 3648) any amount forgiven on a mortgage debt secured by a principal residence can not be taxed.  We recommend that you seek the advice of an attorney or your CPA.

I’m facing foreclosure, do I still have time for a short sale?
Each situation is approached with measures necessary according to your needs, so every file dictates their own timeline. On average, from the time we present a completed short sale package to your lender, it can take 1 to 4 months, depending on the situation.  If time is of the essence, and you are facing foreclosure or have a set auction date, we can expedite your request and negotiate your lender to postpone those dates.

If I file bankruptcy, can I still qualify for a short sale?
Yes. Bankruptcy is typically used as a last resort causing a temporary delay in a foreclosure situation.

How much will it cost to do a short sale?
Nothing. All fees, including title, escrow, closing costs and real estate commissions will be paid by your lender at closing.

What paperwork will I need to provide?
Mortgage Statements for all Mortgages
Financial Statement
3 Months Recent Bank Statements
2 Months Recent Pay Stubs
Last 2 Years Tax Returns
Driver’s License (copy)
Hardship letter
Copy of Real Estate Tax Bill
Proof of Insurance
HOA statement (if applicable)
Other Related Items

If I am still current on my mortgage, will my lender approve a short sale?
Some lenders will not accept a short sale files until the loan is delinquent, and some will approve files on loans that are still current.

Is a short sale still possible if I have more than one loan on my property?
Yes.  Both lenders must approve the short sale.

 

 Posted by John Cadman at 8:50 am

NOD – Notice of Default – How Does it Affect a Short Sale?

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Aug 252011
 

The Notice of Default (NOD) is the first official step in the foreclosure process.  Up until the NOD, the mortgage is just late and the bank has been trying to collect.  They have been privately handling the collection effort and reporting the late payments to credit bureaus.  Every lender is different and there are strategies you can use to slow the arrival of the NOD and strategies you can use BEFORE the NOD to save your house & credit from foreclsoure. We talk about that in other blog posts on this website.  The NOD does disqualify you from some short sale strategies and opportunities so if you are thinking of doing a short sale, don’t wait until the NOD to get started because it limits your options.

When the lender files the NOD, they are changing course from collection to securing collateral. They record the Notice of Default with the county recorder’s office which makes it Public Notice.  The mortgage is now officially in a pre-foreclosure state.  If nothing is done, the bank will step through the foreclosure process and take the house as collateral for the unpaid debt.  They could step through the foreclosures process in approximately 90-120 days – if you do nothing.

What can you do if you already have a Notice of Default (NOD)?  It may be a little late for  loan mod but you could still try if you haven’t already.  The lender collection people will probably encourage you to consider a short sale.  If you have received the NOD, you most likely feelyou won’t qualify or have decided that the house isn’t worth the effort of doing a loan mod.  If you feel you might like to try to do a loan mod, try this free DIY Loan Mod Guide.  If you feel that you just can’t or the house isn’t worth the effort,  you may benefit from a short sale or it could be best to just let it go back to the bank as a foreclosure.  Our staff attorney gives free “short sale or walk-away” consultations to clients of ours – yes, free legal consultation for our clients – you read that right.  Many experts feel that the credit damage of a short sale is less than that of a foreclsoure enabling you to get back into qualifying for a home loan quicker if you do a a short sale.  The Fannie Mae loan guidelines confirm this stating that a buyer may re-establish credit and qualify for a new home loan 2 years after a short sale but it not before 5-7 years after a foreclosure:  https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf.

So if you decide that you are a short sale candidate but you have already received a NOD, you have to get moving fast because it takes a couple weeks to get all the paperwork to the lneder, a few weeks to get a buyer for the house, then a month to 4 months for your lender to process the documentation they require to do a short sale. But, after the NOD, you only have 90-120 days before they take the house back and foreclose.  You should call a good Real Estate Agent who has experience doing short sales and has an attorney on staff available to you throughout the process  (which would be me).

 Posted by John Cadman at 2:38 pm

Should I Short Sale or Should I Loan Mod?

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Aug 202011
 

People often ask me whether they should try to keep the house by doing a loan mod or if they should just get away from the upside down debt and do a short sale.  The economic decision is easy to calculate but there is much more to it than numbers.  The house is a home to individuals and/or families.  Credit histories and personal reputation within a circle of influence are at stake.  For people who have lost their source of income, lost a family member, or are in a divorce, the decision is usually made for them – loan mods are out of the question.  In those cases, the house must be sold or it will be foreclosed on eventually.

The decision to do a loan mod over a short sale is basically 2 things – (1) hardship and (2) income.

1. Hardship – To qualify for a loan mod, you will need to prove a hardship.  Having an upside down mortgage is not a hardship.  Having to cut out trips to Starbucks and your favorite day spa are not hardships. Living paycheck to paycheck while staying current on your mortgage payments and maintaining a positive balance in your bank account is painful but not a hardship.  Having to trim your monthly expenses and still dig into savings to make the house payments is a hardship.  Having a drop in income or an increase in expenses (or both) so that you can no  longer make the payments is a hardship.  Some people experience a difficult period in their lives of health, family, employment problems, etc. and fall behind in payments making it very difficult to impossible to catch up.  That is also a hardship.

2. Income – Another qualification the banks look for is ability to pay – in other words - income.  You have to have income.  If you lost your job, find another one – even if it is for less money before you apply for a loan mod. People out of work don’t get loan mods. If you are out of work, go straight to short sale.  The banks’ target for your house payments (PITI) is to get them down to 31% of your GROSS pay.  So, if currently your house payments are $3000/month and your gross pay is $6000, the target for the modified payment will be $2000/month including the tax & insurance.  If you think you can rent a house in your neighborhood for less than $2000/month, you might consider a short sale because this is what the banks will target as your modified payment.  If you don’t think $2000 a month is not low enough for you, you may as well consider a short sale because that is what the banks will target as a new payment.  How low will they go?  If you are making $3000 a month will they drop your house payment from $3000 to $1000?  Not likely,  but if you can meet your other monthly obligations and 31% of your gross pay for a house payment, give a loan mod a try.

Many people want the upside down part of the loan to be forgiven in a loan mod.  I have seen principal reductions but not to the point where the loans are “right side up”.  After a loan mod, you will still owe more than the house is worth – You will still have an upside down loan.  If you have fallen behind on payments, they could tack the missed payments onto principal so that you may be even more upside down than when you were before the loan mod. So, if your goal is to eliminate an upside down debt – short sale.  If you want to stay put in your home until the property values in the area come up to your loan balance and think you can qualify for payments equal to rents in the area, try a loan mod.

 Posted by John Cadman at 7:44 pm

Short Sale & IRS Tax Considerations

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Aug 092011
 

When considering a Short Sale, you must know what tax consequences the short sale will cause for you.  Be sure to consider both Federal Tax and State Tax consequences. The Tax issues that arise in a short sale come from cancellation of debt or “Debt Forgiveness”.  The IRS considers cancelled debt as ordinary income to the seller and is taxed accordingly.  There is federal tax relief from tax on cancellation of debt income for short sales named Mortgage Debt Relief Act of 2007.  This exemption or relief expires at the end of 2012 and we don’t know if they will extend this relief beyond next year or not.  This relief only applies to owner occupied principal residence properties and only to loans used to purchase or improve the property.  California also has a law for tax relief for short sales that is almost the same as the federal law.

If you borrowed money against your home either as a cash out refinance, home equity or  second mortgage and did not use the money for home improvements, you may have a tax consequence.  If the property is not your principal residence, you may have a tax issue for the debt forgiveness in a short sale. There is another tax relief for cancellation of debt income for insolvent sellers.  You have to prove you were insolvent (owed more than you own) at the time of sale. If you have debts that exceed assets you may qualify as insolvent.  You can use this exemption for debt cancelled on any property or loan - investment, second home,  2nd loan, cash out refinance, or HELOC.  The IRS has a worksheet to determine if you are insolvent in their publication 4681 that covers cancelled debt: http://www.irs.gov/pub/irs-pdf/p4681.pdf .

This information is provided as information only and not given as tax advice for anyone’s particular situation.  You should always request advice from your tax and legal professionals.  They may have more aggressive tactics that could save you thousands on your taxes.

 Posted by John Cadman at 10:27 pm
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