Tuesday, May 11, 2010
Common Foreclosure Misconceptions
We tend to get the same questions during our consultations and start to see trends that are actually misconceptions. Below we've listed some of the most common:
If the house is my primary residence, the lender is unable to issue me a 1099.
Untrue. The lender can choose to issue a 1099c for the forgiveness of debt on any short sale, foreclosure sale or deed in lieu of foreclosure. If the home is the borrower's primary residence AND the loan was a purchase money loan or used for improvement of the property, then any 1099 income received can be excluded on the borrower's tax return. This is the Mortgage Debt Forgiveness Act signed by President Bush at the end of 2008. A purchase money loan is a loan that was signed at the time the borrower bought the house.
Any 1099 income received from the short sale, foreclosure sale or deed in lieu of foreclosure may be excluded as income, but the borrower/taxpayer may still receive the 1099c.
Under HAMP (Home Affordable Modification Program) and HAFA (Home Affordable Foreclosure Alternatives program) the lender is required to…
The lender has no requirement to do anything. All of the governmental programs are voluntary on the part of the lenders. Under Article I, Section 10(1) of the United States Constitution, "No State shall … pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts …" (emphasis added). Basically, this means the federal government is prohibited from interfering with contracts (i.e. a promissory note and mortgage) entered into between two individuals, two entities, or an individual and an entity.
The lender received TARP (Troubled Asset Relief Program) funds and therefore must…
This is a common complaint we receive. Remember that although the plan makes sense to you (lower principal balance, reduce interest rate, re-amortize the loan), whatever the lender does for you it must also do for every other borrower. Therefore, if the lender reduces your principal balance, then they must reduce my principal balance. If the lender allows you to modify a loan on investment property that is current, they must allow all investors to modify their loans whether current or delinquent.
Should I continue to make my payments?
This is likely the most difficult question we receive. As a technical matter, yes, you should stay current on your mortgage. We are unable to advise anyone to breach a binding contract. However, we rarely see modifications, short sales or deeds in lieu of foreclosure on current mortgages; we have seen it happen but a small minority of the time. Consider as well, the lender's incentive to modify, short sale, or voluntarily take back property on a performing loan. The lenders are swamped as-is with loans that are behind. They have neither the resources nor the desire to perform mitigation options on loans that are current.
Contact one of our attorneys today to find out what your rights and alternatives may be.