Archive for the 'Foreclosure' Category

According to a survey, 68 percent of homeowners surveyed saying they would not be able to pay their mortgages if unemployed for more than nine months. That's a lot of potential foreclosures in today's economic climate.

Nationally, the average duration of joblessness in America is roughly 40 weeks, which is a record high since the Bureau of Labor Statistics began tracking the data in 1948. Worse, more than two million Americans have been out of work for 99 weeks or longer.

Could you weather extended unemployment?

A quick and dirty way to calculate your gap is to look at which changes to your monthly income and expenses would occur if you lost your job. For example, unemployment checks are lower than wages, but you also might be able to eliminate child care or commuting costs and income tax. Medical insurance costs would likely increase, and if unemployed you might be unable to pay for non-essentials like gym memberships or even your credit card bills.

Here's an example.

Expenses today:

• Income: $3,000
• Commuting: $150
• Income Taxes: $800 
• Medical insurance: $100
• Savings: $200

Expenses if unemployed:

• Income: $1,500 (decrease cash flow by $1,500)
• Commuting: $0 (increase cash by $150)
• Job search: $75 (decrease by $75)
• Income Taxes: $0 (increase by $800)
• Medical insurance: $250 (decrease by $150)
• Savings: $0 (increase by $200)

If the above situation were yours and you became unemployed, you'd have $475 a month less than you would while working. Divide your savings by that amount and you can see how long you'd be able to pay your bills, including your mortgage, if you lost your job. To weather 10 months of unemployment in this case, you'd need savings of $4,750.

Strategies if you lose your job... or are about to

That's only part of the picture, however. What if you exhaust your benefits? Your shortfall gets a lot bigger and your savings eaten up much faster. The longer you can stretch out your savings, the better your chances of hanging onto your home. Here is a list of some tactics you can use to avoid bad credit and pay your mortgage:

• If you think you might lose your job, behave as though you already have. Get a roommate, drop HBO, carpool, get a cheaper data plan, pack your lunches. You know what you are buying right now that you'd cut if you had to. If you dodge the pink slip fairy, the worst thing you've done is save some money. You can alwys take it to Vegas later!
• However, don't stop saving. Or stop buying medical insurance.
• Shop 'til your rate drops. Now is the time to find a lower mortgage rate if you can, to raise your insurance deductible, sell the second car, or take on some extra paid work. Use your gains to beef up your savings.
• If you lose your job, apply immediately for a mortgage modification under HAMP, a short sale arrangement or for a forbearance from your lender. If your home's underwater, you have a decent chance of getting one. If it isn't, you may have to sell it.

The earlier you get into survival mode, the more likely that you'll survive a layoff.

When homes can't be sold for enough to cover the mortgage(s) against them, homeowners may try to effect a short sale, which means selling for less than what's owed to the mortgage lender(s). You'd think it would be easy to get these done--after all, the sale prices are higher than foreclosure sales prices, buyers avoid bad credit, and mortgage lenders avoid taking more property onto their books. Unfortunately, things aren't that simple.

It's the deficiency, stupid

I watched a client go through all kinds of hoops while trying to purchase a short sale property. For months, he made offers, waiting weeks for the banks to get broker price opinion (BPO) after BPO and appraisal after appraisal to sort out the home's value. Eventually, a lender approved his offer and escrow was opened.

When it came time to close, however, the lender refused to sign off on the deal unless the homeowner agreed to sign a promissory note for $67,500. The seller refused to do so, and the home went into foreclosure. Incredibly, once the property was on the bank's books, its asking price was less than my client's offer had been!

Why would a bank choose a foreclosure in the bush over a short sale in the hand? Because it had reason to believe that the seller had the means to pay off the deficiency--that is, the difference between what was owed and what the foreclosure sale fetched.

Dealing in debt

If the lender had agreed to sell the home to my client without getting the promissory note from the seller, it would have lost $67,500 and had no chance of recovering it. But if it foreclosed and sold the home itself for a loss of $75,000, it still retained the right to collect that deficiency from the previous homeowner. So if it felt that it had a decent chance of getting a deficiency judgment in court, the lender would be smart to choose foreclosure over a short sale.

In addition, if the lender did not itself choose to pursue the foreclosed homeowner for the balance, it could sell the debt to a collection agency. If it was able to get more than ten cents on the dollar, or $7,500, for the debt, it would recover more by foreclosing than by approving a short sale.

HAFA not being met halfway

What about HAFA, the Home Affordable Foreclosure Alternative? It's supposed to make short sales happen by making payments to first-lien holders and second mortgage holders too. But it isn't very popular with lenders because it requires that they waive the right to pursue borrowers for deficiencies, and because the payments are too small to be deemed worth the trouble of jumping through the hoops attached to any government program. And as long as the lenders' goals conflict with the desires of the homeowner or buyer, 90 percent of short sales will continue to fail.

In a very weird Iowa case, a couple going through foreclosure got to keep their house. For free. Matt and Jamie Danielson were both employed in the housing industry - he was a builder and she was a loan officer. They made plenty of money and never saw the downturn coming.

When Matt met with the mortgage lender (no reason was given why Jamie didn't just originate the loan herself since she was in the business), he was told that she did not need to be present. He tried to call her but couldn't reach her. The mortgage was approved without Jamie Danielson's signature, and the couple with their young son moved into the house.

When the real estate industry fell apart Matt lost his business and Jamie's income was severely curtailed. They couldn't keep up with the payments. Expecting the lender to foreclose, they boxed up their life and prepared to move into a rental. "We had our bags packed," Jamie Danielson, 29, said. "We know if you can't pay, you can't stay."

Lawyer finds a mortgage loophole

They went to a lawyer to file for bankruptcy protection, and that's when things got strange. Jerry Wanek, their lawyer, was the first to notice that Jamie hadn't signed the mortgage and to recognize the significance of that omission. "He found the loophole," Matt Danielson said. "You couldn't have planned that." The Iowa law cited by Wanek in the Danielson case was enacted back in 1888, and has its roots in a law passed in 1851. Its purpose was to prevent one spouse from involving the other unknowingly in a transaction against his or her interest or one that he or she hasn't agreed to. It invalidates sales of--or loans taken against--a home unless both spouses sign the documents. The idea is to prevent one spouse from refinancing the home, taking off with the cash, and leaving the other holding the bag.

Mortgage companies have been criticized for sloppy handling of mortgage documents in the lead-up to the financial crisis, which was driven by reckless home lending. Several of the nation's largest lenders stopped foreclosing on homeowners in the fall after widespread reports of flawed paperwork, and 50 state attorneys general led by Iowa's Tom Miller are investigating whether lenders broke the law.

"It's dumb luck that we're in this house," said Matt Danielson, 33.

The banking lobby is embarrassed. The Iowa Bankers Association backed legislation that would change the law so this never happens again. It passed.

Unfortunately, very few will get free houses if they don't read and sign their mortgage documentation.

Whether you take out home loans for people with bad credit, an FHA home loan, read everything and make sure you understand the terms of what you're signing.

The latest HUD scorecard shows that HAMP mortgage modifications are finally making inroads with America's middle class of homeowners. The data released this morning shows that the Making Home Affordable programs are reaching middle income homeowners and providing them with real payment relief.The January Housing Scorecard showed the following:

* More than 4.1 million modifications were implemented between April 2009 and the end of December 2010 -- over twice the number of foreclosure completions during that same period (1.7 million).

* Homeowners in HAMP permanent modifications continue to perform well afterword, with re-default rates lower than industry norms. In the 12 months after receiving a HAMP loan mod, nearly 85% of homeowners remain successfully in their modified plans. Homeowners in HAMP permanent modifications have already reduced their mortgage obligations by more than $4.5 billion so far.

The Administration also released the Making Home Affordable Data File which contains borrower financial information, mortgage terms before and after entering HAMP, performance in a HAMP modification, and race/ethnicity.

Key findings that emerged from a preliminary analysis of the MHA Data File include:

*To date, most program participants are financially-distressed middle-income homeowners who are underwater on their mortgages. Borrowers who received HAMP modifications have a median annual income of about $46,000; a median credit score of 570 upon entering the trial period; a post-modification loan balance of just over $232,000 and a median loan-to-value (LTV) of 118%.

* Of borrowers disclosing their race and ethnicity, African-Americans make up 18% of active permanent modifications and Hispanics 26%.

* Homeowners in permanent HAMP mods got their monthly mortgage payment cut by a median of just under 40%. And 18% of homeowners in active permanent modifications got over $1,000 lopped off their payments.

HAMP mortgage modifications have helped those with mortgage credit problems get relief from their payment burden and allowed them to keep their homes. This data in encouraging.Troubled homeowners trying for a HAMP modification should take heart from these statistics and persevere in their efforts.

It's tax time (groan). If you, like many folks, went through foreclosure in 2010, you will have to deal with it when you file your 2010 return.

Why might a foreclosure add to your taxable income?

When you take out a loan, you get money (or in the case of a mortgage you get a home instead of money), but the money isn't taxed the way it would be if you earned it at your job. That's because you are are supposed to pay it back. But if a lender cancels your debt, the money received becomes taxable income to you. Unless it doesn't -- the IRS loves to make things complicated, so we're going to try and make it easier.

If you lost your primary home to foreclosure, you probably owe no taxes.

That's because the Mortgage Forgiveness Debt Relief Act of 2007 lets those who lost homes during the housing crisis exclude up to $2 million of forgiven mortgage debt ($1 million if married filing separately) from taxable income. It applies to foreclosures occurring from 2007 through 2012. In addition, the act protects those whose debt was lessened through mortgage modification. Freebie! Any Pay-for-Performance Success Payments that reduce the principal balance of your mortgage under the Home Affordable Modification Program are not taxable.

Warning! The exclusion doesn't apply "in cases where the reason for foreclosure is not directly related to a decline in the home's value or your financial condition." And it only applies to debt used to "buy, build, or substantially improve" your home. Home equity debt for anything but the purchase or improvement of your home is NOT covered under the exclusion.

If you lost a vacation or rental property, you probably owe taxes.

Foreclosure of investment property or vacation home

If you let investment property go into foreclosure, you could be on the hook for income tax. You probably received a 1099-C, Income from Cancellation of Debt. But even if you don't get this form, you have to report debt cancellation income unless:

• The debt was included in a bankruptcy filing (attach Form 982)
• You were insolvent to an extent greater than the amount of your taxable gain at the time of foreclosure (meaning your liabilities exceeded your assets by more than you gained from the foreclosure; use Form 982)
• The foreclosed property is a "qualified farm," meaning that 50% of your gross receipts come from the farm
• The foreclosure property was used in a trade or business

Get professional help.

Foreclosure can turn a simple tax return into a complicated business. Your best bet if you receive a 1099-C or lost investment or vacation property to foreclosure is to find a good tax professional, or at least a good tax software program.

The Wall Street Journal in a recent article concluded that the HAMP program is a failure because many homeowners who got mortgage modifications re-defaulted on their home loans. In addition, the publication took the government-sponsored program to task for failing to provide relief to the initially-estimated three to four million homeowners. In fact, only ...

You'd have to have spent the last year under a rock not to know that walking away from mortgages is becoming a big phenomenon in the US. There are moral judgments being thrown all over the place, there is name-calling directed at lenders and homeowners, and there are politicians wringing their hands and tuning ...