Should You Keep The House?

dna Californian

The determination to stave off foreclosure and keep the house must be genetic.

Almost without exception, every homeowner with a troubled mortgage wants to hang on to the house.  “It’s our home”, they insist.

While before the Great Recession, the obstacle to keeping the house was measured by the amount past due on the mortgage.

Now, we need to factor in the often precipitous fall in home values.  Even homes with mortgages that are current  in Northern California  are often underwater by several hundred thousand dollars.

In California, we’ve heard for years that a home is the best investment we could make.

That line was so compelling that lots of the people I see in my bankruptcy practice neglected saving for retirement on the theory that the equity in their home was their retirement.

Now that the equity is gone, homeowners often say, “well, I will hang on until the value comes back so I don’t lose money”.

Every month that paying for your house costs more than renting, you are losing money.

You’re losing the money  that exceeds the cost of renting that is poured into the underwater house.

If you could rent for $3000 and the house costs you $5000 a month (including property taxes, insurance, HOA, and maintenance), you are pouring a fresh $2000 a month into a hole in the water.  That’s $24,000 a year, or nearly a quarter of a million dollars in a decade.  Is that the best use of money?

There are two sound counter arguments:  one is the tax advantages given to paying mortgage interest, and the other is the protection against inflation that a fixed rate mortgage offers.  The tax advantage of homeownership is often smaller than many borrowers think.  The protection against the cost of rental housing rising is, in my mind, a far stronger argument to keep the house.  It only applies if the interest rate on the mortgage is fixed rather than variable.

End game

For those who want to ride out the dip in home values til the underwater house is no longer underwater, my question is, how long will that take?

My second question is: what do you gain from the effort if the “prize” is nothing more than the ability to sell the house for what you owe on it?

To help in thinking about how long it will take for an underwater house to be worth what’s now owed, I created a web-based calculator to answer the question, how long til my home’s value recovers?

The underwater home calculator works like this:  you enter the value of the home today; the total of the debt on the home; and the rate at which you assume that real estate will appreciate on average in the future.  Click the button and it tells you in years, months and days how long you have to wait for the home’s value to equal the debt.

Then you have facts to add to the discussion about should you keep the underwater house.

 Image courtesy of mstoeck.

 

The Tax No One Owes

arrows everywhere

Property taxes are almost unique among taxes:  no human being is liable for a property tax.

Under California law, the county’s property tax lien is first in the line of lienholders on a piece of property.  The property taxes come ahead of even the senior mortgage lien.

First in line

The priority of the tax is why one of the promises in the standard California deed of trust is a promise to pay the taxes. And that’s why the lender will step in and pay them if the homeowner doesn’t.

If the taxes are unpaid for sufficiently long, the county’s lien entitles it to conduct a tax sale and take title to the property.  A tax sale destroys all of the other, junior liens on the property.  That fact keeps the lender interested in whether the taxes are paid.

With the power to sell the property out from under the homeowner, the county does not need a claim against the owner of the property.  Which, after all that’s gone above, gets me to my point:  you have no personal liability for property taxes.

No one in California (and I can’t speak for any other state) can be sued to collect a property tax.  Walk away from a home with the taxes unpaid, and the tax remains as a charge against the real estate.  It does not result in a collection suit for a money judgment against the homeowner.

 When you can’t pay everything

Homeowners struggling to hang on to a home in the face of reduced income  may have to make choices about which liens to pay.

I suggest that not paying the property taxes is the safest bet. Property taxes must be delinquent for 5 years before the county can hold a sale.  There is no immediate threat that the property will be lost to a tax sale.

There is a very good chance that the mortgage lender will pay the tax to protect its position, and to stop the running of a very high rate of interest on the unpaid tax.

Another time, we’ll talk about whether to pay the first or the second when there’s not enough to go round.

Image credit:  Fotolia

Foreclosed? Don’t Take A 1099 Lying Down

Don't take a 1099 form lying down

Don't take a 1099 form lying down

Santa Cruz County mortgage lending lawyer Bill Purdy is our guest author.

Taxable Debt Relief?-Do Ask- Do Tell

Are you currently facing foreclosure? Was your home foreclosed upon in the last 3 years?

Are you considering short selling your home? Did you short sell your home for far less than what was owed to the lender(s)?

Have you received a form 1099-C and/or a form 1099-A from the lender(s)? If so, you’re one the new walking wounded.

What happens now?

Why of course the self-same taxpayers who footed the Wall Street bailout, are receiving huge, crushing income tax bills from the IRS and the California Franchise Tax Board.

These tax bills are so large, most middle class Americans will never be able to actually repay the tax owed, even over time. No matter how long they live.

The IRS is now forcibly collecting taxes for the same cancelled debt the debt buyers are still trying to collect. (Remember the famous video of the water buffalo in Kruger National Park, torn head from hindquarters by a lion and a crocodile at the same time?)

Millions of Americans are getting form 1099-C and 1099-A, Information Returns.

This “information”  will ripen into tax bills unless the recipient takes deliberate thoughtful action.

The resulting tax bills tend to be massive ones.  Many times the tax bills purport to show that the former homeowners owe more taxes in one year than many of they actually made that year.

Very often these taxes can be completely avoided or tremendously reduced.

The truth is no one actually knows how many of these “taxpayers” actually owe ANY of the money they are now being forced to pay.

The IRS’s own form 982 contains at least three exceptions that can wipe out or substantially reduce federal and state income taxes on otherwise taxable relief of indebtedness income tax for former homeowners.

•    There is an exception for debt reduced or forgiven in bankruptcy.
•    There is a separate exception for taxpayers who were insolvent at the time the debt relief occurred.
•    There is still another exception for Qualified Principal Residence Indebtedness.

In California, and some other states, there is a fourth HUGE exception for non-recourse loans.

And yet again, another situation: the foreclosure or short sale of a rental property can often result in little or no tax due because of the suspended passive loss rules and an IRS form 4797 ordinary losses on the disposition of the rental property. The problem is the former property owner has to know what they are doing.

Step one is the realization that you must affirmatively DO SOMETHING.

Most former homeowners have no idea what to do with the 1099-A and 1099-C forms they are NOW getting.

Tens of thousands of CPA(s) and tax preparers have no idea either. The IRS is not helping.

If you are a former homeowner, don’t keep this secret.

Do ask and do tell a competent tax practitioner if you have received from 1099-C or form 1099-A, because the government isn’t telling or helping.

The United States Government is in active partnership with the lending institutions that sent out the forms and has been since the bailout started.
If possible get to a solid tax advisor before you let your home go in foreclosure or short sale. This will maximize your options.

But even if you didn’t do this before foreclosure, more often than not, there is a way to radically reduce or wipe out the tax.

However nothing today is automatic: you must push back.

By William Purdy- Bay Area Tax and Mortgage Lawyer , Simmons & Purdy.

Principal Pay Down Plan

A couple of weeks ago, Cathy wrote about the Principal Pay Down Plan. This is an idea to restructure a homeowner’s mortgage to allow that 5 months of payments will go towards principal only.  The un-paid interest could be added on to the end of the payment term, so the mortgage company would lose nothing.

The theory is, of course, that this plan would give underwater homeowners a chance to get caught up.  Most of the payment that is made on a mortgage, particularly during the first 20 years, goes to interest.  This would re-direct that money to principal making a real dent in the amount of principal a homeowner pays.

A good idea?  Certainly, and one geared to not cost the mortgage companies, and to save the homeowner.

A good number of Congress persons have pushed the Federal Housing Finance Agency (FHFA) to implement the plan.  But, alas, FHFA Director DeMarco’s has recently written to Congress informing them that the agency would not be implementing the Principal Pay Down Plan.  FHFA concluded that the proposal would not be all that helpful, since few GSE (Government Sponsored Enterprises like FHA) borrowers have filed for chapter 13 bankruptcy and are underwater.  I guess he doesn’t live in California (or Florida or Arizona or …).

Not to worry, DeMarco said he’ll continue to encourage the HAMP program.  Great!

So, for now, there is no real relief in sight from the US Government.

Behind in Your House Payments? Sell.

Can't pay the mortgage? Sell

Earlier, I wrote an article about five things that can be done if you get behind on your house payments. I promised to take each suggestion in turn, and elaborate on the general process.

The first suggestion was to sell your house.

This of course is easier said than done as the economy is in such a state that few houses are actually selling. Nonetheless – it does happen.

Here’s how to get started in the right direction:

Step one: accurately analyze the value of your home. This can be done on-line, but it is generally a better idea to have a realtor give you a realistic value.  Your home is compared to others that have sold on the market, and an analysis of the price your home should get can be computed.  This is called a CMA – a Current Market Analysis.  It’s a lot less expensive than a full appraisal and usually quite a bit quicker.

Step two: talk to a realtor or professional about how to make your house desirable to a prospective buyer. Sometimes a new paint job and a little landscaping can dramatically raise a home’s value.  Even inexpensive manual labor can greatly enhance a home’s appeal.

Step three: hire a good realtor to help with the process. Find someone that is honest and straightforward, and won’t lead you down an expensive repair path or promise an unrealistic price.  This will cost a percentage of your proceeds; but the service provided to help you prepare the house, show it, and talk to other realtors is, in my opinion, well worth it.

Step four: be patient.  It’s a buyer’s market so be prepared for the process to take some time.   Lower the price if you have too and can afford it and be ready to negotiate when a buyer comes along.

 

image credit: ejhogbin

Four Dynamite Don’ts for Troubled Home Loans

Worthless Ideas For Saving Your HomeWhen you’re trying to save your home, just as important as a to-do list  is a list of Don’ts.

Bill Purdy, a law professor and Santa Cruz County real estate  lawyer, is my go-to guy for mortgage and foreclosure issues.  Here’s his  list of worthless ideas  for saving your home.

Today just about everyone knows someone who’s experiencing problems with one or more of their mortgages.  We’ve counseled thousands of borrowers in the last 7 years.

As a result, we’ve identified a series of recurrent themes that lend themselves to a list.  They are in no particular order,  save all of them come up extremely frequently. So here they are with no further ado.

1. The bank needs to show me my note-

Forget about this one. Typically you’ll need to pay about $100,000 in attorney’s fees just to get the bank into court.

In California the attorneys for the bank will eventually show up and produce a note. It may not be much of a note, but they’ll find one. Or make one.

Whatever they do produce, regardless of its condition or legal sufficiency, California courts have shown themselves to be slavishly attendant to every whim of the lending industry. Nobody gets a free house. You’ll lose. It doesn’t matter what the banks and servicers did with your note, or to it. It just doesn’t matter.

2. My Loan’s Got RESPA Violations-

You’d be better off with a partridge in a pear tree, or a lovely bunch of coconuts. In fact, Truth in Lending violations would be much better.

However these days, even TILA violations have been so severely hobbled by the fawning, obsequious, toadies in the federal and state courts, that even TILA violations are almost impossible to assert and enforce in California.

RESPA or the Real Estate Settlement Procedures Act sounds like a formidable weapon a homeowner can use against lenders. It isn’t.

The few private rights of action afforded by RESPA allow the besieged property owner to collect what amount to paltry penalties. RESPA violations even if proven, will NOT stop foreclosure in California especially where the lender is using the non-judicial foreclosure route, and they almost always do.

Forget about RESPA if you are trying to stop a foreclosure. RESPA is a tiny adhesive bandage handed out by the government with great ceremony, for borrowers who’ve been gut-shot with an assault weapon.

3. I Paid My Loan Mod Specialist $______

Just fill in the blank with whatever you forked out up front. Chances are right around 100% you’ve been defrauded.

Your “specialist” is requesting the information from you, and sending it to the lender, if you are lucky. You are paying thousands for this service, simple as that.

For the record, no attorney can get you a loan modification. He or she cannot waive an imperious hand and force the banks into cowering, whimpering, docile cooperation. Neither can anyone else.

The elected officials in the federal government literally gave away 7.2 trillion taxpayer dollars to private companies in the financial industry. The banks were not required to give out a single loan modification return. Not one.

Fraud by the banks is rampant in this area. They are immune to criminal or civil prosecution for what they have done to American homeowners and continue to do. Your elected officials have seen to that.

You have no right to a loan modification whatsoever. Consult a HUD certified specialist nonprofit organization. The real good ones don’t charge a cent. Surepath Financial comes to mind (800)540-2227.

4. I Need to Do a Short Sale to Save My Credit Rating-

What a load of hooey. This might be true on certain occasions under specific circumstances. People with security clearances and those in law enforcement and fire departments come to mind. Their credit rating problems can cost then their top secret clearance or even their job.

Since most lenders and servicers fraudulently inform borrowers trying to get loan mods or obtain short sale approval that they must stop paying on their loans to even be considered, many borrowers have already had their credit pillaged by the lender by the time the short sale closes.

Short sales have their place and it’s an important one for some borrowers, especially now in California with the advent of enhanced CCP 580(e) last year.

Improved CCP 580(e) prohibits all lenders, (not just the first mortgage holder) who accept money at the short sale, from later seeking deficiencies.

Short sales are not a universal panacea for credit woes. We’re seeing borrowers who did short sales about 2 ½ years ago buying new homes now and that’s a hopeful sign. But we’re also seeing people, who filed bankruptcy 2 years ago with 725 credit ratings today.

So there you have Bill’s  list of  worthless diversions in the mortgage morass.   That’s straight talk from an expert.  Take it to heart.

Image: © Tom Bayer – Fotolia.com

Is Your Lender Picking Your Pocket?

Banks Pick Homeowner's Pockets With Insurance

Banks Pick Homeowner's Pockets With InsuranceForce-placed insurance on your home protects only the lender, not you.

Please repeat:  force-placed insurance protects only the lender, not you.

When the mortgage company buys the insurance on your home, you lose.

Every mortgage or deed of trust requires that the borrower have insurance to protect the structure in case of fire or other casualty.

It assures the lender that if disaster strikes, there is protection for its investment in your home.

If you let that insurance lapse, the lender can and will obtain coverage on the property, and add the cost of the policy to the loan.

I can’t tell you how often my clients assure me that the lender has insured their home, believing that they are covered.

Whoa!  What the lender has insured is the lender’s interest in the home.  The policy is only large enough to protect the bank;  the bank is not buying a policy large enough to cover your interest in the home.

What’s covered

Suppose that you have a $200,000 loan on a piece of realty that’s worth $500,000.  If you let your coverage lapse, the bank will get insurance with $200,000 in coverage.  Your $300,000 interest in the property is uninsured.  The bank doesn’t care if you suffer a loss when there’s a catastrophe;  it goes out of pocket only enough to protect its exposure.

The “out-of-pocket” phrase brings up another issue.  Force-placed insurance is notorious expensive, two, three or four times as expensive as a policy the homeowner can buy to protect the entire value of the house and provide for other insurance protections from liability.  The suspicion for years has been that the price of force placed insurance is inflated because the lender either owns the insurer who writes the policy, or has a kick back arrangement with them.

The inflated cost of this insurance gets added to the loan balance, and, in the end, added to the lender’s profits on the deal.

The New York state Department of Financial Services  has begun an investigation of the lender practices on force-placed insurance. Gretchen Mortgenson quotes the head of the agency

“Force-placed insurance appears to be the dirty little secret of the mortgage industry,” Mr. Lawsky said in an interview last week. “It is a silent killer harming both consumer and investors while enriching the banks and their affiliates.”

Stay tuned for developments in this investigation.  Mortgenson pointedly notes that the big mortgage lenders “declined to comment” on the inquiry.

What’s not covered

What the homeowner also loses when the bank buys the coverage is the range of insurance protection for injuries that occur on the property, not to the property.  Homeowner’s insurance protects the property owner from claims for slip and fall on the front porch, for example, and for damage or loss to the contents of the house.  You can bet that the bank isn’t paying to protect you from these kinds of loss.

Even if you have decided to walk away from a home that isn’t affordable, keeping liability insurance in place is critical.  Our legal system makes property owners responsible for most accidents that occur on their property.  The property remains yours until title changes as a result of a foreclosure.

So, unless you are willing to have your future shadowed by uninsured claims for injury on property you are shedding, keep a liability policy in place as long as you are the owner.

If you are keeping the property, arrange for your own insurance that protects both you and the bank, at a price that’s fair.

© immortal9000 – Fotolia.com

Is There Such A Thing As An Independent Foreclosure Review?

Recourse for Illegal ForeclosuresThe form in the mail promised an independent review of your lender’s foreclosure practices.

However, it  looked a lot like come-ons from scammers.

Two clients this week asked if this was real and whether they should sign up.

I read the form and did a little research.  I concluded

One, it is real.

Two, it may not make much difference.

The Federal Reserve has required several misbehaving  lenders and loan servicers to offer borrowers an independent review of their foreclosure. The mortgage servicers subject to the Fed’s enforcement action are

  • GMAC Mortgage,
  • HSBC Finance Corporation,
  • SunTrust Mortgage, and
  • EMC Mortgage Corporation-

The Comptroller of the Currency  regulates another class of lenders, and it has required a foreclosure review of this group of servicers

America’s Servicing Company

Countrywide National City
Aurora Loan Services EMC PNC
Bank of America Everbank/Everhome Sovereign Bank
Beneficial GMAC Mortgage SunTrust Mortgage
Chase HFC U.S. Bank
Citibank HSBC Wachovia
CitiFinancial IndyMac Mortgage Services Washington Mutual
CitiMortgage Metlife Bank Wells Fargo
Wilshire Credit Corporation 

 

The program offers the prospect of money damages where foreclosure procedures were defective.

The New York Time’s Gretchen Mortgenson is not hopeful.  Her Christmas Day column detailed charges that the “independent” auditors are in bed with the banks they are supposed to be evaluating.

The National Consumer Law Center is likewise skeptical.  NCLC claims the review process may harm homeowners in that it threatens to strip homeowners of their claims with respect to irregularities in the underlying loans.

The servicers subject to review have set up a site to answer questions on the review process.

Letters to eligible homeowners were expected to have gone out in the last two months of 2011.   The application must be returned with a postmark no later than April 30, 2012.

We’ll follow this story as it develops.

Image courtesy of ImageMD.

5 Things That Can Be Done If You Are Behind In Your Mortgage Payment

Since the hope of a judicially supervised mortgage modification in bankruptcy seems to have died in the Senate, let’s examine the available options to resolve a mortgage deficiency.

Once you get behind, mortgage arrears can snowball to a point where you can’t just “catch up.”  When that happens, there are 5 things you can do:

1.    List and sell the house. If you can’t make the payments, selling the home pays off the mortgage and may even give you some cash to buy a new home.  This used to be the quick, easy solution, but not in today’s economy.   Houses just aren’t selling and the norm is that you probably owe more than the home is worth.

2.    You can do a short sale.  This requires the mortgage company to accept less than what is due, so that you can sell your house to someone for its true market value.  This will pay the first mortgage, but may not pay a 2nd Mortgage or Line of Credit. And you won’t get anything out of the sale: any money received will go to the realtor, costs of sale and the mortgage company.

3.    You can get a mortgage modification. The mortgage company can reduce the interest rate on your mortgage (thereby lowering your monthly payment); can add arrears to the end of the loan, (so you are not behind anymore); or can even change the amount you owe altogether.  Unfortunately, in spite of the fact that there are federal and state laws that encourage such programs, modifications are scarce.  Lenders have all sorts of conditions placed on the process and there is no legal requirement that anyone be granted a modification.

4.    You can pay the arrearage. Unfortunately, mortgage companies want you to do this all at once.  If you can’t come up with that much in cash, you can seek bankruptcy protection (typically a Chapter 13 bankruptcy) and spread the amount you are behind over several years.

5.    You can walk away and allow the property to be foreclosed. (This is often a much better solution than it sounds, since you get to stay in the house for months rent-free before moving and there will be nothing due to the mortgage company even if they don’t recoup all of the money owed.)

There are advantages and disadvantages to all of the above, and over the next several weeks, we will examine each of these “remedies,” in greater detail.

Lifeline for Underwater Homes

The parent agency for Fannie Mae and Freddie Mac is considering a proposal for mortgage pay down through Chapter 13, Reuters reports.  The White House denies interest in the plan.

The Principal Pay Down Plan, conceived by Norma Hammes, a San Jose bankruptcy lawyer, and promoted by NACBA, would allow homeowners in Chapter 13 bankruptcy with an underwater mortgage to direct up to five years of their payments on the mortgage to the reduction of the principal outstanding.  The plan would not otherwise change the mortgage terms.

As proposed, the plan would only apply to home loans owned or controlled by Fannie and Freddie, which make up about 90% of U.S. mortgages.

By devoting five years of payments to principal, homeowners, who now have few economic reasons to keep paying on debt tied to houses with shrunken value, could build up equity and a financial stake in otherwise overencumbered homes.

It’s our opinion here at NorCalMortgageMods that a recovery of the California economy is tied, top and tail, to the housing market.  Congress failed to pass the judicial mortgage modification bill for bankruptcy relief to homeowners two years ago.  The Administration’s encouragement of mortgage modification has been insipid and ineffectual.

If this plan doesn’t suit the White House, what is their proposal?