The local and national real estate markets have been on the ropes for five years. The third quarter of 2007 was the statistical peak for housing prices in the Portland-Metro area. From that point forward, the real estate market went into a downward spiral from which it has never fully recovered.
However, the third quarter of 2012 was the first time since the third quarter of 2007 that home prices have actually increased over the prior year. Bend, Oregon is experiencing the same resurgence.
So for those homeowners still awash in negative equity, 2013 may be the last and best year to complete a short sale with a minimum of adverse consequences. This is especially true since this year we know that if a home is short sold [or foreclosed, or deeded back in lieu of foreclosure] the seller will not have to pay income tax on the cancelled debt. We don’t know if the forgiveness law will be extended into 2014. The extension for this year was not even announced until early January 2013, causing a lot of anxiety for homeowners who were unable to complete their short sales by December 31, 2012.
Introduction. After three years of counseling folks in the throes of making a distressed housing decision, I have to honestly ask myself if loan modification today is a prudent, wise, or productive endeavor. Regrettably, in most – though not all – cases, the answer is an emphatic “No.” Of the many consumer advocates, attorneys, and counselors out there, I may be in the minority. But I suspect that of the many consumers who have gone through the modification process, I am in the majority. Continue reading “The Myth of Lender Modification”
If the politicians in Washington today were instead the CEOs of private industry, they’d all have been fired by now.” Anonymous [sort of]
Introduction. At the end of 2012 we all went over the Fiscal Cliff like Wile E. Coyote. But unlike Wile E., we were able to grab a hold of a small scraggly branch on the way down, and eventually climb back onto terra firma…for the time being. The next looming crisis – the Debt Ceiling negotiations – is the second feature in this macabre satire called “Your Government at Work,” so don’t go away just yet!
Background. In 2007 Congress passed the Mortgage Forgiveness Debt Relief Act. The gist of the law is that for those taxpayers who have had debt cancelled as the result of a principal write-down, short sale, deed-in-lieu, or foreclosure, the ordinary income tax that would normally be assessed is forgiven. There are two primary qualifications: (a) The cancelled debt only applies to loans used to buy, build, or substantially improve a primary residence, and (b) The home must have been used as a primary residence for two of the last five years. Specifics of the law can be found in an IRS Bulletin, here. The law is set to expire December 31, 2012.
Until now, Congress, suffering from chronic ADD and being unable to multi-task, could not focus on anything but the 2012 election. Now that the election is over, Congress is dealing with other items, such as the “Fiscal Cliff,” Dodd-Frank, and everything else they ignored for the past 11 months. Continue reading “Will The Mortgage Forgiveness Law Be Extended?”
Can I sell my home (i.e. my “primary residence”) for less money than I owe to my bank? The short answer is that “it depends.” If there is only one lender and the short sale price clearly represents the current fair market value of the property, the answer – in Oregon, at least – is most likely “Yes.” If there are two lenders, the issue becomes more complicated, but in many cases, the answer is still “Yes.” Short sales have been with us for several years now. However, it hasn’t been until the last year, or so, that banks have finally come around to understanding that actually, short sales represent a far better alternative than foreclosure in almost all cases. The reasons, for bank and borrower, are the same: time and money.
While all distressed transaction will negatively impact one’s credit, short sales can be completed faster than foreclosures. This means that credit repair can begin sooner with a short sale.
Lenders are finally realizing that short sales eliminate the title risk that can occur when they take properties back via non-judicial foreclosure.
In some cases, second position lenders can retain deficiency claims after being foreclosed by the first position lender. The short sale process brings this issue to a head before closing, thus giving borrowers the ability to actually negotiate the matter. Negotiation in advance is a far preferable alternative than having the home foreclose and then waiting to hear from a collector seeing repayment at some unknown time in the future. Remember: The statute of limitations for commencing legal action on a promissory note is six years. This means that the collection company has plenty of time to wait for the borrower to get back on their feet.
Typically, if a homeowner wanted to do a deed in lieu of foreclosure, the bank will require that they first try to complete a short sale. So distressed homeowners should commence a short sale sooner rather than later, even if they believe it will be unsuccessful. The deed in lieu should be Plan B; the short sale Plan A.
Most people with significant negative equity are distressed; the short sale process is the fastest way to get past this unpleasantness, since it can be completed sooner than the other two alternatives, foreclosure and deed in lieu of foreclosure.
Many big banks have significant REO inventory. This means they are incurring millions of dollars of carrying costs that will continue until they can re-sell the home. Short sales do not increase REO inventory since they get the home off their books and into the open market sooner. This savings of time and money is even more significant if the lender is foreclosing judicially, since there is a six-month right of redemption following the sale. (The “right of redemption” is the period, provided by statute, that foreclosed borrowers have to repurchase their home after the sale. This statutory right only has value when the foreclosed borrower had equity, which is rarely the case today.) Nevertheless, this right of redemption means that the property must remain in the banks’ REO inventory even longer following a foreclosure.
Banks are starting to realize that short sales yield better prices than REOs. According to a recent Bloomberg article, short sale proceeds were 15% higher than foreclosure or REO sale proceeds. (And according to the article some lenders are actually paying delinquent borrowers to pursue non-foreclosure solutions. To read the entire article, go to this link.
Nonpayment of one’s mortgage is the only way to invite a foreclosure. But if a distressed homeowner first stopped making their loan payments in 2012, the foreclosure will not likely be completed until 2013. We don’t yet know whether the government will extend the 2007 Mortgage Forgiveness Debt Relief Act (which cancels the income tax on debt forgiveness) now set to expire on December 31, 2012. Since a short sale can usually be completed in six months, there is still plenty of time this year to close it before December 31.
For homeowners wanting to relocate for employment or other reasons, they will generally find the short sale a faster solution than a deed in lieu or a foreclosure, and frequently it can be handled even after they have moved.
Although some are faster than others, generally, most short sales, once started, actually do result in a successful closing. In other words, unlike loan modification, which can be an exercise in futility, short sales do produce results.
[Caveats: 1. The following information is solely based upon Oregon law. Residents from other states should not assume their laws will result in the same outcome. 2. This post is for informational purposes only and should not be relied upon as “legal advice” for your particular situation. In all cases, you should consult with your own attorney. There are many facts and circumstances that can change results. You need to speak with an expert who is familiar with the terms of your specific loan. – PCQ] As we enter 2012, four to five years following the real estate and credit debacles – depending on your location – we’re still in the doldrums. Drifting, and not moving in any specific direction. So, are there any words of wisdom, any encouragement, any sense that this static economic situation will improve? To those looking for predictions, this post is not for you. I have insights, but suspect they are no better than the next person’s. However, having said that, for those readers interested in a discussion about some of the Portland housing statistics, go to this link. Beyond that, for the present, I will refrain from the temptation to say what I think the future holds for Oregon’s housing inventory or its Realtor® industry. I’m saving that for another time. Rather, the purpose of this post is to provide some degree of encouragement. This is not to suggest that things will necessarily turn around this year – or at least not materially so – but that things could always be worse; that life, by definition, is a series of highs and lows, and events are rarely as good, or as bad, as they may first appear. So what do we make of this housing recession, foreclosure mess, and tight credit, all coupled with lagging employment numbers? What about those – now estimated to be nearly 30% of American homeowners – who are struggling with negative equity, meaning that their total mortgage indebtedness exceeds their home’s value? Continue reading “Distressed Housing: This Too Shall Pass”
Word has it that Oregon has agreed to sign on to the 50-state attorneys general settlement with five of the country’s largest banks: Bank of America, J.P. Morgan Chase, Wells Fargo, Ally Financial, and Citi Group. As in all settlements, neither side will be completely satisfied, and this time is no different. But it is high time for something to happen since this effort has languished for months.
As we know, until recently, the vast majority of foreclosures in Oregon were conducted non-judicially, by advertisement and sale. However, due to the McCoy and Hooker decisions, the efficacy of this method of foreclosure has been placed in doubt. The proposal described below suggests that before filing judicial foreclosures, homeowners be offered an opportunity to convey the property back to the bank in lieu of foreclosure. This would avoid any McCoy/Hooker title problems, since the deed would come directly from the homeowner. If there were subordinate liens on the property, the lender could either negotiate a voluntary removal of that lien, or could decide to foreclose judicially or non-judicially without the borrower’s involvement. This solution would provide significant benefits: (a) Lenders could avoid the costly filing fees, legal fees, and prolonged foreclosure process, compounded by the six month right of redemption; (b) Borrowers would be able to transition out of their distressed housing situation sooner, and would avoid having to hire an attorney to explain their rights; (c) The Oregon court system would avoid the time and cost of ramping up for hundreds or thousands of judicial foreclosures, saving significant money and administrative time. – PCQ Continue reading “The Deed-In-Lieu-of-Foreclosure: A Solution Whose Time Has Come”