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Special Note: Short Sale & Short Refinance:
Comments for Congress & Practice Issues:
DELAYS & PROBLEMS WITH ‘SHORT SALES’ & ‘SHORT REFINANCE’
The current loan workout system is riddled with delays and inefficiency.
Something that could take a few weeks, usually takes months (2-4 or more).
Examples of the delays include, but are not limited to:
A. Broker’s Price Opinion (BPO): The lender will also attempt to establish a fair market price for the house. The price the lender will propose is called the Broker’s Price Opinion (BPO). It will usually differ greatly from the price that the borrower expects to sell the home. Automated (Rebuttal) Broker Price Opinions (BPO) on Valuation or AVN (Automated Valuation Networks) should be used. This will allow everyone to expedite preset criteria that will result in expedited loan workout solutions.
B. Lender Intake Systems Are Overloaded: Lenders and servicers must upgrade their automated computer intake systems to better ‘track’ each case and its file materials. All documents received by any clerk at any time, should be found on the computer system at all times. Presently, lenders usually say the file was ‘assigned’ to a particular clerk, but in reality, every time you call them, you are handed off to another person, and then ‘reassigned’ to another clerk, who can’t find your file materials. This game of tag goes on for 1-2 months alone, and then the 2-4 month deal period begins.
C. Workout Deal Terms Disingenuous/Against Public Policy: Lenders want it both ways. They want all options open, even when committing to a particular deal. Lenders overreach and it creates impractical or ‘unconscionable’ deal terms. For example:
Deficiency Liability: Law & Contracts Must Be Amended: When a borrower can’t afford to pay the mortgage timely, why would the lender believe he/she can pay the loan balance deficiency? Of course the borrower in this circumstance cannot afford the forgiven loan balance amount, if he or she could it would have been done to ‘reinstate’ and ‘modify’ the loan to become “cash-affordable”. Many lenders will agree to a ‘short sale’ with the ‘condition’ that “Lender will retain the note on this loan. The customer shall be responsible for the deficiency remaining on the balance. All terms of the original note shall remain in force.” Now the borrower is compelled to accept the offer due to his or her circumstance, and accept the ‘threat’ that the lender may (or may not) come after him/her within one year for the deficiency amount, usually by the lender filing a lawsuit seeking to obtain a ‘deficiency judgment’. The threat of this ‘contingent liability’ precludes the borrower from moving on with his or her life and providing for their family. This type of deal making is ‘unconscionable’ in terms of ‘public policy’.
At-Law Solution To Enforce Public Policy & Contract Principles: If lenders are to accept a lesser sum than due on a mortgage (for mutually beneficial purposes), then the lender should not be allowed – at law – to condition the agreement (at its very heart) by requiring that the borrower remain liable for the very same thing disposed of in the deal (the deficiency liability).
Income Tax Liability: IRS Law Must Be Amended. When a borrower can’t afford to pay the mortgage timely, why would the lender and the IRS believe he/she can afford to pay the phantom income tax due on the forgiveness of debt based in part on the loan balance deficiency amount? Of course the borrower in this circumstance cannot afford the income tax due on the forgiveness of debt, if he or she could, this resource would have been used to ‘reinstate’ and ‘modify’ the loan to “cash-affordable” terms. Many lenders will agree to a ‘short sale’ with the ‘condition’ that lender will send out a 1099 tax notice reporting to the IRS. Now the borrower is compelled to accept the offer due to his or her circumstance, and accept the ‘threat’ that the IRS will come after him or her for income taxes due (if any) for forgiveness of debt, based in part on the very thing disposed of in the short sale, the deficiency loan balance. The threat and reality of this ‘IRS contingent liability’ precludes the borrower from moving on with his or her life and providing for his/her family. This type of deal making is ‘unconscionable’ in terms of ‘public policy’.
The Internal Revenue Code must be amended. (Attached) Lender Overreaching: We agree but, if we Screw Up, You’re Liable, Not Us: Many lenders agree to a short sale with the condition that “In the event the above property should go through foreclosure sale prior to our offer date stated above, this agreement will become null and void, thus the offer will be rescinded.” This really means, we agree to this short sale agreement, but if we can’t correct our internal system and stop the foreclosure attorneys, then you lose, because we do not want to be responsible for our duties under this short sale agreement.
Congress should preclude such conditions as against public policy. Avoid Delays with SHILO™ - Investor and/or Insurers Agreement: Many lenders agree to short sales (and other loan workout devices) but condition or delay such agreements based upon the legal need to obtain agreement from their investors and/or the mortgage insurers, if any. This creates more uncertainty in the system as a whole and causes delays per file. Investors and or insurers should be compelled to preset conditions for approved loan workout terms upfront in their investor agreements and or insurance agreements.
SHILO™ - Safe Harbor Intelligent Loan Options™ - are preset and upfront contractual Safe Harbor Minimum Intelligent Loan Options. SHILO™ is “contractual safe harbor” loan option provisions placed in the loan origination, refinance and loan workout documents upfront. It removes delay and “uncertainty” in the marketplace. SHILO should be included in junior liens and loan documents as well.
Congress should require preset conditions of loan workout type devices and safe harbors in all residential loan documents.
Lender Overreaching: Must “List” House With Realtor: But Realtor Can’t Be Paid: Lenders agree to loan workouts and short sales and short refinances, but condition the deal upon the requirement that the property was listed by a realtor on the market for at least 3-4 months. However, once the deal is accepted, the ‘short’ contract states “Realtors commission not to exceed $0.” So the borrower has the impossible task of ‘listing’ the home with a realtor, but getting the realtor to waive all commission. Try calling 10 multiple listing realtors and see how many will agree to that!
Congress must make laws to allow payment to realtors of up to 3% or some other percentage or amount, so the system can work.
Lender Overreaching - Fictional Legal Loophole re Relocation Money:
RE: SHORT SALES AND FORECLOSURE PROCEEDS
I know. Well, the reality is the seller is broke. The seller needs money to move and start over. Many times there are children left without a roof over their head. This will cause societal problems which will harm the economy as well. The lenders prohibit the seller from receiving any monies in the transaction. So what happens? The system creates and relies upon a fictional legal loophole: The Buyer pays the Seller by purchasing artwork, stoves and heirlooms for usually $1,000-$15,000, documented by a Bill of Sale. Stop the fiction. Stop forcing people to take vulnerable legal positions in order to protect the lender’s interest, and legal uncertainty.
Congress should pass a law allowing the Seller to receive money from the proceeds of the deal for (1) relocation and fresh start, and/or (2) partial equity reimbursement, in certain circumstances. Amounts for relocation might be for “necessary or appropriate moving, relocating, and living expenses”, and an amount for partial equity reimbursement” might be a (very low) percentage of the excess sale proceeds received, if any, in certain circumstances to reimburse the seller for material contributions to improve the condition, value and salability of the home. These methods will (1) allow a mechanism to pay the seller legally so he/she can start anew in society, and (2) motivate sellers to keep their homes in top shape; that will help the sales valuations generally and help to resist deep discount pricing, which hurts everyone, ultimately.
Special Note: Taxes on Short Sales:
TAXES ON SHORT SALES AND FORECLOSURES
Reprint of IRS PUBLICATION 523: “Other Dispositions” Other Dispositions –
The following rules apply to foreclosures and repossessions, abandonments, trades, and transfers to a spouse.
Foreclosure or repossession. If your home was foreclosed on or repossessed, you have a sale. You figure the gain or loss from the sale in generally the same way as gain or loss from any sale.
But the selling price of your home used to figure the amount of your gain or loss depends, in part, on whether you were personally liable for repaying the debt secured by the home, as shown in the following chart.
IF you were... THEN your selling price includes...
not personally liable for the debt the full amount of debt canceled by the foreclosure or repossession.
personally liable for the debt the amount of canceled debt up to the home's fair market value. You may also have ordinary income, as explained next.
Ordinary income. If you were personally liable for the canceled debt, you may have ordinary income in addition to any gain or loss. If the canceled debt is more than the home's fair market value, you have ordinary income equal to the difference.
Report that income on Form 1040, line 21, or on Form 1040NR, line 21. However, the income from cancellation of debt is not taxed to you if the cancellation is intended as a gift, or if you are insolvent or bankrupt. For more information on insolvency or bankruptcy, see Publication 908, Bankruptcy Tax Guide.
Form 1099-A and Form 1099-C. Generally, you will receive Form 1099-A, Acquisition or Abandonment of Secured Property, from your lender. This form will have the information you need to determine the amount of your gain or loss and any ordinary income from cancellation of debt. If your debt is canceled, you may receive Form 1099-C, Cancellation of Debt.
More information. If part of your home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. Abandonment. If you abandon your home, you may have ordinary income. If the abandoned home secures a debt for which you are personally liable and the debt is canceled, you have ordinary income equal to the amount of canceled debt.
If the home is secured by a loan and the lender knows the home has been abandoned, the lender should send you Form 1099-A or Form 1099-C. See Foreclosure or repossession, earlier, for information about those forms. If the home is later foreclosed on or repossessed, gain or loss is figured as explained in that discussion. Trading homes. If you trade your old home for another home, treat the trade as a sale and a purchase.
Example.
You owned and lived in a home with an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 - $41,000). If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed).
Transfer to spouse. If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no gain or loss (unless the Exception, discussed next, applies). This is true even if you receive cash or other consideration for the home. Therefore, the rules explained in this publication do not apply.
If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. You have no gain or loss.
Exception. These transfer rules do not apply if your spouse or former spouse is a nonresident alien. In that case, you generally will have a gain or loss.
More information. See Property Settlements in Publication 504, Divorced or Separated Individuals, if you need more information.
Determining Basis
You need to know your basis in your home to determine any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), its basis is either its fair market value when you got it or the adjusted basis of the person you got it from.
While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home.
To figure your adjusted basis, you can use Worksheet 1, shown later. Filled-in examples of that worksheet are included in the Comprehensive Examples, later.
Cost As Basis
The cost of property is the amount you pay for it in cash, debt obligations, other property, or services.
Purchase. If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Generally, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later.
Seller-paid points. If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points as shown in the following chart.
IF you bought your home...
THEN reduce your home's basis by the seller-paid points...
after 1990 but before April 4, 1994 only if you deducted them as home
mortgage interest in the year paid.
after April 3, 1994 even if you did not deduct them.
If you must reduce your basis by seller-paid points and you use Worksheet 1 to figure your adjusted basis, enter the seller-paid points on line 2 of the worksheet (unless you used the sellerpaid points to reduce the amount on line 1).
Settlement fees or closing costs. When you bought your home, you may have paid settlement
fees or closing costs in addition to the contract price of the property. You can include in your
basis some of the settlement fees and closing costs you paid for buying the home. You cannot
include in your basis the fees and costs for getting a mortgage loan. A fee paid for buying the
home is any fee you would have had to pay even if you paid cash for the home (that is, without
the need for financing).
Settlement fees do not include amounts placed in escrow for the future payment of items such as
taxes and insurance.
Some of the settlement fees or closing costs that you can include in your basis are:
1. Abstract fees (abstract of title fees),
2. Charges for installing utility services,
3. Legal fees (including fees for the title search and preparing the sales contract and deed),
4. Recording fees,
5. Survey fees,
6. Transfer or stamp taxes,
7. Owner's title insurance, and
8. Any amounts the seller owes that you agree to pay, such as:
a. Certain real estate taxes (discussed later),
b. Back interest,
c. Recording or mortgage fees,
d. Charges for improvements or repairs, and
e. Sales commissions.
Some settlement fees and closing costs you cannot include in your basis are:
1. Fire insurance premiums,
2. Rent for occupancy of the house before closing,
3. Charges for utilities or other services related to occupancy of the house before closing,
4. Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs
before 1994),
5. Charges connected with getting a mortgage loan, such as:
a. Mortgage insurance premiums (including funding fees connected with loans
guaranteed by the Department of Veterans Affairs),
b. Loan assumption fees,
c. Cost of a credit report,
d. Fee for an appraisal required by a lender, and
6. Fees for refinancing a mortgage.
Real estate taxes. Real estate taxes for the year you bought your home may affect your basis, as
shown in the following chart.
IF... AND... THEN the taxes...
the seller does not reimburse you are added to the basis of your you pay taxes that the seller home.
owed on the home (the taxes up to the date of sale) the seller reimburses you do not affect the basis of your home.
you do not reimburse the seller are subtracted from the basis of the seller paid taxes for you your home. (the taxes beginning on the date of sale) you reimburse the seller do not affect the basis of your home.
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