Market Reduction In Home Values May Allow For Lower Property Taxes
Florida property owners who have experienced a reduction in the value of their property due to the economy, damage from natural disasters, surrounding foreclosures in the neighborhood, or their home's general need for repair or improvement, may qualify for a reduction in property taxes. In addition, if it can be shown that similarly assessed homes in the neighborhood or subdivision are being charged lower property taxes, a reduction may be warranted.
Florida property taxes are based upon the value of the property as determined by the county property appraiser, and calculated by multiplying the taxable value of the property (the appraised value less any applicable exemptions, such as the homestead exemption) by the millage rate. The millage rate is the amount of tax charged per $1,000 of taxable property value. Each year in August, the county property appraiser distributes the Proposed Truth in Millage (TRIM) notice which notifies homeowners of the appraised value of their home and resulting taxes for that year. Homeowners who feel their property taxes are unreasonably high may petition the Value Adjustment Board within 25 days of receiving the notice in most counties. The property appraiser reviews petitions and approves those who qualify. For petitions unresolved by the property appraiser, the Value Adjustment Board will hire a special magistrate to conduct hearings regarding the property's value.
Homeowners who feel their taxes are too high should start by gathering information about their neighbors' assessed property values and taxes online at the county appraiser's website. It is wise to hire an independent property appraiser to assess the value of the home because the county appraiser typically estimates tax value based on the surrounding neighborhood whereas an independent appraiser can account for more discrete but important factors (such as economic downturn, natural disaster damage, sinkhole damage, surrounding foreclosures, Chinese drywall, or other similar factors). Pursuant to Florida Statutes, the property appraiser is required to consider several factors when estimating property value: 1) the present cash value; 2) the highest and best use of the property; 3) location of the property; 4) quantity or size of the property; 5) condition of the property; 6) the income generated by the property; and 7) the net proceeds from the sale of the property.
If an appraiser determines that property is assessed too high, or it can be shown that the property is comparable to other surrounding properties but taxed at a higher rate, then the property should qualify for a reduction in its taxable value. For any further questions, please contact Yesner & Boss, P.L. today for a free consultation.
Borrowers Cashing In, Instead of Cashing Out
During the housing bubble many homeowners borrowed against the inflated value of their property. The multi-year spike in property value allowed borrowers to obtain loans secured against their homes to free up cash, a process known as cash-out refinancing. When the bubble collapsed, homeowners across the country were left with decimated property value. The fallout was especially bad for those engaging in cash-out refinancing, as most were left upside-down, owing far more than the post-crash value.
In the wake of the housing bubble collapse, it seems some borrowers have learned their lesson, as a new trend known as cash-in refinancing has emerged in direct contrast to the cash-out refinancing. Cash-in refinancing refers to borrowers putting more money down when buying real estate or refinancing a mortgage in order to boost equity in the properties and drive down interest rates on loans. Having a high enough percentage of equity in property also allows homeowners to avoid having to pay private mortgage insurance, as well as avoid "Jumbo" mortgage status which can significantly increase the interest rate on payments.
The growing popularity in cash-in refinancing may also stem from the low yield of interest on traditional investments like certificates of deposits. Borrowers may actually be saving money by putting more equity into property to lower their monthly mortgage payments and interest rates as opposed to leaving the money in a bank.
Cash-in refinancing can be an especially useful strategy in Florida, where the homestead property exemption provides virtually absolute coverage against forced sale to meet creditor's demands. In Florida, a homestead can have unlimited value for personal residences up to 1/2 acre within a municipality, and up to 160 acres outside a municipality. Property taxes, mortgages, and mechanics liens for work performed on the property are the only creditors that can cause a forced sale of a homestead property. Having higher equity in a homestead property is valid asset protection option for Floridians. Contact Yesner & Boss, P.L.a to discuss your asset protection plan today.
Federal Trade Commission Places New Restrictions on Debt Settlement Companies
The Federal Trade Commission introduced new restrictions on debt reduction and debt settlement companies to curb fraudulent activity within the industry. The announced rules seek to deal with complaints from customers alleging they were charged large fees and never saw a reduction in the amount they owed to creditors.
The new regulations require companies to settle or reduce a customer's debt before they are able to charge a fee for the service, as well as provide a timetable and estimates for the total cost of service.
Widespread consumer complaints about these types of companies caused the Federal Trade Commission to act. The story was common, depressed and vulnerable consumers in deep debt see an advertisement on television or the internet for debt forgiveness and settlement companies. They then give their last dollars in an earnest attempt to satisfy their debt, but are left with nothing to show for their effort.
"This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, upfront fees," said Jon Leibowitz, chairman of the F.T.C.
After the housing market collapse many of the now infamous same sub-prime mortgage lenders switched business plans and are the same people now offering distressed borrowers debt settlement programs. Since the housing bubble burst in 2007 the number of settlement companies and complaints of their abuse have grown exponentially.
Advocates for debt reduction services complain that the new F.T.C. regulations place an unfair burden on the companies by forcing them to collect fees only after the customers debt has been reduced or settled. Most credit card companies require the deposit of the full debt into an independent account before it will begin settlement negotiations, and without upfront fees many of these companies would be forced out of business.
The new F.T.C. regulations are lauded as a victory for consumers, but some consumer advocates are criticizing a loophole that would allow settlement companies to avoid compliance if their interaction with debtors is conducted entirely over the internet. The regulations are an amendment to an existing rule that governs telemarketers and thus only protects consumers who use their phone to communicate with the debt settlement companies.
The F.T.C. acknowledged the loophole but argued nearly 100% of the complaints against debt settlement companies involved telephone traffic.
Common Debt Collection Practices Under Florida Law
In a climate where more consumers are struggling to meet their credit obligations, creditors and debt collectors are becoming highly aggressive in their attempts to collect consumer debts. Federal Trade Commission (FTC) complaints are up by fifty percent (50%) in 2009 and are on track to jump an additional thirteen percent (13%) by the end of 2010. Despite increased complaints to the FTC, creditors and debt collectors continue to march over federal and state consumer protection statutes on their way to collecting debts. This article addresses the impact of the Florida Consumer Collection Practices Act (FCCPA), on common consumer collection issues.
Prior to resolving a debt, collection calls are the most common collection issue encountered by consumers. When dealing with credit card accounts or mortgage debts, collection calls begin immediately upon delinquency. The FCCPA provides consumers broad protections and consumer rights. For example, drastically limits the frequency and manner of collection calls. With very few exceptions, creditors are forced to cease communication with the consumer and must communicate strictly with the attorney.
After a debt is resolved and is no longer collectable, consumers may continue to experience collection activities and improper credit reporting. Specifically for struggling homeowners, many turn to a short sale transaction as way to resolve a mortgage debt and avoid a foreclosure. The collection of a short sale deficiency where a lender forgave the mortgage debt is the collection of an illegitimate debt and a violation of the FCCPA. Another common consumer protection issue following completion of a short sale is improper credit reporting. It is a violation of the FCCPA for a creditor to knowingly publish false information about a consumer's creditworthiness. It is not uncommon for completed short sale transactions to be improperly and falsely reported to the various credit reporting bureaus.
Every consumer collection activity that occurs in the state of Florida is subject to the FCCPA. The examples cited above are only a few examples of collection activities that potentially violate Florida law. In addition, there are a number of other collection activities that are improper in the state of Florida. It is also important to note that federal laws may apply in these situations including but not limited to, the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. Enforcement of the FCCPA is left to individuals and private attorneys. When faced with a collection activity, a consumer can maximize their consumer rights and limit collection activity by acting immediately.
New Bill Demands HOA Fees Paid by Tenants
As of July 1, 2010, the Florida's Senate Bill number 1196 will take effect. One of the changes that will accompany this new bill is the right of Homeowner Associations to demand payment, without taking legal action, from tenants occupying a unit owned by a non-paying, non-resident owner. If a parcel is occupied by a leasing tenant and the owner is delinquent on any financial obligation to the association, the association may demand the tenant to cover these delinquent amounts. This obligation continues until the association releases the tenant or the tenant vacates the unit.
If the tenant has prepaid several months of rent at the time the tenant receives notice of the obligation to pay the outstanding amount, the tenant has fourteen days from the date of receipt of the demand to provide the association with written evidence of prepayment. If the tenant provides this written evidence, he or she will receive a credit in the amount of prepaid rent. Likewise, the tenant will receive a credit against rent payments due to the owner of the parcel in the amount surrendered to the association for delinquent monetary obligations.
A tenant will not be responsible for increases in the amount of monetary obligations due the association unless the tenant receives written notification of the increase at least ten days before the rent becomes due.
Tenants who respond in good faith to their association's demands will enjoy immunity from any landlord-tenant claim brought by the owner. However, if a tenant fails to meet the monetary obligations demanded by the association, the association is within their rights to stand in the shoes of the landlord/owner and file suit for eviction.
Government Takes a Stronger Hold On HAMP
Since the Making Home Affordable plan has been implemented, about 300,000 homeowners have enjoyed an average reduction of $500 a month. Unfortunately, however, this has done very little to improve the housing market.
Borrowers have complained that there are no consequences for the lenders who fail to follow the foreclosure prevention program's guidelines. Until recently, there was no recourse for a homeowner who was wrongfully denied access to the plan, whose mortgage information was incorrectly calculated, or whose documents were lost.
On Wednesday, June 16, 2010, the Senate approved an amendment creating the Office of Homeowner Advocate under the Treasury Department. This new office will be responsible for investigating homeowner's complaints of improper exclusions and conduct by lenders and correcting mistakes that have denied them eligibility. The cost of the program is expected to be around $1 million a year which will be funded by the Troubled Assets Relief Program. The program will be modeled after the Office of Taxpayer Advocate at the Internal Revenue Service that has been reported as a success.
The Office of the Homeowner Advocate hopes to allow more homeowners access to the HAMP program and enable HAMP to reach its goal of benefitting three to four million homeowners as originally expected.
Key Victory for Creditors in Florida Supreme Court
Today the Florida Supreme Court ruled in favor of the Federal Trade Commission (FTC) in the pivotal case Olmstead v Federal Trade Commission. The decision greatly favors creditors in their attempts to collect personal debts from debtors with assets held in single member Limited Liability Corporations (LLCs). LLCs are business entities created to provide tax benefits similar to that of a partnership, and liability protection similar to that of a corporation. The ruling of Olmstead threatens these benefits and protections for LLCs that have only one member (owner).
The issue before the Court stems from an advanced-fee credit card scam being operated by the appellants (Olmstead). This prompted suit by the FTC for unfair or deceptive trade practices. The assets of the appellants were frozen and placed in receivership. Several single-member LLCs were among the assets which were placed in receivership. Ultimately, the FTC was awarded over $10 million in restitution. The FTC was then granted an order compelling the appellants to forfeit all of their right, title, and interest in their respective LLCs to partially satisfy this judgment. Olmstead appealed this decision, claiming that this violated their statutory rights under the Limited Liability Corporation Act.
The Florida Supreme Court rejected this contention, stating that "Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in the debtor's single-member LLC to satisfy an outstanding judgment." The ruling was not passed unanimously. Supreme Court Justice Lewis dissented, arguing that this could potentially have adverse effects on multimember LLCs and "render the assets of all LLCs vulnerable".
In light of the foreclosure epidemic and that Florida is a recourse state (banks can pursue mortgage deficiency often referred to as deficiency judgments), the Olmstead case would make mortgage borrowers' LLCs susceptible to bank deficiency judgments stemming from short sales, foreclosures and deed-in-lieu of foreclosure. If you have any questions regarding assets that may be vulnerable to judgment creditors, please contact Yesner & Boss, P.L. for a free consultation or visit www.yesnerboss.com.
Seven Year Penalty for Strategic Default
Strategic default is often defined as the conscious decision of a borrower to stop payments on an otherwise affordable mortgage because the property is worth less than the mortgage balance.
The recent trend of strategic foreclosures has sparked concern and action on the part of Fannie Mae. In an effort to curb such default, Fannie Mae stated on Wednesday that it would "lock out" homeowners from receiving a new loan for a seven year period if it is determined that the borrower is guilty of strategic default.
The lock out period replaced the previous five year period adopted in 2008. Unless a borrower can demonstrate extenuating circumstances through documentation or show a good faith attempt with the lender to avoid foreclosure, the borrower will not be eligible for a new Fannie Mae for at least seven years. Other lenders, such as Freddie Mac, also punish defaulters with lesser lock out periods.
In addition to the new "lock out" plan, Fannie plans to more aggressively pursue deficiency judgments by executing on borrowers' assets, as well as monitoring and studying delinquent loans to identify cases that should receive extra attention. It is important to note that Florida is a recourse state that allows lenders to pursue deficiency judgment post-foreclosure.
Fannie's new measures were adopted to prevent the increasing number of losses that may result if borrowers continue to strategically default on loans they can afford because the value of their home has greatly depreciated. As of February, Morgan Stanley estimated 12% of defaults to be strategic. With almost 25 percent of homeowners with mortgages currently "underwater", continued strategic default would most certainly exacerbate Fannie and other lender’s mortgage loss.
Fannie Mae is acting on concerns held by most lenders that it is becoming common and acceptable among society for financially able borrowers to stop paying their loans. Executives of Fannie believe this growing practice of strategic default is "bad for borrowers and bad for communities." Such default strategy may be viewed as being in the best interest of the particular borrower, but if the use of strategic default continues and grows it could worsen the already depressing conditions of the housing market.
Although Fannie has sharpened its penalties, it is also preparing to counter the increased penalty period by reducing the lock out periods for borrowers experiencing legitimate hardships who cannot avoid foreclosure. The previous waiting period of five years was applied to all borrowers who went into foreclosure across the board, regardless of the borrower's circumstances. Under the new plan, borrowers experiencing legitimate hardships will receive a two year lock out period if they exercise the option of transferring their homes to the lender through a "deed in lieu of foreclosure" or completing a short sale. In the absence of a deed in lieu or short sale, if the borrower can provide documentation of extenuating circumstances and/or show that an effort was made to negotiate with the lender, the lock out period may be shortened to as little as three years.
Some believe that the increased lock out period will do little to curb the number of strategic defaults based on the little deterrence that resulted from Fannie's previous lock out period increase in 2008, however, Fannie Mae's new policy of pursuing deficiency judgment should be taken very seriously by borrowers who live in recourse states such as Florida.
For information on strategic default, deficiency judgments and other mortgage and debt issues, please visit www.yesnerboss.com
Bullies in the Housing Market
The dire housing market has left buyers with an upper hand and sellers with few choices. The government's $8,000 tax credit for home buyers program recently expired leaving the seller's market weaker than ever. Under the terms of the program, buyers were required to get a signed sales contract by April 30 and complete the sale by June 30.
There was a nationwide housing market fall about a month ago immediately following the expiration of the housing tax credit. In some areas of the country, sales dropped over 20 percent from the prior year.
The conditions for those attempting to sell their homes are worse than ever and buyers are taking advantage of these opportunities to make unreasonable demands of panicked and desperate sellers. Last-minute demands for concessions, improvements, and substantial price reductions are becoming common of buyers who believe the seller will meet any demand to avoid ending up underwater and being forced to sell the home through the bank.
Buyers sometimes reserve these tactics for when the inspection is conducted on the seller's home. The buyer will make unreasonable demands for repairs or improvements on the home leaving the seller feeling trapped in the deal. If the seller refuses the demands the only alternative option is putting the home back on the market somewhat damaged.
These conditions have also adversely affected builders. According to the Commerce Department, new home construction fell 17.2 percent from April and permits being issued for new construction fell 10 percent. Home mortgage rates are the lowest they have been in decades but this has done little to boost the market. There has been more than a 30 percent decrease in the number of home loan applications compared to last year.
Buyers think they are playing it smart by taking advantage of struggling sellers but these demands will eventually meet a wall. In some situations, it's not a matter of negotiation and the seller cannot afford to concede anything further because knocking off another $5,000 will force the seller underwater. Buyers feel they have the upper hand and should get the best deal possible and sellers are frustrated to see their home traded for so little. The conflicting expectations of both parties often times lead to disappointment on both ends, even when a sale is successful.
Fortunately, the Senate recently approved a three month extension to allow homebuyers to complete qualification for the tax program that helped increased home sales last spring. Homebuyers now have until September 30, 2010 to complete their purchases and qualify for the tax credit. This will allow the large number of homebuyers, roughly 180,000, who were in the process of purchasing homes but just missed the deadline to complete these purchases.
This silver lining, however, is only temporary and the brief period following the original close of the tax credit program and the extension period was very telling of what the state of the housing market will become once the tax credit program expires for good in September.
Freddie/Fannie – Modification Now Possible for Higher Income Households
The Home Affordable Modification Program (HAMP) was created to provide struggling homeowners the opportunity to avoid foreclosure and formulate more affordable payments by modifying or refinancing their mortgage. Program guidelines provide a maximum reduction in monthly mortgage payments to 31 percent of the borrower's monthly income. However, Fannie Mae and Freddie Mac have started modifying loans for borrowers whose payments do not exceed 31 percent of their monthly income. Some of these borrower's mortgage debt constituted as little as 20 percent of their monthly income.
These more fortunate borrowers have received these benefits, despite the HAMP guidelines, courtesy of "backup plans." Backup modifications are designed for borrowers who make the requisite three trial payments but did not receive permanent modifications because their debt-to-income ratio is less than 31%. Critics of these backup strategies claim that allowing borrowers with the ability to pay their mortgages to benefit from HAMP could provide an incentive for other non-struggling consumers to seek aid. Because so many borrowers are struggling to some degree and would like a reduction in their mortgage payments, potentially every borrower could be asking for a reduction.
In response to these criticisms, government-sponsored enterprises and advisors of the Federal Housing Finance Agency (FHFA) have stressed that a borrower's mortgage debt is just one factor in determining financial distress. Many times the borrower's debt as a whole, not the mortgage debt by itself, is the source of the problem. Although some borrowers may be paying a smaller percentage of their income towards their mortgage, it is hardly fair to categorize a borrower as able to pay when their total monthly debt obligations are reserving more than 70% of their income.
In addition, it has been determined that these lending organizations would lose more of the taxpayer's money by foreclosing than by working with the borrowers. FHFA advisors have stated that a modification may result in a 10% loss while foreclosures result in a 50% loss at minimum.
The Treasury Department did not initially require borrowers to verify their income before the 3 month trials so many borrowers who entered the program don't qualify and are now slowly being eliminated. An estimated 277, 640 trial modifications have been eliminated. Less than 1 million of the applicants qualify for the backup plans and the plans are only available to those who participated in trial modifications prior to March 1st, and as of April the number of borrowers participating in trial modifications was 637, 353.
The Cost of Education
Bankruptcy judges have broad powers when it comes to erasing consumer debt. A bankruptcy judge may help a borrower who has leased a car that is no longer affordable, or incurred substantial credit card debt. However, when it comes to former students attempting to obtain relief from loans incurred to finance education, bankruptcy judges are almost always unable to assist in erasing the debt.
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. This Act added private student loans to the small list of debts that cannot be forgiven (government funded student loans had been long been included on the list). Students are able to borrow much more money with private loans than with government funded loans. This makes students more likely to use the private sector, as well as enabling them to fall much deeper in debt.
Consumer advocate groups are currently rallying to have Congress alter their stiff policy on student loan debt forgiveness. The proposed changes would make it easier to obtain relief from private student loans. However, there are pros and cons to such bankruptcy code changes.
One thought is that this would encourage more people to declare bankruptcy which may anger tax payers already tired of watching their neighbors walk away from home loans during the current mortgage crisis. Additionally, banks would have less incentive to grant young people, typically with little or no collateral, the large sums of money needed to obtain certain college degrees. This will raise borrowing costs, since the banks would pass this risk to borrowers as a whole.
On the other hand, such changes could allow those borrowers that truly cannot repay such loans necessary relief.
It is uncertain whether any changes will be enacted. The current policy favoring creditors over borrowers is likely to continue for some time. If you are struggling with student loans, obtaining representation can help you get the best results out of a law unfavorable to your situation. Yesner & Boss, P.L. has attorneys that will help you navigate your way out of debt. We will fight to restore your credit and get you out of debt.
Homeowners Turn to Mediation for Relief
Nationwide foreclosures being initiated have slightly dropped in the past year. However, delinquent home loans have actually increased by 40 percent. An estimated 10 percent of all home loans are delinquent by 60 days or more, and in Florida the rate is more than 20 percent. HOPE NOW, a group of 38 private lenders started in 2007, recently reported that 2.9 million permanent home loan modifications have been offered since their program began. In addition, the Home Affordable Modification Program (HAMP), which allotted $75 billion towards the prevention of foreclosures, was implemented by President Obama last March. HAMP recently released a report stating that 300,000 modifications have been granted and an estimated 3.275 million delinquent loans are eligible for the program. Even with the measures taken by these programs, the increasing number of delinquent borrowers requires additional steps to encourage lender/borrower negotiations and prevent foreclosures.
Considering the enormous time and expense lenders face litigating a foreclosure action, one would think it would be in the lender's best interest to modify every loan possible and provide a way for the borrower to pay back a substantial, if not full, portion of the loan. Lenders have communicated their desire to help struggling homeowners facing true financial hardship but are also bound to honor the terms of their contracts with investors who have purchased the loans. This apparent struggle of interests between the lenders, their investors, and the borrowers may be the reason delinquent homeowners find loan modifications to be so rare and elusive.
Specialists in the area of loan modification and debt negotiation have indicated that the primary obstacle experienced by homeowners in their attempts to obtain a loan modification is the inability to get a loan servicer or lender to sit down and negotiate with the homeowner. This lack of communication between the lender and borrower has prevented early resolution of foreclosure cases. The Florida Supreme Court determined that effective case management and mediation techniques are the best way for courts to ensure that the necessary communications occur early enough to avoid wasted resources of the courts and parties.
In December of 2009, the Florida Supreme Court issued an administrative order requiring the lower circuit courts to adopt rules for mandatory mediation on all residential foreclosures. The mediation program mandates referral of new foreclosure cases to mediation within 5 days of service of process. The court may not enter any default or summary judgment until the mediation is completed. The lenders are required to file with the Complaint and bring to the mediation "any polling or servicing agreement with investors maintaining an interest in the property that may affect the plaintiff's ability to mediate and completely settle the foreclosure action." If a lender or its representative with full authority to settle does not appear, the court may dismiss the case. The cost of the mediation is born by the lender to avoid discouraging borrowers from agreeing to quickly mediate the issues because of the cost. However, the court may tax costs to the borrower as part of the judgment if the lender prevails. Some of the options discussed in the mediations are: modification of the mortgage terms, partial loan forgiveness, short sale, deed in lieu of foreclosure, placement of delinquent payments at the end of the loan term, principal set aside, waiver of deficiency, repayment plan, loan reinstatement or right of bank to rent property to the former borrower at market rental rate.
The mandated mediation program will provide struggling homeowners with an opportunity to possibly resolve the issues surrounding their loans that they otherwise might not have received. Unfortunately a downfall that accompanies this new measure is the extra burden placed on the mediation programs which have not received additional funds from the state to subsidize the increased workload and need for additional mediators. At the end of 2009, the Florida Supreme Court estimated there would be 465,000 foreclosure cases pending in 2010.
Contact one of our attorneys today to find out what your rights and alternatives may be.
June 1st Marks The Beginning Of What Could Be A Very Active Hurricane Season
Recent reports indicate that the approaching hurricane season will be more severe than that of years past. Studies performed by Colorado State University's Dr. Bill Gray and Dr. Phil Klozbatch indicate that there will be an above-average probability of major hurricane landfall, with 11 to 16 named storms, 6 to 9 hurricanes, and as many as five that could become major hurricanes. Dr. Gray and Dr. Klozbatch made their predictions based on comparing the hurricane cycles of the past 40 years to the trends of today.
Hurricanes and tropical storms can cause massive damage to your home and other property. Floridians are especially susceptible to the devastating effects of these powerful storms. It is crucial to insure the welfare of yourself and your family by properly insuring your home and other belongings. Unfortunately, insurance companies can be extremely difficult to deal with when attempting to get a fair settlement for the damages you incur.
Hiring an experienced hurricane insurance claim lawyer can help you ensure the best possible results from your claim. Regardless of whether you're in Tampa, Sarasota, St. Petersburg, Brandon or anywhere else in the State of Florida Yesner & Boss, P.L. is a law firm experienced in handling hurricane and storm insurance cases. Our attorneys are prepared to challenge insurance companies offering undervalued settlements, incomplete repairs, or denying your claim completely. Contact our office today to set up a free consultation. We can answer any questions you have, and can serve as your trusted partner in ensuring the insurance companies handle your claim fairly and properly.
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.
Non-Judicial Foreclosure Bill Appears Dead
The beginning of May marked what appears to be a substantial victory for Florida homeowners. The proposed bill in the Florida legislature that would allow banks to circumvent the courts with a nonjudicial foreclosure process suffered multiple set-backs in both the Florida House and Senate committee hearings.
The bills would allow banks to foreclose without judicial hearings within as little as 120 days. In order to contest the non-judicial process, homeowners must contest the foreclosure by filing documents with the court. The issue is that the cost of litigation shifts from the bank to the homeowner – the filing of such documents could cost the homeowner as much as $1,900. Given the fact that the homeowners are already facing financial hardship, such financial burden would be impractical and unfair.
Florida Real Estate attorneys have banded together to fight against the non-judicial foreclosure process under the presumption that the bill is unconstitutional. Many Florida attorneys would agree that the bill denies homeowners Constitutional due process – simply stated that the homeowner was not allowed their "day in court."
In legal circles, Florida is known as a state that zealously protects its citizen’s property rights – the non-judicial foreclosure process goes against the grain of nearly 175 years of Florida law. The fact that the proposed bill appears dead is a tremendous victory for Floridians and great thanks should be given to the Florida Real Property, Probate and Trust Law Section attorneys that lobbied for Florida’s homeowner rights.
Loan Modification Truths and Misconceptions
This past February marked the one year anniversary of the Obama Administration’s Home Affordable Modification Program (H.A.M.P.). As a plan to stabilize the housing market and help homeowners, it has evolved and changed to meet the challenges most Americans face in today’s tough economy. Recent changes have made the process of modifying a mortgage difficult to navigate. In addition, depending on the lender few people have had permanent success. Even though each homeowner’s situation is unique and should be reviewed individually, here are some of the things to keep in mind when looking towards modifying a mortgage.
Principle Reduction – One of the major recent changes to H.A.M.P. is the encouragement by the U.S. Treasury Department for principle write-downs for borrowers who owe more than 115% of the current value of their home. As part of a H.A.M.P. modification, lenders would run a Net Present Value assessment to assist in the qualifying of struggling homeowners. Many of these homeowners would not normally qualify towards a modification without a principle write-down. The write-down approach will include incentives for servicers and lenders to lower mortgage principle over time. As of today very few loans have had their principle reduced. We are monitoring how lenders respond to this enhancement in the coming months.
Improvements of Timeframes – To reach more borrowers who may be candidates for H.A.M.P., the U.S. Treasury has also asked lenders and servicers to make a ‘reasonable effort’ in contacting homeowners who have missed two or more payments. This includes minimum solicitation requirements notifying homeowners by mail and by phone. In addition, the lender or servicer must provide proof that a homeowner is not a candidate of the new Making Home Affordable enhancements prior to any major action. The lender or servicer is also limited in the scope of their foreclosure action and sale.
Who’s Your Lender – This is a great misconception for the majority of homeowners. When a homeowner is speaking with their bank it is more likely that they are simply talking to a servicer and not the entity that holds the homeowner’s mortgage. Many people believe that if they are making their payments to Bank of America/Wells Fargo/Citibank/Chase that Bank of America/Wells Fargo/Citibank/Chase owns their loan and they are the decision maker. More than likely they are not – they are simply a servicer. They are the equivalent of a property manager. They collect the homeowner’s payments, send them the appropriate notices when something changes, and answer their calls. The real owner of the loan pays the servicer to deal with the homeowner and service the loan. The homeowner’s loan was possibly sold to Fannie Mae, Freddie Mac or may just be part of some mortgage backed security.
Modifying a mortgage loan will damage a homeowner’s credit score – Unfortunately this may be the case. When the original terms of a note are modified for a lesser amount it is reflective on the borrower’s credit report and may have an impact on their credit score. If the homeowner is saving a considerable amount of money per month by modifying their mortgage payment their respective score may not be as important.
We are monitoring how each lender incorporates these new recommendations and how they will affect homeowners both in the short and long term. If you know someone who is having trouble making their mortgage payments or has questions about loan modifications they should contact a licensed Florida attorney for further assistance.
- Sam Wax, Yesner & Boss, P.L.
Changes to Florida Rules of Civil Procedure in Foreclosure Cases
On February 11, 2010, the Florida Supreme Court issued an opinion amending Florida Rules of Civil Procedure and adopted two new forms for use in connection with foreclosure cases filed in Florida. These changes come based upon recommendations of the Task Force on Residential Mortgage Foreclosure Cases, which was created by administrative order of the Florida Supreme Court dated March 27, 2009.
Most significant, Rule 1.110(b) was amended to require verification of mortgage foreclosure complaints involving residential real property. Verification requires that a representative of the lender sign the lawsuit under penalty of perjury attesting that all facts within the lawsuit are true to the best of their knowledge and belief. This is significant in that the lender will be attesting by its signature that it owns and holds the note and mortgage – effectively eliminating any defense that the note was “misplaced” or “lost.”
In fact, the Supreme Court specifically stated that the primary purposes of this new requirement are “(1) to provide incentive for the plaintiff to appropriately investigate and verify its ownership of the note or right to enforce the note and ensure that the allegations in the complaint are accurate; (2) to conserve judicial resources that are currently being wasted on inappropriately pleaded ‘lost note’ counts and inconsistent allegations; (3) to prevent the wasting of judicial resources and harm to defendants resulting from suits brought by plaintiffs not entitled to enforce the note; and (4) to give trial courts greater authority to sanction plaintiffs who make false allegations.”
It is likely that those within the industry, both attorney and non-attorney alike, may now lose some of their leverage in a foreclosure defense action when the plaintiff claims to have “lost the promissory note” making it even more important to seek competent legal counsel at the time the foreclosure is first filed.
The Supreme Court made other forms changes, briefly:
- New Form 1.924 – Affidavit of Diligent Search and Inquiry (for use when the plaintiff is unable to find or serve the lawsuit on the defendant(s)); and
- New Form 1.996(b) – Motion to Cancel and Reschedule Foreclosure Sale (to make uniform and reduce the often vague, last-minute motions filed by the plaintiff’s attorney to cancel foreclosure sale when a loan modification, short sale, or other work-out is pending).
These new forms can be found online, or by consulting with a Florida attorney.
-Shawn M. Yesner, Esq.
Yesner & Boss, P.L.
Short Sales From a Tax Perspective - Myth vs Truth
Short sales, principal reduction loan modifications, deeds in lieu and foreclosures all present unique tax consequences, and they vary from one person to another. Much of what we are hearing from clients, which they are hearing from others, is either not true or not true for them.
Here are my Top 10 Myths --and the corresponding truths-- in this area. With a few exceptions, the myths stem from a grain of truth. But just like the game of telephone, the fact that it began as truth doesn’t mean what you’re hearing is reliable.
Myth #1 - “I won’t owe any income tax because this is homestead property.”
This myth began with the passage of the Mortgage Debt Forgiveness Relief Act (“MDFRA”) in December 2007, which does provide some relief to those taxpayers who face debt forgiveness (which would otherwise be taxable) relating to their real estate.
There are significant limits on the relief, however. Here are the requirements:
- The debt applies to a principal residence as defined in Internal Revenue Code Section 121. (Principal residence is NOT necessarily homestead property in Florida.)
- The debt was used to acquire, construct or substantially improve the principal residence (as defined in Internal Revenue Code Section 163(h)).
- The amount of the forgiven debt is not included in the taxpayer’s income, but it reduces the taxpayer’s basis in the property.(This will increase the gain on the sale if the property is sold, and that gain is taxable).
- The amount of the forgiven debt also reduces, dollar for dollar, the amount of gain that can be excluded under other provisions (IRC Section 121).
- Only the first $2 million of forgiven debt is excluded from income.
A principal residence for IRS purposes is not the same as homestead property under Florida law. A principal residence is property which has been owned and used, during the 5-year period ending on the date of the sale or the debt forgiveness, as the seller’s primary residence for a total of at least 2 years. Often, a seller did not use the property as a principal residence for 2 years or more during the prior 5 years, even if he declared it as homestead property. If it’s not a principal residence under this definition, there is no tax relief under the MDFRA.
The other requirement that is often not met is the use of the debt to acquire, construct or substantially improve the principal residence. Many property owners refinanced to access cash for reasons unrelated to the property: they started a business, paid off a car loan or credit cards, or took a vacation. Any part of the funds used for those purposes remains taxable. However, if the proceeds were used to add a pool, renovate a kitchen or replace the roof, that portion of the debt forgiven will be excluded from taxable income.
Myth #2 - “I’ll have a loss on the property, so I don’t need to worry about tax.”
Capital losses resulting from the sale of the property will not offset the income resulting from the forgiveness of debt. Also, sellers often believe they have a “loss” on their property when in fact they don’t – selling it for less than you owe isn’t the test. If your basis is less than the debt forgiven, you can actually have a gain. This often happens in the short sale situation, due to the reduction of basis (see 1c above).
Myth #3 - “I can use the $500,000 capital gain exclusion to wipe out any taxable income from the short sale.”
The $500,000 exclusion (for married filing joint, $250,000 for single taxpayers) is a capital gain exclusion only. Income from debt forgiveness is ordinary income, not capital gain. This exclusion is only helpful if a capital gain results from the reduction in the basis of the property. But beware, (as mentioned in 1d above) the amount of the forgiven debt which is excluded from taxable income also reduces the amount of gain that can be excluded under this provision, dollar for dollar.
Myth #4 - “I’m in a low tax bracket, so the tax won’t be that much.”
Before the transaction in question, the seller probably was in a low tax bracket. If the debt forgiven is large (and it’s not unusual these days to see amounts of $50,000-$150,000 and higher), this increases the seller’s taxable income by that amount. It’s like getting a big fat paycheck that you never see, and it puts many sellers into higher tax brackets than their historical rates.
Myth #5 - “I have no assets, so I’m insolvent and don’t need to worry about the tax consequences of a short sale.”
This is true as far as it goes: Section 108 of the IRC indeed provides for excluding forgiven debt from income to the extent the seller is insolvent. However, just because a seller is upside down on their property doesn’t mean they’re insolvent for this purpose. The extent of insolvency for IRS purposes is the difference between the outstanding liabilities and fair market value of the assets (this is all assets, including protected assets such as retirement accounts) owned by the Seller on the date of the short sale. It is virtually impossible to reach a conclusion on insolvency for this purpose without a detailed analysis of all of the seller’s assets and liabilities, including those unrelated to the property, as well as the basis reduction that would occur in the short sale.
The good news on this one is that, unlike the MDFRA, the insolvency exclusion applies to investors. This is an important aspect to explore for them particularly.
Myth #6 - “I heard that the IRS isn’t going after people due to the economic climate.”
Ok, this one doesn’t stem from a grain of truth; it’s just wishful thinking. The IRS is actually increasing its enforcement and collection efforts in the current economic climate. It’s primary purpose is to collect revenue; and the government needs revenue as much as anyone else these days.
Myth #7 - “I’ll just tell the lender that I don’t want a 1099.”
Good luck with that. The 1099-C requirement is not negotiable: it’s the law. If the debt is forgiven, the tax liability has been generated. The lender must report it, and so must the property owner (even if they don’t receive a 1099-C by January 31 of the year following the short sale). Sellers can be subject to a 25% reporting penalty if they don’t report the debt forgiveness; this is not one to be taken lightly.
Myth #8- “I heard on the news that there is no tax on short sales anymore.”
See Myth #1. And stop watching the news.
Myth #9 - “I’ll just let the property go into foreclosure, rather than do a short sale, to avoid the taxes.”
This wouldn’t necessarily help you. The tax is the same regardless of how the debt forgiveness comes about: a short sale, principal reduction loan modification, deed in lieu of foreclosure or foreclosure all have the same effect. The only potential difference is the amount of the debt forgiven. For example, default interest, attorney’s fees and costs continue to add up during a foreclosure, which might be avoided or reduced in a short sale, typically making the unpaid balance of the loan (and resulting debt forgiveness) in a foreclosure higher than if a short sale were completed.
Myth #10 - “If I end up owing tax, I’ll just file bankruptcy.”
Chances are, you’ll still owe the tax. Income tax is not typically discharged in bankruptcy. While there are a few exceptions, most will not apply in these cases.
The tax implications of foreclosures and short sales are more complex than mass media would lead us to believe, and there is considerable misunderstanding among property owners as to what the rules are and how they would apply. Hopefully we can help to dispel the myths by steering our clients toward tax professionals who can help and help them plan appropriately.
-JoAnn M. Koontz, Esq., CPA
Yesner & Boss, P.L.
Credits When Dealing With the New GFE and Settlement Statement
With the passage of new amendments to both RESPA (Real Estate Settlement Procedures Act) and HUD rules and regulations, short sale lenders and negotiators may get confused as to why we reflect credits on page 1 of the settlement statement.
Pursuant to §3500.7(d) “The loan originator must prepare the GFE in accordance with the requirements of this section and the Instructions in Appendix C to this part.” (emphasis added). Click here to see page R-4.
Appendix C requires that the loan originator include a charge on the GFE for “Owner’s Title Insurance” in Block 5 of the GFE, and “Government Recording Charges” in Block 7 of the GFE. Click here to see page R-18 and R-21.
In some parts of Florida, including the Tampa Bay Area (Pasco, Hillsborough, Pinellas and Polk Counties) both Owner’s Title Insurance and Government Recording Charges related to the deed are paid by the Seller of property. However, the GFE requires these costs be shown as Buyer costs.
To remedy this, see Appendix A to Part 3500 which states as follows:
As a general rule, charges that are paid for by the seller must be shown in the seller’s column on page 2 of the HUD-1 (unless paid outside closing), and charges that are paid for by the borrower must be shown in the borrower’s column (unless paid outside closing). However, in order to promote comparability between the charges on the GFE and the charges on the HUD-1, if a seller pays for a charge that was included on the GFE, the charge should be listed in the borrower’s column of page 2 of the HUD-1. That charge should also be offset by listing a credit in that amount to the borrower on lines 204-209 on page 1 of the HUD-1, and by a charge to the seller in lines 504-509 on page 1 of the HUD-1. (emphasis added). Click here to see page R-7.
Therefore, in those areas of Florida, including Tampa Bay, where the seller pays certain closing costs pursuant to the contract, which are listed as buyer costs on the GFE, those costs must be shown as a credit to buyer and seller on page 1 of the settlement statement. To do otherwise would violate Federal Law related to real estate closing procedures.
How Does Bankruptcy Affect My Credit?
Bankruptcy and its affect on credit is unquestionably the biggest concern of most bankruptcy clients. The ironic aspect is that often bankruptcy, especially Chapter 7 bankruptcy, is the quickest road to credit recovery.
Everyone knows that credit score dictates a person’s ability to borrow. What many people do not realize is that credit score is only one element of lending criteria.
Lenders will tell you that credit score will “open the door” to getting a loan, but the single most important lending criteria is DTI, or, debt to income ratio.
DTI, in basic terms, is the percentage of a person’s monthly gross income that is utilized to pay their debts. If a person’s DTI is too high, that too much of their income is used to service debt, lenders will be very reluctant to continue to lend money.
Again, the irony of credit is that a person can have a credit score of 750 (which is excellent and would indicate a good potential borrower) but will be denied a loan because their high DTI ratio. For example,
Bob has a FICO credit score of 750 and DTI ratio of 85%. Bob wants to borrow money to purchase a vehicle. While Bob will be “pre-approved” based on credit score alone, the vehicle lender will likely decline Bob’s loan. Based on Bob’s DTI, the lender is concerned that Bob cannot continue to service his debts and will therefore be a substantial default risk.
I use the term ironic in describing credit because credit score is very often just a façade. While Bob’s score is high, it is still somewhat worthless – really no different than a person with a 550 credit score. Why? NEITHER CAN BORROW MONEY!!
Bankruptcy is often a very quick credit recovery because a person’s DTI is instantly and substantially reduced through the bankruptcy. Bankruptcy discharges the debt – instantly improving the DTI ratio, which again, are the single most important criteria evaluated by lenders when taking loan applications.
Christopher W. Boss, Esq.
Yesner & Boss, P.L.
How Does Bankruptcy Affect Child Support?
There are two facets to child support and alimony in a bankruptcy context; both the payment and receipt of child support and alimony.
Sometimes, child support and alimony debt can become so burdensome that the parent or ex-spouse believes that bankruptcy is the only way out. Bankruptcy is a bad alternative to eliminate child support or alimony; a family law court would be a better forum to have those obligations reduced, if appropriate. Bankruptcy might help reduce other unsecured debts that will allow the child support and alimony obligations to be more affordable however.
When the bankruptcy is filed, the automatic stay halts all collection activities, except those actions to establish paternity, and actions for domestic support, child custody or visitation. In addition, the automatic stay has no effect on the reporting of overdue child support to any consumer reporting agency.
Both domestic support obligations and debts owed to a spouse or former spouse pursuant to a divorce or separation agreement are non-dischargeable in bankruptcy. Therefore, those debts remain even after the bankruptcy is completed.
Finally, in order to file for bankruptcy protection, child support and alimony obligations must be current and must be kept current during the bankruptcy case.
Therefore, bankruptcy is ineffective as a tool to eliminate child support and alimony obligations, although it might be a good alternative to reduce other debts, thereby making child support and alimony easier to afford.
What happens, however, when the person receiving child support or alimony is forced to file for bankruptcy protection? For those bankruptcy filers that receive child support and alimony, both federal law and Florida law allow the receipt of child support and alimony to be exempt from creditors and from the bankruptcy trustee. Therefore, the receipt of child support and alimony has little effect on the amount the debtor may have to pay to unsecured creditors during the pendency of the bankruptcy case.
Shawn M. Yesner, Esq.
Yesner & Boss, P.L.
New Law Requires All Loan Modifiers to be Licensed but Lawyers Representing Clients Are Exempt
On January 1, a new law took effect requiring that private businesses offering loan modification services to Florida homeowners must be licensed by the state of Florida. However that law does not apply to lawyers who are representing clients though a bona fide law office as outlined under the Rules Regulating the Florida Bar.
This law passed by the Legislature requires that all private companies and individuals must first be registered with and licensed by the state in order to offer help to troubled homeowners working with lenders. This law hopes to eliminate massive fraud that has taken place around the state, many of which have resulted in the Attorney General filing civil lawsuits on behalf of consumers.
The Florida Bar and the Office of Financial Regulation agreed that when there is an attorney-client relationship between the homeowner and the provider of modification services established by the attorney and not a third party, then the relationship is properly governed by The Florida Bar and the Rules of Professional Conduct. If there is no such attorney-client relationship, then the loan modification “mill” is just a business and should be licensed and regulated by OFR like any other nonattorney business within its regulation — even if attorneys own or are employed by the nonattorney business. Further, the bar took the position and the agency agreed that nonattorney staff members in a law office would not have to be licensed by OFR as the attorney remains responsible for their conduct.
Personal Bankruptcy Filings Rising Fast in Florida’s Middle District
The number of citizens in the Middle District of Florida filing for bankruptcy rose by nearly 45% this past year. This drastic increase in filings is largely due to the number of foreclosures and unemployment.
Almost twice as many people are filing for Chapter 7 bankruptcy, which liquidates assets allowing filers to pay off some debts and absolving them of others. This figure is significant due to the number of federal bankruptcy laws enacted in 2005 with the purpose of encouraging Chapter 13 filings. Chapter 13 filings require filers to reorganize their debt and enter into repayment plans in exchange for keeping certain assets.
The idea behind the 2005 bankruptcy laws was to make it harder for people to completely dispose of their debt, particularly for Chapter 7 filings. In order to segregate those who had the means to repay their debt and those who did not, a “means” test was implemented. If the test establishes that a person is financially capable of satisfying at least part of the debt after it is restructured, they will not qualify for a Chapter 7 filing.
All together, personal bankruptcy filings in central Florida rose to 61,009 as of December 2009, according to United States Bankruptcy Court for the Middle District of Florida statistics. This figure is up 45% from 2008. This is also the highest number reported since 2005 when there was a dramatic increase in filings due to the new legislation which was about to take effect.
Chapter 7 filings were up more than 58% as of December 2009, compared with December of 2008, according to the Middle District. December is the most recent month with data available. Chapter 13 filings rose by 17% and accounted for 25% of the 2009 filings as of December. Judging by these numbers, it does not appear that the 2005 legislation is very effective or is achieving its purpose.
The massive amounts of foreclosures and the unemployment rate have caused people to file for bankruptcy who wouldn’t have otherwise. Nationwide statistics have shown more highly educated and affluent citizens have turned to bankruptcy. Some experts believe that bankruptcies peaked at some point in 2009, but it does not appear that the number of bankruptcy filings is going down whatsoever.
When Does My Bankruptcy End?
I am often asked, “how long will this take – when will my bankruptcy end?” The answer depends on the congestion of the court’s docket and what type of bankruptcy is filed. Sparked by the great economic disaster of 2008 bankruptcy filing in the Middle District of Florida is up almost 50% from 2008, topping out at almost 58,000 according to the Tampa Bay Business Journal. The increase in filings in the Middle District of Florida is the second largest in the nation behind the Central District of California.
Despite the increased number of filings, a common chapter seven bankruptcy case in the Middle District of Florida takes anywhere from three to six months from the filing date until the date of discharge. Discharge being the conclusion of a bankruptcy case i.e. the Debtor is alleviated of the debt obligations. Considering the overwhelming number of filings and the second busiest bankruptcy court in the country, a Debtor can make their way through a chapter seven in a reasonable amount of time.
However, if a debtor files a chapter thirteen bankruptcy, the time frame is much different. In a chapter thirteen bankruptcy, the Debtor makes a monthly repayment to the Trustee over the life of a thirty-six or sixty month repayment plan. Once the Debtor makes the last payment in their chapter thirteen plan, the Debtor is then discharged. Depending on which plan, a chapter thirteen bankruptcy takes at least three years before discharge and in many cases five years before discharge.
Vincent C. LoBue, Esq.
Associate Attorney
Yesner & Boss, P.L.
The Bank Said My Foreclosure Sale Will Be Next Week! Help!
We often receive frantic calls from homeowners because they’ve called the bank after having been served with a foreclosure lawsuit, only to hear from the bank’s representative that “Your foreclosure sale is December 22, 2009.” “How can that be?” the borrower thinks, “The lawsuit was first filed on November 12, and I’ve received nothing by mail from my lender.” In this blog, we will explain why this happens and what borrowers can do about it.
When the bank refers a case to its attorney, they require that attorney to stay within certain timelines. The speed and efficiency within which the plaintiff foreclosure firm can complete the foreclosure action, or the average time within which they can complete all cases referred to them, determines how many cases will get referred to that firm above their competitor plaintiff firms.
Although all lenders have their own internal timelines, one example is:
File Foreclosure
|
5 days from receipt of referral from the lender
|
Service of Process complete
|
30 days from filing
|
File Motions for Default & Judgment
|
30 days from Service Complete
|
Schedule Judgment Hearing
|
30 days from Filing Motions
|
Foreclosure Sale
|
30 days from Hearing
|
Certificate of Title Issued to Lender
|
10 days from Foreclosure Sale
|
Tenants / Homeowner Evicted
|
5 days from Certificate of Title
|
Pursuant to this timeline, the lenders expect that the foreclosure will be complete between 140 and 150 days. Further, the lender automatically creates this timeline upon referral of the case to its counsel so that they can track and monitor their attorneys’ speed and efficiency. Accordingly, the lender knows that if the file is referred on January 1, 2010, then the foreclosure sale should be on May 5, and all occupants evicted by May 21.
The problem is that each individual foreclosure action will vary in length based upon a number of factors: the judges’ or courts’ calendars (given the volume of foreclosures today, some judges have a wait time of between 3 and 4 months to get time on their hearing calendar); the number of defendants and their ease in being found (the more defendants or defendants who live out of the county where the case is pending may increase the time needed for service of process); foreclosure sale dates granted by the judge of 60 days or longer; and attorneys who file motions to challenge the lender’s foreclosure action on any number of legal grounds. When the actual timeline varies from the lender’s anticipated timeline, conversations like the one described above occur between lender and borrower because the lender’s computer system shows the anticipated timeline rather than the actual timeline.
What can borrowers do about this? First, do not panic. Second, consult with an attorney who is familiar with the foreclosure timeline and the lenders’ practices to come up with a plan to either save your home, or get rid of the house with minimal liability owed to the lender. Finally, inquire with an attorney as to whether this practice by the lender is a violation of the Fair Debt Collection Practices Act (FDCPA) or Florida’s Consumer Collection Practices Act (FCCPA). Pursuant to those two laws, it is improper for the lender to misrepresent any facts about your debt in furtherance of the collection of a debt. Clearly, telling a borrower that their foreclosure sale is set for a date certain that is physically impossible given the Florida Rules of Civil Procedure would violate both the FDCPA and FCCPA. However, as these types of cases are very fact specific, you should consult with an attorney before coming to any conclusion that the lender’s actions violate either of those two laws.
If you know someone who is facing foreclosure, and they contact the lender for information and the lender gives them a “foreclosure sale” date that seems unreasonable, it likely is based on an anticipated rather than actual timeline. That homeowner should follow up with the Clerk of Court, or a Florida licensed attorney before jumping to the often inaccurate conclusion that the sheriff is going to take their house away sooner than Florida Law allows.
Obama Guidelines Aim to Ease Short Sales
In an effort to assist financially troubled borrowers attempting to sell their home, the Obama administration has laid out guidelines designed to encourage the use of short sales allowing the borrower to sell their home for less than what is owed on the loan. In effect this program also makes it easier for borrowers to voluntarily transfer ownership of properties through a "deed in lieu of foreclosure."
The program’s official name is the Home Affordable Foreclosure Alternatives Program (HAFA), and its part of the existing Home Affordable Modification Program (HAMP). HAFA will apply to loans not owned or guaranteed by Fannie Mae or Freddie Mac, which cover over half of all U.S. mortgages; however, Fannie and Freddie will issue their own versions of HAFA in coming weeks.
This is the latest addition to the Obama administration's $75 billion foreclosure-prevention plan, which includes incentives for mortgage companies and investors to rework troubled loans. The government first said in May that it would include short sales in the program, but it has taken months to finalize the details.
Under this plan, if a home is sold for less than the amount of the mortgage the borrower will receive $1,500 and the Mortgage-servicing companies will receive $1,000 upon completion of the short sale. The program is open to borrowers who may be eligible for the government’s loan-modification program but don’t end up qualifying, or are delinquent on their modification, or request a short sale or deed-in-lieu transaction.
Also under these new guidelines, second-mortgage holders can receive up to $3,000 of the sales proceeds in exchange for releasing their liens. Investors who hold the first mortgages, meanwhile, can collect up to $1,000 from the government for allowing such payments.
Of Critical importance, borrowers who complete a short sale under the program must be "fully released" from future liability for the debt, according to the HAFA guidelines.
While the goal of the HAFA is to simplify the process in the hopes of increasing the number of short sales and “deeds in lieu of foreclosure” the rules can be a bit complex, and it comes with 43 pages of guidelines and forms. To review these guidelines and forms please click here.
This program will not take effect until April 5, 2010 but servicers may implement it before then if they meet certain requirements.
How Do Common Credit Issues Affect FICO Scores?
A common question we are asked during our client consultations is “How will a bankruptcy, foreclosure, and/or short sale affect my credit score?” One common answer is “We have no idea, but there is no way to protect your liability without some negative impact on your credit, which can recover over time.”
Probably a bad answer, but now we have a new answer.
On Thursday, November 26, 2009, FICO (Fair Isaac Corporation) revealed its “damage points” information. Previously, the company revealed only broad categories of factors influencing a consumer’s credit score, rather than the specific number of points at stake for credit mistakes.
FICO is the company that pioneered consumer credit scoring, and is most familiar to all consumers. FICO assigns a three-digit number from 300 to 850, depending upon how well consumers handle credit. Other companies offer consumer credit scoring systems, but FICO’s version is the most well-known and most widely used by lenders in determining whether a consumer can borrow, how much, and at what interest rate.
As the table at left demonstrates, those consumers with excellent credit (780 and above) may suffer a bigger point drop than those with an average credit score (680 points). For example, someone with excellent credit who has a 30-day late payment will suffer a FICO score drop of between 90 to 110 points, whereas someone with average credit will suffer a smaller FICO score drop of between 60 and 80 points.
Unfortunately, given the high rate of foreclosures, record-filings in bankruptcy, short sales, unemployment, and all of the other economic woes outside the control of many consumers, it is difficult to avoid these drops in credit. However, given the information provided last week by FICO, when faced with two difficult decisions it is now easier for consumers to take the least-worst decision, if FICO score is more important to the consumer than liability to any particular creditor.
- Shawn M. Yesner, Esq.
Congress Extends Homebuyer Tax Credit Until April 30, 2010
On November 5, 2009, Congress voted to extend the homebuyer tax credit program until April 30, 2010. The extension continues the $8,000.00 tax credit to first time homebuyers, and includes an additional credit for current homeowners of $6500.00. Further, by extending the Homebuyer tax credit, the Florida Homebuyer Opportunity Program will continue to provide loans to first time buyers for down payment and closing costs. The chart below provides a comparison of the benefits to homeowners under the original act and the new benefits under the extended program:
FEATURE
|
Jan 1 – Nov 30, 2009
Rules as enacted February 2009 |
Nov. 7 – April 30, 2010
Rules as enacted November 2009 |
First-time Buyer
Amount of Credit |
$8000
($4000 married filing separate) |
$8000
($4000 married filing separate) |
First-time Buyer
Definition for Eligibility |
May not have had an interest in
a principal residence for 3 years prior to purchase |
Same |
Current Homeowner
Amount of Credit |
No Provision
|
$6500
($3250 married filing separate) |
Effective Date
Current Owner |
No Provision
|
November 7, 2009
|
Current Homeowner
Definition for Eligibility |
No Provision
|
Must have used the home sold
or being sold as a principal
residence consecutively for 5 of the previous 8 years |
Termination of Credit
|
Purchases after November 30,
2009.
(Becomes April 30, 2010 on Date of Enactment.) |
Purchases after April 30, 2010 |
Binding Contract Rule
|
None
|
So long as a written binding
contract to purchase is in
effect on April 30, 2010, the
purchaser will have until July 1, 2010 to close. |
Income Limits
(Note: Increased income
limits are effective as of date of enactment of bill) |
$75,000 – single
$150,000 – married
Additional $20,000 phase out |
$125,000 – single
$225,000 – married
Additional $20,000 phase out |
Limitation on Cost of Purchased Home |
None
|
$800,000
November 7, 2009 |
Purchase by a Dependent |
No Provision Ineligible |
November 7, 2009 |
Anti-fraud Rule |
None
|
Purchaser must attach
documentation of purchase to tax return |
An IRS 1099-C Form Does Not Mean Debt Is Discharged
A third circuit bankruptcy case recently decided that Form 1099-C does not establish that debt is discharged. A creditor typically issues a Form 1099-C to a debtor in bankruptcy to show cancellation of debt. The credit union in the case In re Bononi, had sent the Chapter 7 debtor zero-balance account statements and an IRS form 1099-C for “cancellation of debt.” After receipt of the form and the account statements, the debtor received money from the settlement of a personal injury action. The court found that despite the statements and the 1099-C form, the debtor still had an obligation to pay on the past debt. Additionally, the court found that even if a creditor issues a 1099-C form, the form does not prohibit the creditor from pursuing collection of the old debt. Only a discharge from the Bankruptcy Court has the effect of canceling the debt and removing the debtor’s liability for the debt. In re Bononi, 19 CBN 864.
Commercial RE Distress Will Have A Big Impact on Housing
Below is a recent article written by John Burns Real Estate Consulting Vice President, Lesley Deutch regarding the potential impact on the housing market as the Commercial Real Estate Market becomes distressed.
We were lucky enough to present at an all day Commercial Real Estate Symposium at the Fed, where the preeminent industry experts from each real estate sector shared what is occurring in their industry. Prior to the meeting, we had been estimating that banks would not recover 20% of the commercial real estate loans outstanding. Now, we feel that the recovery will even be less.
This distress will certainly have an impact on housing, and one that will be both good and bad at the same time.
• Good: As soon as commercial real estate distress hits the banks in full force, solvent banks will need to dispose of residential assets to concentrate on commercial real estate distress. This will create land buying opportunities in the next several months. Builders acquiring land for cheap means the beginning of a recovery.
• Bad: Banks with high commercial real estate exposure are unlikely to lend to the residential sector, and many of these banks will be lucky to survive at all. To determine whether or not your bank has significant commercial real estate exposure, check out their balance sheet, which is usually in the investor section of their website.
The Problem
Property values are now down 35% from the peak, according to Moody's. We think prices will fall even more as leases expire and the tenants lease less space at a lower rent.
Why is this a problem? Commercial banks own nearly 45% of mortgage debt outstanding. By comparison, the banks own only 21% of the single-family mortgage debt outstanding.
The insolvency of several thousand banks will overwhelm the understaffed regulatory system and it will take at least 3 more years for a healthy banking system to emerge. We expect the government to intervene even more than it has in order to save the US banking system. When this occurs, it could indirectly benefit home builders by providing great distressed land buying opportunities, and by shoring up the banks so the better banks can start lending again soon.
