The Oregon Legislature has recently passed, and the Governor has signed, House Bill 2916. Here’s a quick summary:
- It applies to lenders who hold mortgage or trust deed on property consisting of one to four family dwellings, one of which the borrower occupies as their primary residence;
- It applies to “Residual Debt” which is the remaining amount due to the lender after closing of the short sale;
- It provides that if a lender files a 1099-C form with the IRS reporting that it has canceled all or a portion of the borrower’s remaining debt due under the loan, the lender (or its assignee) may not thereafter bring legal action for repayment of that deficiency.
Is this a good thing? Will it, as recently reported by the Oregon Association of Realtors©, “…protect sellers by eliminating the current uncertainty that is inherent in the short sale process, reducing the amount of time it takes to sell property and the number of foreclosures in communities throughout the state“? I certainly hope so. It is clearly a positive move forward, and anything that helps distressed home sellers (and by extension, their buyers) is a good thing.
But I have a couple of questions:
- If I close a short sale in 2011, a 1099-C normally isn’t issued by the lender, if at all, until the start of 2012. The form goes to the IRS and a copy goes to the borrower. But how do I know, at the time of the short sale closing in 2011, whether the lender will file the form? Unless the lender expressly agrees to release me from all deficiency liability at the time of closing, I really have no assurance about what will happen the following year. Am I supposed to just trust that the bank will file a 1099-C? Remember, these are the same banks that repeatedly lost borrowers’ modification documents, promissory notes, and other paperwork.
- According to the IRS instructions about the 1099-C form, certain pass-through entities are not required to file it. One such pass-through entity is a Real Estate Mortgage Investment Conduit, or “REMIC“. Many – if not most – loans were securitized into REMICs during the 2005 – 2007 credit bubble. If this is correct – although I hope I’m wrong – many distressed sellers who close short sales this year in reliance upon the belief/hope their lender will file a 1099-C may be disappointed to learn that the true owner of their loan – the REMIC – didn’t need to do so in the first place. Where does that leave short sale sellers?
Although perhaps we’ll know more after others weigh in, my initial reaction is that this new law may not be a silver bullet. In short, it appears that the most prudent course of action is to always insist upon a written release of deficiency liability at the time of closing the short sale. Then, regardless of whether a 1099-C is issued or not, the door has been forever closed to any future claims. – Q
