Category Archives: Short Sale Articles

Administration Revamps HAMP to Reach More Borrowers

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The Obama administration has announced changes to its flagship foreclosure prevention initiative – the Home Affordable Modification Program (HAMP) – which officials say will expand its reach to more distressed homeowners.

Among the changes, borrowers who are struggling because of debt beyond their mortgage will be eligible for a secondary evaluation with more flexible debt-to-income criteria, and eligibility will be extended to investor-owned homes that are used as rental properties.
The administration is also giving principal reductions a bigger role within the program, tripling incentives for investors that agree to write down an underwater borrower’s principal and offering these same incentives to the nation’s two biggest mortgage investors – Fannie Mae and Freddie Mac.

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More failed HAMP trials end in foreclosure

Monday, January 16th, 2012, 12:00 pm

 

Mortgage servicers are putting more failed Home Affordable Modification Program trials through foreclosure than they were one year ago.

 

According to Treasury Department data released last week, 10.6% of the more that 615,000 canceled HAMP trials completed the foreclosure process as of Nov. 1. That’s more than double the 4.4% of failed HAMP trials foreclosed on as of November 2010.

 

While foreclosures are increasing, alternative modifications on these loans are dropping. Of the canceled HAMP trials, 39.7% went through the bank’s own private programs, down from 45.4% over the same time period, according to Treasury data.

 

Foreclosure completions as a percentage of borrowers never accepted into HAMP trials are lower but still increasing as well. Of the 1.8 million borrowers denied a HAMP trial, 7.6% completed the foreclosure process as of Nov. 1, up from 5% one year before.

 

Roughly 26.5% of these borrowers received alternative modifications, which held flat over the last year.

 

The increase in more foreclosure completions on failed HAMP trials occurred at nearly every large servicing shop participating in the program. Citigroup (C: 30.74 -2.72%) saw the highest jump. Of the 71,808 HAMP trials it canceled, roughly 13.5% completed the foreclosure process as of Nov. 1, up from 3.1% one year ago.

 

At Ally Financial (GJM: 21.32 -0.28%), the percentage increased to 12.8% from 6.4% over the same period. At JPMorgan Chase, the increase went to 11.3% from 6.2%. And at Bank of America (BAC: 6.61 -2.65%), the largest servicer in the program, 9.3% of failed HAMP trials went through foreclosure compared to just 1.9% the year before.

 

The highest percentage is currently held by OneWest Bank. It foreclosed on more than 19% of its roughly 20,000 failed HAMP trials, up from 10% last year.

 

Interestingly, Wells Fargo (WFC: 29.61 0.00%) has one of the lowest percentages of completed foreclosures on these mods at 6.7%, almost the exact same percentage one year before.

 

This could be a sign servicers are both skirting poorer performing private modification programs or the data is beginning to reflect these higher redefault rates.

 

According to the Office of the Comptroller of the Currency, 17% of the 108,000 HAMP modifications began in the second quarter of 2010 went 60 or more days delinquent within one year. That’s compared to a 31% redefault rate for other private programs.

 

D. Corwyn Jackson, whose company The Corwyn Group helps to train housing counselors for foreclosure prevention, said servicers are getting mixed signals from the government-sponsored enterprises Fannie Mae, which administers HAMP, Freddie Mac and other stakeholders across the country.

 

“The servicers are mandated to stick to the agreed upon foreclosure time lines by state,” Jackson said. “But other stakeholders such as nonprofit housing counseling agencies across the nation are requesting servicers during the negotiation to exhaust their loan workout options before starting the foreclosure process.”

 

The GSEs charge servicers for taking too long to complete the foreclosure process under specific, state-by-state guidelines. Servicers are expected to still consider the borrower for the GSE programs, but time is of the essence. BofA, for example had to pay Fannie and Freddie $1.3 billion in foreclosure delay penalties in the first nine months of 2011.

 

GSE policies and the failed HAMP trial foreclosure rates is beginning to show in the overall economy. Over the same time period covered by the Treasury data, the shadow inventory of homes in foreclosure or on the verge it has been declining. According to CoreLogic (CLGX: 13.48 -0.96%), roughly 1.6 million homes sit in this inventory, down from 2.1 million in November 2010.

ARTICLE LOCATED HERE: More failed HAMP trials end in foreclosure.

Write to Jon Prior.

 

Follow him on Twitter @JonAPrior.

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Taxation of Foreclosures and Short Sales


Introduction

The real estate industry, on a large-scale basis, has been flooded with
foreclosures, deeds- in-lieu of foreclosure, and short sales of real property.
These distress sales and foreclosures are the result of a convergence of
tightening credit, falling property values, and the consequences of prior
lending practices.

Adding insult to injury, owners of real property
facing these circumstances, and generally already under financial strain, may be
unpleasantly surprised to learn that two types of taxable income can result from
a foreclosure, deed-in-lieu of foreclosure, or short sale: capital gains and
forgiveness of debt income ( also known as cancellation of debt—COD income).
COD income has also been referred to as “phantom income.” Both types of income
can trigger unexpected taxes for the owner.

This legal article discusses
the income tax consequences to the borrower in the event of foreclosure, in the
event the borrower simply transfers title to the lender (deed-in-lieu of
foreclosure), and if the borrower sells the property to another in a short sale
in which a lender accepts less than the balance due on the loan as payment in
full. This article has been updated to reflect the recent California Mortgage
Debt Forgiveness Tax law signed by the governor on April 12, 2010 as part of the
California Conformity Act of 2010.

Q 1. Are
foreclosures, deeds-in-lieu of foreclosure, and short sales subject to federal
tax income taxation?

A Yes. However, the income is taxed
differently depending on several factors, including whether there was a
foreclosure, a deed-in-lieu of foreclosure given to the lender, or a short sale
(a sale where the lender agrees to reduce the amount owed in order to facilitate
a sale), and whether the underlying debt is “recourse” (the borrower is
personally liable for the debt) or “nonrecourse” (the borrower is not personally
liable for the debt).

For federal income taxation as a result of
foreclosure, see generally 26 U.S.C. §§ 1001 through 1016. For federal income
taxation of short sales, see generally 26 U.S.C. §§ 61, 108 and 1001 through
1016.

TAXATION OF FORECLOSURES
OR DEEDS-IN-LIEU OF FORECLOSURE

Q2. What is the
difference between a foreclosure and a deed-in-lieu of
foreclosure?

A A foreclosure refers either to a
trustee’s sale foreclosure (not a judicial proceeding) or to a judicial
foreclosure (a judicial proceeding). A deed-in-lieu of foreclosure means that
the lender has agreed to accept title to the property and the borrower transfers
title to the lender rather than waiting until the lender forecloses on the
property. A deed-in-lieu of foreclosure is not a special instrument. It is
simply a conveyance of the property to the lender by grant deed or quitclaim
deed; and, in exchange, the lender cancels the promissory note secured by the
real property. In this way the lender can avoid the foreclosure process to
regain title to the property.

However, a borrower cannot simply transfer title to the lender without the
lender’s permission. Because some lenders have refused to negotiate and accept
the deed-in-lieu of foreclosure, some creative homeowners have quitclaimed the
property to the lender anyway, and have recorded the instrument without the
lender’s permission.

In 1993, the California legislature passed a statute to protect lenders from
involuntary (and invalid) transfers of real property to the lender. The lender
must record a “notice of nonacceptance of a recorded deed” in the county where
the real property is located. Redelivering a grant of the real property back
to the original homeowner (e.g., borrower) does not legally retransfer the
title. (Cal. Civ. Code § 1058.5.)

A lender may not want to take a
deed-in-lieu of foreclosure because taking title in this manner does not
extinguish any junior liens. A foreclosure by a senior lienholder essentially
wipes out all junior liens.

Q 3. How does the
owner receive “income” from a foreclosure or a deed-in-lieu of
foreclosure?

A A foreclosure proceeding, whether
through a trustee’s sale or judicial foreclosure, and a deed-in-lieu of
foreclosure given to the lender are treated the same as a sale for income tax
purposes. The foreclosure or deed-in-lieu of foreclosure is reported on the
taxpayer’s tax return as a sale or exchange in the year the foreclosure is
finalized or the deed-in-lieu of foreclosure is given to the lender.

In
a foreclosure or deed-in-lieu of foreclosure, the owner can receive “capital
gain or loss” as in any other sale of real property (i.e., be subject to capital
gains taxation or receive a credit for a capital loss). Additionally, the owner
can receive “forgiveness of debt” income. This is also referred to as
“cancellation of debt” (COD) income. Whether the owner is subject to taxation
on COD income may depend on whether the debt is “recourse” or “nonrecourse.” If
the debt is a recourse debt, the owner may be deemed to have received taxable
income in the amount of debt that is forgiven by the lender (except in certain
situations discussed below where the owner will not be taxed). If the debt is
nonrecourse debt, there is no taxable income from forgiveness (or cancellation)
of debt, but the owner may be still be subject to capital gains
taxation.

Q4. What
is “nonrecourse” debt?

A Under California law, a debt is
considered “nonrecourse” when a loan is made under either one of the following
two circumstances:

(1) When the loan is made to purchase a one-to-four unit property and the
borrower intends to occupy at least one of the units, or

(2) When the
seller carries back financing for all or a portion of the purchase price of any
real property.

(Cal. Code Civ. Proc. § 580b.)

In the event of default by the borrower, the lender, or financing seller, is
restricted to recovering the property with no right to proceed against the
borrower for any deficiency should the property be worth less than the loan
amount.

Q5. What
is “recourse” debt?

A Under California law, a “recourse”
debt is one in which neither of the two exemptions in Question 4 occurs.

Examples of recourse debt are refinances of existing mortgages, home
improvement loans, equity lines of credit, and loans other than seller
financing, securing a debt for purchase of property that is not an
owner-occupied one-to-four unit property. The lender is not limited to taking
the property back and the borrower may be personally liable on the debt. If the
lender chooses to foreclose using a trustee’s sale, then the lender waives the
right to go after the borrower for the deficiency despite the fact that the loan
was a recourse debt. In order to go after a deficiency judgment, the lender
must go through a judicial foreclosure process.

Q6. How is the amount realized
(taxable income) calculated for a “recourse” debt in a
foreclosure?

A If the debt is recourse debt,
meaning the owner may be personally liable for the debt, the amount realized is
calculated in a two-step approach.

First, you take the difference between the Fair Market Value (FMV) of the
property (usually the sales proceeds at the judicial foreclosure or trustee’s
sale) and the Adjusted Basis in the property. Generally, the Adjusted Basis
consists of the purchase price of the property plus any capital improvements
(less depreciation, if the property is investment property). This difference is
the capital gain or loss. If the FMV exceeds the amount of the Adjusted Basis,
then the borrower has realized a capital gain at the time of the transfer
(foreclosure). If the Adjusted Basis exceeds the FMV, then the borrower has a
capital loss.

Second, you take the difference between the amount of the cancelled debt
(e.g., unpaid loan amount) and the sales proceeds at the foreclosure (FMV).
This is the forgiveness of debt (cancellation of debt) income and it is treated
by the IRS as ordinary income despite the fact that the borrower has received no
cash at the time of the foreclosure.

However, if the cancelled debt
amount is considered “qualified principal residence indebtedness” pursuant to
the Mortgage Forgiveness Debt Relief Act of 2007(federal law) and SB 401 (the
Conformity Act of 2010—California law), there will be no taxation on this
forgiveness of debt (COD income). See Question 9 for a definition of “qualified
principal residence indebtedness.”

RECOURSE DEBT

Example One:

1. The unpaid balance of the loan is $300,000.

2. The FMV of the
property is $250,000.

3. The taxpayer’s adjusted basis in the property is
$200,000.

Assume the lender forecloses and will forgive the underlying
debt.

Step one:

FMV ($250,000) less taxpayer’s adjusted basis ($200,000) results in capital
gains for the taxpayer.

FMV $250,000
Less Adjusted Basis $200,000
Capital Gains $ 50,000

Step two:

Amount of cancelled debt (amount owed on $300,000 loan) less FMV ($250,000)
is ordinary income to the taxpayer.

Amount Owed $300,000
Less FMV $250,000
Ordinary Income $50,000

Note: If a lender chooses to foreclose through a trustee’s sale and is
barred from obtaining a deficiency judgment by the one action rule under
California Code of Civil Procedure Section 580d, it is likely the IRS will still
consider that the underlying debt as a recourse debt and it will be subject to
debt forgiveness income. (See Rev. Rul. 90-16.) However, there may be
no taxation of this income under The Mortgage Forgiveness Debt Relief Act of
2007.

RECOURSE DEBT

Example Two:

If the FMV at the foreclosure sale is more than what the lender is owed,
there will be no forgiveness of debt and, thus, no ordinary income to the
taxpayer.

1. The unpaid balance of the recourse debt is $300,000;

2. The FMV of
the property is $400,000;

3. The taxpayer’s adjusted basis in the
property is $200,000.

Step one:

FMV ($400,000) less taxpayer’s adjusted basis ($200,000) results in capital
gains for the taxpayer.

FMV $400,000
Less Adjusted Basis $200,000
Capital Gains $200,000

Step two:

The debt is fully paid (since the FMV of $400,000 exceeds the unpaid loan
amount of $300,000) resulting in no forgiveness of debt.

Q7. How is the amount
realized (taxable income) calculated for a “nonrecourse” debt in a
foreclosure?

A If
the debt is nonrecourse, meaning the owner is not personally liable for any
deficiency (beyond the value of the property), the amount realized is the
difference between

(a) the greater of: (i) the FMV or (ii) the entire
outstanding debt; and

(b) the adjusted basis of the property.

This
amount is treated as capital gains and there is no taxation for forgiveness of
debt income.

Even though the adjusted basis might exceed the FMV and the
outstanding debt, generally no capital loss would be allowed because nearly all
nonrecourse debt is associated with a principal residence. (Capital losses are
applicable only to investment property.)

NONRECOURSE DEBT

Example:

1. The unpaid balance of the loan is $300,000;

2. The FMV of the
property is $250,000;

3. The taxpayer’s adjusted basis in the property is
$200,000.

Greater of FMV ($250,000) or entire unpaid debt ($300,000) minus taxpayer?s
adjusted basis ($200,000) results in capital gains to the taxpayer.

Greater of
FMV ($250,000)
OR
Unpaid Debt ($300,000)

Greater of the above $300,000
Less Adjusted Basis $200,000
Capital Gains $100,000

Q8. How is a
deed-in-lieu of foreclosure treated for tax purposes?

A A deed-in-lieu of foreclosure is
treated as a sale and taxed just like a foreclosure.
See Questions 6 and 7
above.

TAXATION OF SHORT
SALES

Q9. What are the tax
implications of a short sale?

A

Cancellation of Debt (COD)
Income

A short sale, where the lender agrees to reduce some or all of the
outstanding debt, may give rise to forgiveness of debt income (also called
“cancellation of debt” or COD income). The amount of the debt that the lender
agrees to write off is treated as “ordinary income” (as opposed to capital gains
income which is taxed at a lower rate). Even though the lender may be taking
this action to facilitate the sale by the owner who is under a notice of default
and facing a foreclosure, the agreement between the owner and the lender is
considered voluntary and the amount of the loan written off by the lender is
treated as forgiveness of debt (cancellation of debt–COD). The taxpayer will
generally receive a 1099 tax form from the lender in the amount of the
cancellation of debt.

This forgiveness or cancellation of debt which is treated as “ordinary
income” under certain circumstances may or may not be subject to
taxation.

Federal Mortgage Forgiveness Debt
Relief

Under the Mortgage Forgiveness Debt Relief Act of 2007
(H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code
§108(a)(1)(E) was added and provides that a taxpayer will not be taxed upon
cancellation of debt income if the following conditions are met:

. The property sold in
the short sale is the taxpayer’s principal residence, as that term is used in
IRC §121.
. The
cancellation of debt is Qualified Principal Residence
Indebtedness**
under IRC Section 163(h)(3)(B).
. The indebtedness is discharged
after January 1, 2007 and before January 1, 2013. (The end date was increased by
three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic
Stabilization Act of 2008).

**Qualified Principal Residence Indebtedness is a loan
secured by the residence used to acquire, construct or substantially improve the
residence. The income relief provided is capped at $1,000,000 in the case of a
married person filing a separate return and $2,000,000 for all others.

Any reduction of indebtedness excluded by IRC §108(a)(1)(E) will be applied
to reduce the basis of the taxpayer’s principal residence, but not below zero.
This could result in a higher amount of capital gains tax owed by the taxpayer.

California Mortgage Debt Forgiveness Relief

California law, SB 401, conforms California Revenue and Tax Code Section
17144.5 to federal law, but with the following changes:

(1) The maximum amount of qualified principal residence indebtedness is
$800,000 for married couples filing jointly, registered domestic partners filing
jointly, single persons, head of household, widow/widower; and $400,000 for
married couples or registered domestic partners filing separately; and

(2) The maximum amount of debt relief income that can be forgiven is
$500,000 for married couples filing jointly, registered domestic partners filing
jointly, single persons, head of household, widow/widower; and $250,000 for
married couples or registered domestic partners filing separately; and

(3) California’s debt relief statute applies to property sold on or after
Jan. 1, 2009 and before Jan. 1, 2013.

Qualifying taxpayers who have already filed their 2009
California tax returns should file Form 540X, Amended
Individual Income Tax Return
, to subtract the
amount of debt relief from income. To expedite processing, write “Mortgage Debt
Relief” in
red across the top of the amended tax return. Taxpayers must attach a
copy of their federal return, including Form 982, Reduction of Tax
Attributes Due to Discharge of Indebtedness (and Section 1082 Basis
Adjustment)
, with their state tax
return.

Capital Gains Income

Finally, if the owner has owned the property for some time and has
refinanced to take out some of the equity, the owner could be subject to capital
gains taxation when selling the property as well. For example, the borrower has
a remaining loan on the property when the borrower refinances in order to buy an
investment property (or to buy a car, to take a vacation, consolidate credit
card debt, etc.) and now owes $300,000 to the lender. Thus, the taxpayer’s
adjusted basis may be lower than the outstanding balance on the loan (see the
example below).

The tax calculation for any capital gains income looks just like step one
when calculating capital gains income for a foreclosure sale of recourse debt.

Example:

1. The unpaid balance of the loan is $300,000;

2. The sales price
(FMV) is $250,000;

3. The taxpayer’s adjusted basis in the property is
$50,000.

Sales price (FMV $250,000) less taxpayer’s adjusted basis ($50,000) results
in capital gains for the taxpayer.

Sales Price (FMV) $250,000
Less Adjusted Basis $50,000
Capital Gains $200,000

Additionally, the taxpayer will have ordinary income from the
lender’s write off of any debt, which in this example would be $50,000 (** See
the discussion above in this question to determine whether or not this would be
taxable)

Loan Balance $300,000
Less Sales Price $250,000
Ordinary Income $50,000

TAX EXEMPTIONS

Q 10. Are there any other
exemptions from the taxation of cancellation of debt income?

A Yes. There are four other
circumstances, in addition to what was discussed in Question 9, where the
taxpayer can get relief from taxation on cancellation of debt income:

(1) The taxpayer is insolvent (the taxpayer’s debts exceed their assets, but
the cancellation of debt is forgiven only to the extent of the insolvency);

(2) The debt is discharged as part of a bankruptcy proceeding;

(3) The debt discharged is qualified farm indebtedness; or

(4) The
debt discharged is qualified business indebtedness.

For all of the above, any reduction in indebtedness will be applied to reduce
the taxpayer’s basis in the property.

(26 U.S.C. §§ 108(a), 108(b), 108(c) and IRS publication
908.)

Note, however, it is likely that many taxpayers currently
subject to cancellation of debt income will qualify for the insolvency exemption
from taxation. Taxpayers should be advised to speak with their own tax advisors
as to whether they meet the insolvency exemption.

Q11. Are there any
exemptions from the capital gains taxation in a foreclosure, deed-in-lieu of
foreclosure or short sale if the property is a principal
residence?

A Yes. If the sale, whether through
a foreclosure or deed-in-lieu or short sale, generates capital gains and if the
property was the seller’s principal residence, the seller may be able to use the
capital gains exclusion of $250,000 if single and $500,000 if married filing a
joint return. This exclusion does not apply to ordinary income from cancellation
of debt.

MISCELLANEOUS

Q12. Which is better
for an owner facing a distress sale: a foreclosure, a deed-in-lieu of
foreclosure or a short sale?

A Any of these situations will impact the
owner’s credit negatively. Additionally, the owner may have a significantly
different tax liability depending on the disposition of the property.
Consequently, this is a question that the owner needs to discuss with their own
tax advisor.

Q13. What is a quick
summary of these taxation rules?

Recourse Foreclosure/
Deed-in-Lieu
Nonrecourse Foreclosure/
Deed-in-Lieu
Short Sale
Capital Gains FMV Less Adjusted Basis Greater of FMV or Outstanding Debt Less Adjusted Basis FMV Less Adjusted Basis
Ordinary Income Outstanding Debt Less FMV * No Ordinary Income Amount of Debt Forgiven*

*No Ordinary Income if property is considered a “Qualified Principal
Residence Indebtedness” (See the discussion in Question 9).

Q14. Does
California follow the federal COD debt relief rules set forth
above?

A Not exactly.
California law, SB 401, conforms California Revenue and Tax Code Section 17144.5
to federal law, but with the following changes:

(1) The maximum amount
of qualified principal residence indebtedness is $800,000 for married couples
filing jointly, registered domestic partners filing jointly, single persons,
head of household, widow/widower; and $400,000 for married couples or registered
domestic partners filing separately; and

(2) The maximum amount of debt relief income that can be forgiven is
$500,000 for married couples filing jointly, registered domestic partners filing
jointly, single persons, head of household, widow/widower; and $250,000 for
married couples or registered domestic partners filing separately; and

(3) California’s debt relief statute applies to property sold on or after
Jan. 1, 2009 and before Jan. 1, 2013.

Q15. Where can readers
obtain more information on the subjects covered above?

A Information is available from a
variety of sources, including:

. The Internal Revenue Service
(IRS) (http://www.irs.gov/), which has
detailed publications available for free on many tax related subjects. For more
information, see IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions,
and Abandonments
, and IRS Web page, The Mortgage Forgiveness Debt Relief Act and Debt
Cancellation
.
.
The IRS Tele-Tax system, which is an automated voice message information system
with recorded information on many commonly asked tax questions. Tele-Tax can be
reached by calling (800) 829-4477.
. A tax professional, such as a
certified public accountant, tax attorney, or enrolled agent.

This legal article is just one of the many legal publications and
services offered by C.A.R. to its members. For a complete listing of C.A.R.’s
legal products and services, please visit www.car.org.

Readers who require specific advice should
consult an attorney. C.A.R. members requiring legal assistance may contact
C.A.R.’s Member Legal Hotline at (213) 739 8282, Monday through Friday, 9:00
a.m. to 6:00 p.m. and Saturday, from 10 a.m. to 2 p.m. C.A.R. members who are
broker-owners, office managers, or Designated REALTORS® may contact the Member
Legal Hotline at (213) 739 8350 to receive expedited service. Members may also
submit online requests to speak with an attorney on the Member Legal Hotline by
going to http://www.car.org/legal/legal-hotline-access/.
Written correspondence should be addressed to:

CALIFORNIA ASSOCIATION OF
REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, CA
90020

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What is a deficiency judgement and How do you know you do not have to pay anything back

Question: What is
a deficiency judgment?

Answer:   A deficiency judgment is a
judgment obtained by the lender in court against the borrower for the difference
between the unpaid balance of the secured debt and the amount produced by sale
or the fair market value of the security, whichever is greater, in a judicial
foreclosure. (Cal. Code Civ. Proc. § 726 (b).)  A lender may obtain a deficiency
judgment only with a judicial foreclosure.  With a trustee’s sale foreclosure,
the lender cannot go after a deficiency judgment.

With a short sale, except under certain
circumstances–see Question below, the lender may demand the balance still owed on  the note that the sales transaction did not cover (e.g., short sale of the
property pays the lender $120,589.23 but the full amount owed on the note is
$250,000). This difference may be referred to as a “deficiency balance.”  It is
not really a “deficiency judgment” since no court has issued such a judgment as
part of a judicial foreclosure.

Question:  Under what circumstances is the lender
prohibited from going after the “deficiency balance” as defined in Question above after a short sale?

With the passage of SB 458, effective July 15, 2011,
after the short sale of a residential property of one-to-four units, the holder
of any senior or junior deed of trust cannot pursue the borrower (seller) for
any deficiency under the note. If the lender consents to the short sale in
writing, as long as the proceeds of sale were tendered to the lienholder as per
the buyer and seller’s agreement, then no deficiency can be collected or is even
owed, and no deficiency can be rendered or even requested. The borrower (seller)
is protected even if the loan is refinanced as long as it’s secured by a trust
deed.

An exception to SB 458 occurs if the borrower
(seller) has committed fraud with respect to the sale of the property or has
committed “waste” of the real property (e.g., severely damaged the property)
(Cal. Code Civ. Proc. § 580e (b)). Under these circumstances, the borrower
(seller) may still be liable for the deficiency balance.

Note:  SB 458 doesn’t apply if the
borrower (seller) is a corporation or political subdivision of the state (Cal.
Code Civ. Proc. § 580e (c)).

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C.A.R. sends letters to lenders, urges more action on Short Sales

C.A.R. knows that
short sales will be a part of the California real estate landscape for years to
come, and is highly aware that lenders’ requirements have made closing these
transactions a difficult process. To that end, C.A.R. recently sent letters to
the heads of the nation’s largest lenders – JPMorgan Chase, Citigroup, Bank of
America, and Wells Fargo – calling them out on their short-sale practices and
making recommendations on how the process can be improved for all parties
involved.

In the letters, C.A.R. made the following recommendations:

  • Provide realistic
    time frames and then meet those time frames.
  • Provide a
    comprehensive list of information needed upfront.
  • Provide approval requirements upfront
    that, if satisfied, would assure the borrower of a short sale approval.
  • Disclose whether a
    loan you service is owned by you or if others own it.  If others own it, provide
    time frames for approval.  Be clear on who has final authority.
  • Pre-approve the
    short sale and price upon request, prior to the property being listed.
  • Review and respond
    with an approved offer to a borrower’s short sale request within 30 days of
    receipt of the request.  If rejected, be explicit on why, and how, it can be
    corrected.
  • Do not “restart”
    files from square one if something is missing.  Allow the correction and
    continue, without bumping it to the back of the line.
  • Have a person
    available who can inform the borrower about the file’s status and shortcomings,
    and who can assist in problem-solving.
  • Increase the speed of processing files.
    Often, a single home goes through the process numerous times, resulting in
    months elapsing and buyers losing interest.  The pre-approvals and cumulative
    files discussed above will dramatically assist this effort.
  • Increase the amount junior lienholders
    receive.  This is a common reason why short sales fail.
  • When the property
    is cleared for sale, be explicit that there will be no recourse on the notes as
    required by SB 458, which now is in effect.

C.A.R. will continue
to remain vigilant in the arena of short sales and keep members updated on our
progress.

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