Jan. 7, 2008

Short Sale and Phantom Tax Debt Relief Overview

Lots of questions have arisen from people since President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007, whereby in certain circumstances, a homeowner does not have to pay federal income tax on debt forgiven on a loan secured by a qualified principal residence via a short sale, foreclosure, deed in lieu, loan workout or short refinance where the loan amount was reduced and forgiven in order for the homeowner to keep the property.

It is somewhat confusing just reading a bill with only references to other sections of the law. Below is the text of Section 2 of H.R. 3648 that specifically pertains to mortgage forgiveness. To save you the hassle of cross-referencing all this, I have included the sections of the IRS Tax Code that were added to or modified as a result of Section 2 of H.R. 3648.

SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Mortgage Forgiveness Debt Relief Act of 2007’’.

SECTION 2. DISCHARGES OF INDEBTEDNESS ON PRINCIPAL RESIDENCE EXCLUDED FROM GROSS INCOME.
(a) IN GENERAL. Paragraph (1) of section 108(a) of the Internal Revenue Code of 1986 is amended by striking ‘‘or’’ at the end of subparagraph (C), by striking the period at the end of subparagraph (D) and inserting ‘‘, or’’, and by inserting after subparagraph (D) the following new subparagraph: ‘‘(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.’’.
(b) SPECIAL RULES RELATING TO QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.  Section 108 of such Code is amended by adding at the end the following new subsection:
‘‘(h) SPECIAL RULES RELATING TO QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.—
‘‘(1) BASIS REDUCTION.—The amount excluded from gross income by reason of subsection (a)(1)(E) shall be applied to reduce (but not below zero) the basis of the principal residence of the taxpayer.
‘‘(2) QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.—For purposes of this section, the term ‘qualified principal residence indebtedness’ means acquisition indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting ‘$2,000,000 ($1,000,000’ for ‘$1,000,000 ($500,000’ in clause (ii) thereof) with respect to the principal residence of the taxpayer.
‘‘(3) EXCEPTION FOR CERTAIN DISCHARGES NOT RELATED TO TAXPAYER’S FINANCIAL CONDITION.—Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer.
‘‘(4) ORDERING RULE.—If any loan is discharged, in whole or in part, and only a portion of such loan is qualified principal residence indebtedness, subsection (a)(1)(E) shall apply only to so much of the amount discharged as exceeds the amount H. R. 3648—2 of the loan (as determined immediately before such discharge) which is not qualified principal residence indebtedness.
‘‘(5) PRINCIPAL RESIDENCE.—For purposes of this subsection, the term ‘principal residence’ has the same meaning as when used in section 121.’’.
(c) COORDINATION.
(1) Subparagraph (A) of section 108(a)(2) of such Code is amended by striking ‘‘and (D)’’ and inserting ‘‘(D), and (E)’’.
(2) Paragraph (2) of section 108(a) of such Code is amended by adding at the end the following new subparagraph: ‘‘(C) PRINCIPAL RESIDENCE EXCLUSION TAKES PRECEDENCE OVER INSOLVENCY EXCLUSION UNLESS ELECTED OTHERWISE. Paragraph (1)(B) shall not apply to a discharge to which paragraph (1)(E) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(E).’’.
(d) EFFECTIVE DATE. The amendments made by this section shall apply to discharges of indebtedness on or after January 1, 2007.
 

The following are the sections of the IRS Tax Code that were added to or modified as a result of Section 2 of H.R. 3648. Anything that was to be deleted is still there, but with a strikethrough. Additions are highlighted in yellow.

Section 108. Income from discharge of indebtedness

(a) Exclusion from gross income
    (1) In general
    Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if -
        (A) the discharge occurs in a title 11 case,
        (B) the discharge occurs when the taxpayer is insolvent,
        (C) the indebtedness discharged is qualified farm indebtedness, or
        (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness. , or,
        (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.

    (2) Coordination of exclusions
         (A) Title 11 exclusion takes precedence

Subparagraphs (B), (C), and (D) of paragraph (1) shall not apply to a discharge which occurs in a title 11 case.
(B) Insolvency exclusion takes precedence over qualified farm exclusion and qualified real property business exclusion
Subparagraphs (C) and (D) , (D) and (E) of paragraph (1) shall not apply to a discharge to the extent the taxpayer is insolvent.

Section 108. Income from discharge of indebtedness

(h) Special rules relating to qualified principal residence indebtedness
    (1) Basis reduction
    The amount excluded from gross income by reason of subsection (a)(1)(E) shall be applied to reduce (but not below zero) the basis of the principal residence of the taxpayer.
    (2) Qualified principal residence indebtedness
    For purp
oses of this section, the term ‘qualified principal residence indebtedness’ means acquisition indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting ‘$2,000,000 ($1,000,000’ for ‘$1,000,000 ($500,000’ in clause (ii) thereof) with respect to the principal residence of the taxpayer.
    (3) Exception for certain discharges not related to taxpayer's financial condition
    Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer.
    (4) Ordering rule
    If any loan is discharged, in whole or in part, and only a portion of such loan is qualified principal residence indebtedness, subsection (a)(1)(E) shall apply only to so much of the amount discharged as exceeds the amount H. R. 3648—2 of the loan (as determined immediately before such discharge) which is not qualified principal residence indebtedness.
    (5) Principle residence
    For purposes of this subsection, the term ‘principal residence’ has the same meaning as when used in section 121.

 

Two key terms require defining within the context of the Code.

  • Principal residence is defined in this link to Section 121
  • Acquisition indebtedness  is defined in Section 163 cited below.

Section 163(h)(3)(B)
(B) Acquisition indebtedness
   (i) In general
    The term ''acquisition indebtedness'' means any indebtedness which -
        (I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
        (II) is secured by such residence.
         Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

Feel free to search all San Diego real estate throughout the county.          

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Tim Harris Jan. 14, 2008

Insight into these kinds of transactions is always helpful. Being knowledgeable and motivated are key to surviving in today's more difficult market conditions. Don't you agree that putting both of these halves together is the ingredients of success??

Bob Jan. 14, 2008

Tim, It sounds like your comment is directed more to real estate agents. I'm not sure many read what I write, but I'll agree that in this market, an agent without knowledge is worthless. The other side of the coin should not be motivation, but fiduciary - looking after the consumer's best interest. Agents are taught by trainers and coaches to go after distressed sellers for business. I wish you guys wouldn't push it as the "low hanging fruit" - the easy way to get business. Homeowners facing distressed situations need the most knowledgeable and most qualified assistance out there, not the agents who brands themselves as the "short sale expert", and doesn't know what they are doing, or worse, doesn't care as long as they close the transaction. After 18 years in this business, I can tell you that most in the real estate "coaching" business, who teach agents how to twist or manipulate the truth, are more of a disservice to the consumer than a benefit. Thanks for the inspiration though Tim - I'll follow up on this with a consumer Agent BS Meter - "Lies, Damned Lies and Real Estate Agents".

Lucy Jan. 19, 2008

I own 2 houses. I live in one and the other one is rented. Which one will apply better for a short sale? If I do it with the one I live in will the bank take money from the one I have rented if there is any equity? Thanks for your guidance!

Bob Jan. 19, 2008

Lucy, you can do a short sale on either if the lender agrees, but the debt forgiveness would only apply to the primary residence, and only to "qualified acquisition debt". A lender can't go after other assets on a short sale, but they can require you bring money to the table or to sign a note where you are still liable for the difference in the amount owed and what the bank nets as a condition to releasing the lien on the property and allowing it to be sold. Some lenders will come after you for a deficiency judgment once the short sale is completed. It is important to have the lender's short sale documents and terms reviewed by an attorney prior to signing. Do not rely solely on the advice of your real estate agent or the lender.

Mary Jan. 22, 2008

I am thinking of a short sale of my home because of fincial hardship of being laid off last Oct., it is my primary residence and I have a 1st and 2nd mortage with the same lender. This new law that past does this keep me from getting a 1099 form for the difference? Even if I have a 1st and a 2nd mortage?

Steve Mullins Jan. 22, 2008

Mary, You are forgiven the debt and you are not held liable for the taxes on the debt, i see no way that you could then 1099 it. I am not an accountant but that is how i see it. Great post! -Steve

Bob Jan. 22, 2008

Steve is correct that there would be no tax liability as long as the forgiven debt qualifies as acquisition debt - "indebtedness which is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer".

Kenneth Jan. 22, 2008

I had 2 jobs last year and lost both due to job reductions. Found a job but at a reduced wage. No way to keep the house and foreclosure process to begin feb,15th. Want to short sell and have debt forgiven but i keep reading the phrase " forgiven in order for the homeowner to keep the property" and I know right now I cannot keep the property and survive. How do I know the debt will be forgiven?

Tom Jan. 23, 2008

Hello Bob, I have a construction loan for a house I had planned to move into when completed. The propblem is the house was never even begun to be built. The indebtedness is for the aquisition of the lot and construction of a home on it to live in. I am now negotiating a short sale of the lot with the lender (a combination of a buyer I have located and additional cash provided by me) & the lender is telling me that he is required by federal law to issue a 1099 for the amount of the difference between the loan balance and the monies the lender is paid as a reslut of the short sale. This is on the order of $125K. Even in the 15% tax bracket, that would equate to an $18,750. tax bill. Am I to understand that I can exclude the amount on the 1099 the lender sends me from my income & thus get tax relief? While I am able to assemble cash needed to complete the short sale, the extra $18K is a deal breaker that could lead to foreclosure and, the lender tells me, subsequent deficiency judgment to be persued by a collection agency "for as long as it takes". What a nightmare! What tax form do I use to exclude the 1099 amount from my income? This would be true tax releif if it is the case! Tom

Bob Jan. 23, 2008

Kenneth, "How do I know the debt will be forgiven?", is an important question many don't ask because they assume short sale and debt forgiveness are the same. It doesn't hurt to ask this upfront. You'll get one of three responses - 'yes', 'no', or 'we'll let you know'. If the loan is non-recourse, where the lender can't come after you for a deficiency judgment, they are more likely to forgive the debt in a short sale. In instances where the lender is likely to seek a deficiency, they probably won't tell you until you are well into the escrow where you are less apt to back out. You'll see it in the approval docs they send you. The lender may require a note or could have language that says that they agree to release the lien on the property in order to sell it, but they are not releasing the underlying debt. It is important to add language into any purchase agreement that makes the deal contingent upon the seller 's approval of all lien holder conditions.

Bob Jan. 23, 2008

Tom, many lenders have been telling homeowners that they will seek a deficiency. You need a tax attorney to advise you on options and how the IRS would treat this situation, and/or assist in the negotiations. They are correct about the statutory requirement to file the 1099C, regardless of how the IRS will treat any debt forgiveness.

Michelle Jan. 24, 2008

My questions are much like the others--I own my home of 11 yrs, got engaged WE bought another home, things went south, I moved out he moved out the house is now up for short sale. Can they file a lien against my home for the bal? He also has a home, will they divide the amount between us? If they 1099 me can I get debt relief from the amount of the 1099? any light you can shed on the answers would be greatly appreciated. I have to research online but not fairing very well! Thanks, Michelle

wade Jan. 24, 2008

Hello Bob, I had lost my job last year and now I am Short-selling my property and I owe about 715k split 80/20. The Property is approved to sell for 430k and the lenders have approved the short sale. Will I get hit for a 1099?

Bob Jan. 24, 2008

Michelle, unless you used the first property as collateral, then the lender cannot come after other property. If they can go after a deficiency,then they may choose to seek a deficiency judgment. If the lender forgives any debt, they are required by law to send you a 1099C. If they forgive the debt, then there is no deficiency. Assuming they forgive the debt, any tax relief on the forgiven debt would depend on a) the property being your primary residence and b) if the debt forgiven was acquisition debt. If you are both on the note, then you would both have to deal with the potential tax issues. You do need to speak with a tax attorney or cpa.

Bob Jan. 24, 2008

Wade, If the lien is released and debt is forgiven, the lender has to send you a 1099C. Whether or not you qualify for the tax relief on the forgiven debt is not a determination the lender makes.

Robin Willis Jan. 24, 2008

Bob, I appreciate your clarifying this situation. It seems that some Realtors believe that anyone can do a short sale and not worry about the possible taxation because this bill was passed. That concerns me as a Realtor myself because our duty is to give our clients accurate information and also to refer them to their tax professionals for details. I basically tell my clients that there could be tax ramifications and that they should seek tax advice prior to committing to a short sale. I have linked your blog in a comment I made on mine at http://activerain.com/blogsview/350958/What-are-the-tax Thank you for taking the time to dig out the portions of the code that the bill referred to.

Bob S. Jan. 25, 2008

I had a short sale in 2005 and was assessed $13,000 is tax, plus interest and fees equaling over $18,000. I have paid most of this off, about $16,500. Can I contact the IRS and get some of this back?

scott Jan. 25, 2008

I'm confused a bit on the Acquisition Debt part. I bought a house for $330k, refi-d a couple of times along the way, and the last time was to pay my ex $55k as part of the divorce settlement. I currently owe $580k, as I was paying neg. am. while the divorce took 2 years. Am I not able to get tax relief on anytthin other than the original $330k? Landscaping, flooring, etc.?

Bob Jan. 26, 2008

Bob, the new law only applies to transactions that close after Jan 1, 2007 to Dec 31, 2009. Scott, refi debt that is used to substantially improve the property qualifies. I do not know how the IRS defines "substantially".

Carrie Jan. 26, 2008

I did a short sale due to divorce back in April 2002. There was a primary mortgage and a home equity loan. The short sale did not cover the home equity loan at all. To do the sale Chase had me a sign a document saying that I would pay it back. Because my exhusband filed bankruptcy, Chase would not let me pay. They, then, wrote the loan off but I had to then pay a collection agency. Eight months after the collection agency lost it's license, April, 2007, Chase contacted me and told me I had to agree to a settlement. When I did, as I had no choice, they told me they were going to submit a 1099 for the difference. And the amount they are going to use is even higher than the loan amount started out at. They won't even show me a statement of how they came up with this amount and are not taking into consideration all the payments that I made. Will this law solve my problem since the settlement was in 2007?

Bob Jan. 26, 2008

Carrie, your question raises some interesting issues - - does the law apply to when the sale occurred, or when the debt was forgiven? - how does the bankruptcy come into play? - is the lender making a mistake by not providing you with a statement? This is certainly worth the expense of an hour consultation with a tax attorney experienced in this aspect of the tax code. I would bet there is more than one argument that could be made on your behalf.

Andrea Jan. 27, 2008

Our fixed mortgage just went adjustable and jumped $500/mo. We came upon a company that says that they are able to get a loan modification that will include principle reduction. Thay claim that we will not have to pay any taxes on the debt forgiven and it will not affect our credit. Is this possible? We of course pay them a lump sum before they do this for us. Are we being scammed? Thanks for your insight.

Bob Jan. 27, 2008

Andrea - if the lender is willing to do it, you don't need to pay a third party an upfront fee, although some attorneys will take a retainer to do this. They can't guarantee no credit hit in every situation, and if there is debt forgiveness on debt that doesn't qualify under the new law, they can't promise you that there won't be tax issues. If you email me the name of the company. I'll have someone check it out for you. Email is bobwilson@gmail.com.

Shellie Jan. 28, 2008

I just bought my condo last Feb 2007 and found myself out of a job at the end of the year. I've placed my property up for a short sale. The lender has assessed it for $13000 below what I owe for the mortgage balance. If it sells for less than the assessment price, will I have to make up that difference or will it be written off?

Richard Jan. 28, 2008

We paid 695K for our house, it is now appraising around 425. With the new Mortgage Forgiveness Debt Relief Act of 2007, how do we keep our house and have our loan re-structured to the current value? We have not missed any tax, insurance, or mortgage payments. Any advice would be greatly appreciated. Thanks

Sue Jan. 29, 2008

I spoke with my lender and they kept omitting the second loan in our conversations. I will have to reapply for modification because I won't have the loan for a year until today (1/29) so the application I submitted at the end of October was denied. During one of the times I called back last week, I was told there was no "one-year" waiting period. They've decided this toward the end of December 2007, which was just two weeks after they denied my application. When I finally got transferred to the person assigned to my case, she told me that I needed to resubmit and at the least show that I have more income to have anything done. I would have to be very optimistic of how much I'm making because I am a real estate agent / loan consultant with a regular full-time job to try to save my family from being out of a house. I've considered deed in lieu of foreclosure -- not a good idea -- huge credit ding. I'm currently considering short sale, but I am pretty certain that the HELOAN will not be forgiven unless I have that in an agreement before proceeding with the short sale. For the loan modification, I have to show I have money to pay. For the short sale, I have to show that I am insolvent. I had initially asked for deferment, but I would have to miss a few payments for that to happen and I don't want to risk having a 90-day late on my credit report. It seems a lot of people are put into this category because they are not aware of other alternatives. I'm sort of lost now because it seems that I have no alternative but to make more money to get out of this sticky situation. Anything that I missed?

Bob Jan. 29, 2008

You pretty much covered it, except which state you are in. If it's a non-recourse state like California, that puts the deed in lieu back on the table as an option where you weigh credit against a deficiency. I would pursue the negotiation with the lender on releasing the debt if you can do the short sale.

Rachel Jan. 29, 2008

Bob, My story is pretty much the same as everyone else. We purchased our home February 2007. My husband was laid off in December, we can't afford the mortgage anymore and since the home hasn't gained any equity our shots at selling it to break even is not likely so we are facing a short sell or foreclosure. I'm trying to understand the real estate lingo here and am trying to understand if we do a short sale and have debt forgiven does this qualify as acquisition debt as described in your definition (“indebtedness which is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer”). It is our primary residence. Your reply is very much appreciated.

Bob Jan. 29, 2008

Rachel, unless you refinanced since you purchased the property, it would be acquisition debt.

Cindi Jan. 30, 2008

Just trying to understand all of this. When exactly is the debt forgiven? Is it only if someone files BK? If the bank agrees on a short sale? Or if someone walks away from their house and lets it go into foreclosure, it goes back to the bank and the bank EVENTUALLY sells it at a loss, does the person still have to pay the bank for the difference of what the loan balance was and what they actually sold it for? If so, what is the meaning of the tax relief? If one is still paying the balance, why would there be tax due on it? I thought I understood how it worked until today when I was told by someone the homeowner still had to pay the difference.

Nate Jan. 31, 2008

Lots of great information above. Thank you. I have a few questions, and my apologies if these are a duplicate of a question above. - Scenario - Second home (Cabin), mortgages (80/20) on property are from Original Purchase in 05'. I would not qualify for relief because it is not my primary res, and because it was in 05' correct? - There are many investors out there right now making offers on properties in Short Sale. Does it make a difference to the Seller who purchases the property. Investor vs. Owner Occupied purchase? Thanks! Nate

Joe Somebody Jan. 31, 2008

Cindy's comment is interesting, Bob what about walking away when the bank keeps lying and changing their story every time you talk to them. My real estate attorney says walk away, you've try to negotiate a short sale with your realtor's help. I know this will have negative effect on credit but with if you have to transfer and there's no other way!

Jennifer Feb. 1, 2008

My situation is like most peoples. I bought a house in Dec 2006 for my primary residence for $675K. I got an 80/20 on the loan both with the same lender. I am now out of work and cannot afford the payments any longer. We are going to move back to our other house we own that is now being rented out. We have to do a short sale on the house being that it is now only worth $500K. My question is will I be able to fit in the new tax relief or will I have to pay taxes on the remaining balance. Also I have not had any mortgage lates yet, I am very concerned about my credit. Will the short sale be reported on my credit. Thanks for your help.

Aimee Feb. 1, 2008

We just short saled our townhouse this morning. It was not our primary residence. We owned it since 01' and had it on the market for almost 5 years. We did refi in 04' to take out equity because my husband lost his job. Our ARM was up in 06'. The interest rate ended up going from 6.5 to 12.95!Since we owned the property, we put about 40-50k in renovations. I guess I am asking if we fall under the debt relief act? Is it all short sales or are there stipulations? In the acceptance letter from the lender, I made sure it stated zero deficiency. The difference from what we owed and what they accepted was around 62k.

Catherine Coy Feb. 2, 2008

What's really irritating is Bush's comments on the passing of this Act: [quote] The President welcomed those in attendance, saying, "Thank you all for coming. Welcome to the White House. I’m pleased to sign a bill that will help homeowners who are struggling with rising mortgage payments. The Mortgage Forgiveness Debt Relief Act of 2007 will protect families from higher taxes when they refinance their homes. It will help hardworking Americans take steps to avoid foreclosure during a period of uncertainty in the housing market." [end quote] How does this Act help people who have not lost their homes through a short sale? What has the Mortgage Forgiveness Debt Relief Act got to do with REFINANCING?!

Catherine Coy Feb. 2, 2008

Aimee, how much longer will you be able to live in your home before you must move out?

Catherine Coy Feb. 2, 2008

Bob, I just read this comment by you on another blog post: [quote] Keep in mind that this law wasn’t designed to create more short sales, but to allow flexibility for loan workouts so homeowners can stay in the property. For example, if you bought the property for $800k and now it is worth $600k, the bank’s net will be somewhere in the mid $500s with a short sale at market value. If you can handle the payments on a loan that is more than the lender’s net, it is in everyone’s best interest to simply redo your loan. This wasn’t an option many looked at before because to reduce the loan created the taxable phantom income and subsequent tax. [end quote] Are you saying, then, that this Act applies to refinances, too, where the homeowner continues to live in the home? Wha....?! How is that possible? You mean the lender may agree to reduce the principal balance? Based on what? Must the homeowner fall completely behind on payments before a loan modification is considered?

Bob Feb. 2, 2008

Yes, it applies to loan workouts where the borrower wants to stay in the home and the lender reduces the loan amount, thus forgiving some debt. One scenario would when you have a 1st and 2nd on a primary residence with the same lender. A short sale would wipe out all of the 2nd and part of the 1st. The lender forgives the 2nd entirely and restructures the 1st. The homeowner keeps the house and the lender avoids a foreclosure or short sale that lowers the surrounding comps even more.

Lucy Feb. 2, 2008

Bob, We purchased our home in 2005 for $556K, and have a 80/20 Loan with two diffrent lenders. Due to financial situation we are unable to keep the home. It is currently worth $399K, we have not refinace or have any lines of credit since the purchase of the home. We are wanting to sale our home so we are facing a short sell or foreclosure. If we proced with a short sale would be hit with 1099? We were also told if the Feds did not taxe you, you could be Taxed by the State? Do we qualify for debt forgivens? Lucy

Catherine Coy Feb. 2, 2008

Well, that is truly incredible. This news will be a blow to all the so called Short Sale Consultants out there who are licking their chops that foreclosures are up 79%. Have you heard of any lenders reducing the principal balance, thus allowing the homeowner to remain in the home? So far, only short SALES are occurring. What you're suggesting makes perfect sense because, as it is, it's like the housing version of musical chairs out there. I see one downside: people could merely stop making their payments as a negotiating tool to force the lender to forgives the 2nd. It wouldn't be right for the lender to be forced into taking it in the shorts just because this Act provides relief to the homeowner.

Bob Feb. 2, 2008

Cindi - excellent questions. <i>Question: When exactly is the debt forgiven?</i> Debt can be forgiven by the lender if they choose to reduce the debt owed in a loan workout, in certain short sale situations, or in certain foreclosure situations. <i>Question: Is it only if someone files BK?</i> No. <i>Question: If the bank agrees on a short sale?</i> Debt is forgiven in a short sale when the lender agrees to release the lien and allow the property to be sold AND agrees to not come after the borrower for the difference between the loan balance and the payoff. <i>Question: Or if someone walks away from their house and lets it go into foreclosure, it goes back to the bank and the bank EVENTUALLY sells it at a loss, does the person still have to pay the bank for the difference of what the loan balance was and what they actually sold it for?</i> Yes, in circumstances where the lender has recourse (the ability to seek a judgment against you for the difference between what was owed and what the bank eventually sells it for). California is a non-recourse state, so adeed in lieu or foreclosure that results in a trustee sale usually means that the lender gets the deed in full satisfaction of the debt. <i>If so, what is the meaning of the tax relief?</i> The IRS considers forgiveness of debt to be income. You owe $50k, but don't have to pay it back, the IRS sees that as you making $50k, so they tax it as income. The tax relief this bill provides means that you don't have to pay the tax on the forgiven debt. <i>If one is still paying the balance, why would there be tax due on it?</i> In that situation, there would not be any tax relief since there is no forgiven debt to tax. Sometimes the homeowner is asked to take a note for the difference. Sometimes the lender decides to sue and seek a deficiency judgment, providing the terms of the loan allow them to do so.

Bob Feb. 3, 2008

Nate, the cabin wouldn't qualify if it isn't a primary residence. The '05 purchase date does not matter. What matters is the year the debt forgiveness occurs. The bank won't care if the buyer is an investor or one who intends who to use it as a primary residence. The question I can't answer here is whether or not a second home can qualify as a primary residence.

Bob Feb. 3, 2008

Joe, has your attorney spoken with the bank?

Bob Feb. 3, 2008

Jennifer, have you approached the lender about a loan modification? It is possible that they could forgive the second if you continue to pay the first. It would be up to them if they reported anything to the credit bureaus. If they did, it would be as a charge off.

Bob Feb. 3, 2008

Aimee, the debt forgiven on an investment property would not be eligible for tax relief. You should check with a tax attorney or CPA to see if bankruptcy or filing insolvency with the IRS may be an option.

Bob Feb. 3, 2008

Lucy, lenders are required by law to file a 1099C if they forgive debt. Nothing I have seen changes that requirement. I don't know how each state treats this type of situation, but it would not surprise me if many still tax this as income. The IRS would not tax the debt forgiveness on the acquisition debt for a primary residence.

Bob Feb. 3, 2008

Catherine, yes I know of some who wanted to stay in their homes and have negotiated loan modifications.

Kevin Feb. 3, 2008

We did a short sale on our primary residence in April 2007. We agreed to a promissory note for $58000.00 over 20 years and now we rec'd a 1099-C for $35000.00. With this new law, are we required to claim the cancelled debt as income or not? Please advise.......Thanks

Cindi Feb. 3, 2008

Bob, so if I understand you correctly, the debt forgiveness relief act means absolutely nothing to California homeowners except those people who want to stay in their house and the lender works out a deal and reduces the amount of the debt? In all other scenarios, the balance is forgiven or written-off and because we live in a non-recourse state, the bank come after the homeowner for the difference? So the only bad thing for people who want to or have no other choice other than to just walking away from their houses is a mark on their credit? No other consequences? Thank you!

Cindi Feb. 3, 2008

The part of my question should have read: In all other scenarios, the balance is forgiven or written-off and because we live in a non-recourse state, the bank CAN'T come after the homeowner for the difference? (Sorry for the typo)

Cindi Feb. 3, 2008

Bob, I just reread your response to me. This could also be the opposite in that this relief means alot to every Californian who loses their house for whatever reason because it is ALWAYS written off unless someone is not educated on California loan laws enough to know that they don't have to pay back the difference and they voluntarily agree to take on a note with the bank agreeing to pay back the difference without knowing that the bank cannot come after them. ?? Sorry, I am still confused. I guess I am just trying to understand what is deterring people who are struggling to stay in their house that's value has declined to not just walk away? My assumption is most people who bought in the last 2-3 years, put zero down on their purchase so they don't have much to lose except a bad mark on their credit. Am I wrong?

CS Feb. 3, 2008

Bob, Our principal residence was foreclosed Oct. 2007. Our first mortgage lender ended up purchasing the property covering only their balance and property taxes. Our second mortgage lender is still sending us monthly bills. I already spoke with them and told them that the property is already foreclosed and therefore will not pay them anymore. They said that they will continue to do this until they decide that it is uncollectible and then will 1099 us. We are about to file our taxes. Does this mean we don't have to report the foreclosure until next year since we don't have the 1099 from the lender yet?

Bob Feb. 3, 2008

Kevin, that is a question for a tax expert. Cindi, it is not always written off. Purchase money loans are non-recourse in California, but Helocs and refi loans are not always non-recourse. A huge number of homeowners have refinanced out of their original non-recourse loans into recourse loans. On these loans, the borrow would need to check the terms of the loan to determine whether or not the lender has recourse or not. CS, I don't know how the foreclosed first affects the 2nd in your situation. You need to talk to a tax expert who understands the foreclosure laws in your state.

cynthia Feb. 3, 2008

Bob wrote: "One scenario would when you have a 1st and 2nd on a primary residence with the same lender. A short sale would wipe out all of the 2nd and part of the 1st. The lender forgives the 2nd entirely and restructures the 1st. The homeowner keeps the house and the lender avoids a foreclosure or short sale that lowers the surrounding comps even more." Is this really happening?? We are looking to modify our two loans (re-fi both w/Citimortgage). We are afraid to pursue a short sale since our loan is conisdered recourse and Citi coud come after us for the 97K on the second. Are lenders really forgiving part of loans under a loan modification/workout??

Cathy Feb. 4, 2008

Question....my husband and I divorced 15 mos. ago. We owned a home together. In June of '07 our mortgage company agreed to a short sale at fair market value, which was 79k less than we owed on the mortgage. We have EACH received a separate 1099 with the amount of 79K on each one. Is this so that at least one of us presents it during tax prep, or do they expect BOTH of us to claim it? If so, it seems to be doubling the amount ? Thanks for your help.

barb Feb. 4, 2008

I am considering a short sale on my home in michigan. Is it better to strike a deal wtih a bank to pay off part of the deficiency so that they will not sue me? Also, what are the tax implications of a short sale vs foreclosure? Under the new mortgage law, will I have to pay taxes on the deficient amount in April 08?

Bob Feb. 4, 2008

Cynthia, speaking with the lender first is important. Every situation is different, so until you talk to the lender you don't know what options are available to you. Unless there is equity, no lender wants a property back. Cathy, yours is tax question and I don't know the answer. Barb, it is important to start off by asking the lender what options they would consider. You need to talk to a qualified tax expert about the tax consequences. The debt forgiveness law applies to debt forgiven, not deficiencies.

Kevin Feb. 5, 2008

I bought a house with the intention of moving into but chose to keep my primary residence. I never told the bank that I was now going to use this property as an investment property. Now I cannot carry this mortgage even with renters. My question is now that I am going through a short sale, can the bank come after my personal assets like my roth IRA for the difference in the short sale settlement. What would be my tax liability?

Jen Feb. 5, 2008

My business is suffering. We have been trying to manage our $5000 mortgage payment on our $3600 a month. The drop we initially assumed was the fires....it still is not picking back up. Currently we are due. Our first mortgage will not negotiate the terms. We have no late payments on our credit to date. We live in Southern CA and our mortgage is about 65k over the value of our home so selling is not an option. I have talked to attys and realtors and everything we hear is so contradicting. Is there somewhere specific in our loan docs we can locate what their recourse would be?

Catherine Coy Feb. 7, 2008

Jen, CA is a non-recourse state. You should stop making the payments and live in your house until you can no longer live in it. If you make your payments on everything else, you'll be surprised how quickly you can recover from this unfortunate event. Save your housing expense money to regroup. Tomorrow will be a brighter day. You'll see.

Bob Feb. 7, 2008

Kevin - Not in most cases. Catherine - while California is a non-recourse state, that does not mean every loan is non-recourse, so your advice to Jen may not be correct. Jen, give me a call. 858-382-5820.

Billie Feb. 7, 2008

Bob, I am thinking of a short sale and am wondering if I have to be behind in payments to do a short sale. I put quite a bit of money into the house to bring up the value. My timing was bad and in spite of the very considerable home improvements, the value has decreased below the amount now owed. The area tanked. My payments are due to go up to 13.5% and I can barely afford what I am paying now. I don't know what to do or where to start. Can you give me some advice?

Catherine Coy Feb. 8, 2008

Billie, did you know that conforming loan limits are legislatively due to increase to $729,750 in high cost areas? Your post doesn't say what state you're in, but that may help you. If you're already in a conforming loan, the new higher loan limits probably won't help. But, frankly, Billie, there's no benefit to a short sale relative to qualifying for an institutional loan a minimum of two years down the road and/or your credit score. You may as well live in the house until it goes to Trustee's Sale and use the time to regroup by banking your housing expense for the months that it takes for the lender to foreclose.

Catherine Coy Feb. 8, 2008

I forgot to mention, Billie, that by living in your house rent-free for as long as it takes for the lender to foreclose, you would be effectively recouping some of your fix-up money, would you not? Perhaps if you think of it that way, your anguish will be lessened. I would caution you, however, not to try to stay in the house so long that the lender is forced to file an unlawful detainer action. UD is the kiss o' death where prospective landlords are concerned. Many landlords will show mercy to a consumer who has suffered a foreclosure, but not one who has forced a lender (or landlord) to forcibly evict.

Maggie Feb. 9, 2008

Bob, With HR 3648 Do I still need to show the 1099 form we received when we do out taxes?

Maggie Feb. 9, 2008

what is the difference between 1099B &amp; 1099C?

Joyce Feb. 10, 2008

I received a 1099-A, not a 1099-C......what is the difference? Also, I already filed my taxes before I even knew of this debt relief act. Will I have to amend my return?

Bob Feb. 10, 2008

Maggie and Joyce, This IRS publication explains the different forms: http://www.irs.gov/efile/article/0,,id=98114,00.html Here are the IRS instructions for forms 1099-A and 1099-C: http://www.irs.gov/pub/irs-pdf/i1099ac.pdf

Daniel Feb. 12, 2008

We bought a townhouse for $352500 with 80/20 under my wife's credit and name. This is our only and primary residence and I have not been late in any payment until today. However I am the one that makes the payments since my wife is home with our baby. Because of my financial situation, I am strugling and cannot pay anymore. In our situationm, can we benefit from "The Mortgage Forgiveness Debt Relief Act of 2007"? If we consider shortsale, will we end up owing taxes on the forgiven debt? Does this "Debt relief Act" help us to seek a loan modification not only on lower interest rates but lower the initial debt of $352000 to a current market value of the property? Some realtors have advice me not to pay anymore and stay in the property until the lender decides to shortsale, so we can take advantage of free home until it sells. After leaving home, will we still be able to rent an appartment or townhouse, after getting my wife's credit hit for the shortsale? I will appreciate any advice or comment.

Bob Feb. 12, 2008

Hi Daniel. A few questions. Do you have the same lender for both loans? What state are you in?

Daniel Feb. 13, 2008

Thank you Bob, No, we do not have the same lender for both loans. We are in Virginia.

Kate Feb. 14, 2008

This is more informative than the dozen or so attorneys I've spoken to. For whatever reason, nobody will give me straight answers - they don't seem to want even to take my money! My situation is unusual. We have 2 mortgages on the house. The 1st is for the acquisition value. The 2nd is extra and thus doesn't qualify as acquisition debt. Both debts are in my name alone - though the trust deed and the title are in both of our names. My questions are: 1) If we do a foreclosure, will my husband's credit be affected? 2) In a foreclosure, since we are in CA - there is no deficiency right? They won't be able to come after anything post-foreclosure. 3) If I apply for a short sale, will the bank be looking at my husband's income? Mine is small and I was hoping that it would be sufficient to get them to agree. 4) In the case of a short sale, will my husband's credit be affected? (The loans do not appear on his credit report; the notes are in my name alone) 5) Do you know *any* real estate attorneys who might be willing to talk to me for a fee? Thanks so much for your help! Cheers, Kate

Bob Feb. 14, 2008

Kate, Is there one lender for both loans or two?

Catherine Coy Feb. 14, 2008

Kate, I'm a mortgage broker, so I feel qualified to answer your questions relative to credit. 1. Since he's not on the mortgage note, no. 2. Not on the 1st (acquisition) but possibly on the 2nd (HELOC) 3. For the bank to agree to a short sale, you must prove hardship so, yes, they will ask about "household" income. 4. Since he's not on the mortgage note, no. 5. I don't know any in San Diego. If you go the short sale path--(although I don't know why you would, since a short sale trashes your credit the same as a foreclosure)--the lender may demand a promissory note and/or pursue you for the deficiency. If they attempt that, you may as well go to foreclosure.

Bob Feb. 15, 2008

Short sales are not always treated the same as foreclosures when it comes to credit reporting. It depends on if and how its reported. Credit reporting is not required. It can and is frequently negotiated with the lender. Making a blanket statement about short sales vs foreclosures is irresponsible. Every situation is different. It is one reason why doing a short sale without an attorney at the ready is foolhardy. Kate, you could be getting different answers for a multitude of reasons. Reading the law is not the same as first hand experience. I have dealt with 5 different attorneys today. All of them see things a little different. One explained to me that forcing a TILA (truth in lending act) issue didn't work with one lender because they are federally regulated. Another told me the way around that was to frame the argument differently. He turned it into a contract law issue. Case still ends up in Fed court. Lawyer A says no can do, Lawyer B takes a different tack and gets it done. I have two attorneys in California you should contact. I'll email their contact info to you.

Matt Feb. 15, 2008

Bob, I'm in Florida and came across your site. A few questions regarding an second home (rented out) we purchased in South Florida. Won't bore you with specifics, but the jist is we lose 1500 per month on the place, it is worth 60K less than what we paid and hurricane insurance just put our monthly association fees to 500 per month on the unit. I have spoken to an attorney and he said stop making payments because a lender doesnt usually talk to you regarding a SS if you are current. We have paid faithfully for over 2 years. 1)Have you had any experience with Countrywide's Home Retention Dept? They are hurting pretty bad as a company now and I was wondering if they are being stiff or flexible regarding SS or loan mods. 2)Are lenders negotiating loan amounts to keep you in a loan? I could afford the loan if it were at the current market value and would be willing to keep it since I have a tenant in place, but can't afford it and the association dues at the current rate any longer. 3) I have fallen behind in association fees to the tune of 3K. I know a lien can be placed on the unit by the homeowners association, how does that affect a short sale? 4) Last and 2 BIGGEST questions...we have one other rental property that we break even on each month but have about 20K in equity in...A) have you ever heard of gifting that to a child or moving into a land trust to protect it from a deficiency judgement? B) Can a deficiency judgement call for garnishing of wages?

Bob Feb. 15, 2008

Matt, I work with an attorney in California that also practices law in Florida. I'll put you in touch with him. To answer the questions I can: 1) yes. I am working with them now. They have an analysis they put the short sale offer through. If it makes sense, they try to do the deal. In some cases the deal make sense, but the loss can be so great that it takes a secondary approval if there is an investor involved. By that I mean if CW is servicing the loan for an investor. 2) I am working on that issue as well. That is more complicated. You need to call Customer Service and ask for a loan modification package. 3) In a short sale, liens get added to the good faith estimate and are figured into the payoff amount. 4) One of the biggest mistakes people make is transferring property incorrectly. Both 'a" and "b" require an attorney to answer. I'll follow up with you via email.

MIke Feb. 16, 2008

What about foreign nationals. I have a client that owns four investment properties here in the US. All four are currently behind anywhere from 30 to 120 days. I have listed two of them as short sales for her at this point. We have a cash offer on one (she owes $300K, the offer is $275K) and the other should sell in the next month or two. The question is whether any 'shortage' can really be recouped from her as she is a foreign national. I have, of course, advised her to speak with her attorney and tax professional regarding both liabilty and tax implications. However, I have yet to hear any definative answer from either regarding the general question of the true 'reach' of the lenders involved as it relates to foreign nationals. Please let me know your insight in this regard...

Bob Feb. 16, 2008

That would be an area where FIRPTA could apply.

Catherine Coy Feb. 16, 2008

In my experience of nearly 20 years as a loan originator, I've never ever--no, not once--seen a short sale reported on a credit report as anything but Score Factor Code #22--"serious delinquency, derogatory public record or collection." Therefore, it was not irresponsible but factual to respond that a short sale and a foreclosure are treated exactly the same at the bureau level. If, however, a short sale negotiator can persuade the shorting lender to report the short sale using a code other than Score Factor Code #22, that's a significant coup for the negotiator and a slam dunk benefit for the homeowner. If you would like to verify this fact, you can write to cbhelp@fairisaac.com and a Fair Isaac &amp; Co. representative will call you back to discuss. In addition, short sale and foreclosure are treated exactly the same by subsequent institutional lenders for loan qualifying purposes. A seasoning period of no less than 24 months stands between the former homeowner who went short sale or who was foreclosed upon and a new institutional loan. If you would like to verify this fact, you can call any institutional lender and ask, "Is there any difference between a short sale and a foreclosure with respect to seasoning?" They will say, "no." There's a lot of misinformation flying around the internet with respect to how short sales are treated by credit bureaus and lenders. I suspect it has a lot to do with the potential business that could be lost by realtors and short sale consultants when/if the consumer realizes there's no benefit to a short sale as opposed to a straight foreclosure. The practical reality is that the difference between short sale and foreclosure is the difference between being hit by a train or a bus. Your credit is just as trashed by a short sale and future lenders are just as cautious about lending to you again.

Mike Feb. 16, 2008

Could you be more specific? Do you have an opion on this based on your knowledge?

Bev G Feb. 16, 2008

I am interested in the short sale idea. I have an investor willing to negotiate the short sale for me but is getting something out of it for him. I am concerned if I will be 1099ed the difference or "forgiveness". The investor is thinking to sell the home on the short sale forgiveness negotiated and let me live in it and down the road buy it back. What will the future hold for me as far as the forgiveness in an attempt for me to keep the home. I may sell it, rent it and buy it again if do-able - what are your thoughts?

Bob Feb. 16, 2008

Mike, here is the IRS publication that explains FIRPTA, the <a href="http://www.irs.gov/businesses/small/international/article/0,,id=105000,00.html">Foreign Investment In Real Estate Tax Act</a>. Bev, what you are describing is the script for a very common scam. You should speak with an attorney.

Mike Feb. 16, 2008

Bev This sounds like one of the classic scams. I bet he/she is suggesting that you first deed the property over in order to 'facilitate' his right/ability to negotiate, right? Step one is to consult an attorney. If after consulting an attorney to explore all of your available options (re-negotiated loan terms/payments, bankruptcy, short sale, foreclosure, etc.), if short selling is the one you choose, the last thing I would do is go to an investor/buyer and say, 'please negotiate for me.' They clearly will not be acting in your best interest.

Mike Feb. 16, 2008

Thanks Bob. LOL, you beat me to the punch on Bev's comment.

Bob Feb. 16, 2008

Catherine, thanks for the link, but my brother-in-law works for FairIssac. One item you are over-looking is that not all short sales are reported as short sales. From <a href="http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/09/11/BUVUS2U88.DTL">SFGate.com</a>: <blockquote><em>According to the credit bureaus, any negative item - whether it's a past-due payment, charge-off, short sale, deed in lieu of foreclosure or outright foreclosure - stays on your credit report for seven years. The only exceptions are tax liens, which stay on your report until the taxes are paid, and bankruptcies, which generally stay on for 10 years. (In some cases, a Chapter 13 bankruptcy can come off after seven years.) How these negative items affect your credit score - and for how long - is another matter. Companies like Fair Isaac take the data from your credit report and plug it into a formula that spits out your credit score. Your score depends on all the information - positive and negative - in your report. The problem is, there is no category on credit reports for short sales or deeds in lieu of foreclosure, which until recently were rare, says Craig Watts, a spokesman for Fair Isaac. "We're not sure how the credit bureaus are representing those transactions," he says. How they affect a credit score "depends on how the lender has chosen to report it to the credit bureau."</em></blockquote> Nothing is boiler plate these days. Attorneys that were swearing off short sales 9 months ago are now using them in conjunction with TILA and RESPA laws to leverage lenders to negotiate differently. With so many <a href="http://www.investopedia.com/terms/c/cmo.asp">loans packaged as CMO's</a>, more and more banks are having a difficult time responding to specific RESPA related requests put forth by attorneys. As a result, we have seen loan servicers suddenly become very agreeable to the idea of not seeking a deficiency and follow through with a short sale. The credit reporting is negotiated as well. Put credit aside for a moment though. For many, the bigger issue is not the credit, which frequently is already in the 500s, but the 5 or 6 figure deficiency they'll never be able to pay off. At some point then, lenders just write it off. If this is done after the Mortgage Debt Forgiveness Act sunsets, you now have a tax liability. Telling people to not bother with a short sale and just live rent free for a few months is bad advice if they face a deficiency as a result. Once they property is foreclosed, is there anything left to leverage in a negotiation about a deficiency? Not much that I can see. I am the first to say that a short sale option is not always the best option, but if it provides negotiating leverage, then it is quite valuable. As far as the motivation providing bad advice, for some it is just ignorance. Regardless, that comment of yours was an <a href="http://en.wikipedia.org/wiki/Ad_hominem">ad hominem</a> argument that argues the players and not the facts. This distressed market is not like what you and I have seen in the past. The entire lending landscape is different. When mortgages became securitized, it changed the game. Foreclosures are now being challenged on the basis that <a href="http://www.nytimes.com/2007/11/15/business/15lend.html?_r=2&amp;ref=business&amp;oref=slogin&amp;oref=slogin">the lender can't readily prove</a> they own the loan. This creates leverage in the hands of a skillful attorney. I will continue to argue that one size fits all advice like "there’s no benefit to a short sale as opposed to a straight foreclosure" is extremely irresponsible.

Catherine Coy Feb. 16, 2008

Unless and until the homeowner brings the loan current through (1) payment of past due payments, (2) loan modification, or (3) forbearance, the practical reality is that s/he will lose the home through (1) straight foreclosure, (2) short sale or (3) deed-in-lieu. The short sale investor/buyer, because he hopes to resell for a profit, will negotiate on his own behalf. The lower the negotiated short sale price, the more profit he makes when he re-sells. Once the homeowner is destined to lose the home, there really isn't any "best interest" to be protected beyond trying to persuade the short selling lender to report the now derogatory mortgage trade line as "paid as agreed" (fat chance!) and not go after the homeowner for deficiency. However, an ethical short sale investor/buyer will attempt to do just that: negotiate with the lender to (1) waive the deficiency and/or (2) not report the trade line in quite so devastating a manner as Score Factor Code #22. If the lender balks at either of these two benefits, the short sale consultant will not press the matter, because to do so would jeopardize his ability to buy the property at a discount and re-sell it for a profit. Clearly, then, the short sale investor/buyer has a conflict of interest, whether he acknowledges it or not. Mike, I don't know if you were addressing me when you asked, "Can you be more specific?" but my answer is that my comments are based on my experience in dealing with FICO scoring issues and originating loans under the guidelines of Fannie Mae and Freddie Mac.

Bob Feb. 16, 2008

Adding to Catherine's last comment, is that because the investor/buyer needs the lowest price, they are not usually the seller's best option. One concern with being overly reliant on a low ball investor instead of getting a closer to market price buyer, is that if the investor deal is not approved by the lender, you may have run out of time. If you do this on your own, make sure you have an attorney.

Catherine Coy Feb. 16, 2008

&lt;<I>&gt; Fair Isaac is in a quandary, aren't they? If their scoring algorithm becomes even more transparent than it already is, and we all figure out how to "crack the code," they're out of business. So they will continue to obfuscate to protect their proprietary scoring algorithm, and no one can make them come clean with the exact details of how scores are derived. We do, however, know all about Score Factor Codes because they've been published all over the Internet. As I said, I have never, not once, seen a lender characterize short sale, foreclosure or deed-in-lieu as anything but Score Factor Code #22. That doesn't mean they can't or haven't used Score Factor Code #03 or its equivalent, which is much less damaging. Maybe they have. I'm stating what the lender is most likely to do, based on my analysis of thousands of credit reports over nearly two decades of originating loans. What IS irresponsible is for anyone with skin in the game to tell a homeowner that a short sale will "save their credit," or "you can recover faster from a short sale," or any other wishful thinking. Since a short sale and foreclosure are treated the same (that dang Score Factor Code #22), and no future lender will lend until 24 months seasoning has passed (Fannie Mae underwriting guidelines), I see no benefit to short sale over foreclosure. Perhaps someone has a thought about HOW short sale is better than foreclosure that I'm not privy to. If a short sale negotiator can negotiate a less damaging Score Factor Code, I'm all for giving that the old college try. An attorney using obscure fragments of the law to challenge the lender's position is a unique twist.

Catherine Coy Feb. 16, 2008

Bob wrote: Telling people to not bother with a short sale and just live rent free for a few months is bad advice if they face a deficiency as a result. I thought the "one action" rule says that once a lender has exercised its right to foreclose, no other action can be taken against the homeowner; therefore, the lender cannot come after the homeowner for a deficiency. http://library.findlaw.com/1998/Aug/1/130432.html Another "benefit" to the homeowner to foreclosure, not short sale, in my opinion.

Catherine Coy Feb. 16, 2008

In California when a debtor defaults on a real property secured debt, the creditor's options are significantly limited by section 726(a) of the California Code of Civil Procedure. Commonly referred to as the one-action rule, section 726(a) most obviously aims to prevent a real property secured creditor from suing the defaulting debtor on the indebtedness itself prior to foreclosing on the security interest. If the debtor in the situation described does not raise the one-action rule as an affirmative defense and if the creditor obtains a personal judgment on the debt, the one-action rule would forever bar the creditor from foreclosing on the security interest. Full text of Section 726(a) of the California Code of Civil Procedure can be found here... http://law.onecle.com/california/civil-procedure/726.html

Bob Feb. 16, 2008

What you cite is part of the problem, created in part by lenders, agents and buyers who didn't realize the potential consequences of 80/20 loans with two different lenders. If the first forecloses, the 2nd doesn't get his "one action" and can pursue a deficiency. It's little things like that why blanket advice is dangerous. I don't want to take this overview of the Debt Forgiveness Act any further of course here. I'll publish a post on foreclosure rules and we can continue this discussion there.

Matt Feb. 16, 2008

"Foreclosures are now being challenged on the basis that the lender can’t readily prove they own the loan. This creates leverage in the hands of a skillful attorney." Great Post. I am actually in Jax, FL where April Charney, the attorney going after the lenders is located. Interesting info regarding the repackaging of loans and proving who owns what or what portion of your actual loan. Bob-the attorney you know who practices in CA and FL, do you know how successful or not he is in negotiating on an owner's behalf? Also, in your experience, what is the overall cost from beginning to end of retaining an attorney to represent you in a situation like most people are facing. I sat next to 2 real estate attorneys recently on a flight, and they said I could do the negotiation myself with the lender...while I agree, I just feel a lender may take an experienced atty more seriously. Thoughts?

Matt Feb. 16, 2008

"Adding to Catherine’s last comment, is that because the investor/buyer needs the lowest price, they are not usually the seller’s best option. " In that case then, who should we as owners sell to and how do you not attract the vultures in the process?

Bob Feb. 16, 2008

Matt, Florida is tougher than California because there is not the non-recourse consumer protection. That leaves RESPA and TILA as the remaining leverage. I believe the attorney adds value. If the lender stonewalls the seller, the options for the seller are to a)give in, b) fight on. Option A means losing. Option B is stronger with an attorney fighting for you. I prefer to cut to the chase and have the attorney at the ready. I have seen attorney fees from $1000-$2000 typical in quite a few cases.

Matt Feb. 16, 2008

Regarding the atty challenging the loans, April Charney...she is a member of NACA, who was started by Bob Marks...the atty guy who was ruthlessly pursuing lenders on the behalf of homeowners a few years ago. He once passed out fliers in a CEO's neighborhood about the CEO of one company having an affair with a worker and pickets schools where the children of lenders' CEOs attend, telling the kids their daddy's are wicked. While aggressive, his company just teamed up with Countrywide, obviously, according to the pair, to help out homeowners. I say that with a sarcastic tone.

Matt Feb. 16, 2008

Bob- To your best guestimate, from your experience and what you have seen...what percent of cases can an attorney negotiate a non pursuit of a deficiency judgement?

Bob Feb. 16, 2008

&gt;who should we as owners sell to and how do you not attract the vultures in the process? List the property. The investor/buyer who wants "to negotiate on your behalf" would likely preclude you from getting better offers. While some may think listing the property is strictly a self-serving real estate agent task, if you do this in conjunction with an attorney and the agent knows up front that the end result is what is best for the homeowner, which may mean no sale, then you have your bases covered. In Florida I am hearing of situations where the best end result is a deed in lieu with the lender agreeing to not seek a deficiency.

Bob Feb. 16, 2008

Matt, I don't have a guess. I have seen attorneys suggest like Catherine that a deed in lieu or just walking away is the best answer, but lately i have seen more attorneys see that they can fight lenders and win. One attorney I spoke with this week has had success in Federal Court and in some cases has had the mortgages cancelled outright. Others are fighting on behalf of Spanish speaking borrowers who didn't get loan docs and/or escrow instructions in Spanish.

Matt Feb. 16, 2008

"In Florida I am hearing of situations where the best end result is a deed in lieu with the lender agreeing to not seek a deficiency." Why would a lender want to do a deed in lieu when they already have a ton of real estate on their books that they must auction off. Wouldn't that just be adding one more to the mix that they would have to auction off? Just curious. Also if you did a deed in lieu of foreclosure and you have a tenant in place. Does the lender force the tenant to vacate or do they collect the future rent payments from the tenant?

Joyce Feb. 16, 2008

I received a 1099-A for abandonment of my property. I'm not sure how they determined that, but, in any case, do I have to report as income the difference between the amount of the debt and the fair market value of the property? Or is this "forgiven" under the new tax rules?

Bob Feb. 16, 2008

Joyce - The gross foreclosure bid price is considered to be the FMV. If an abandonment (mailed the keys to the lender) or a voluntary conveyance to the lender (a deed in lieu of foreclosure) occurred, then they enter the appraised value of the property. From the IRS: <em><blockquote>Box 1. For a lender’s acquisition of property that was security for a loan, the date shown is generally the earlier of the date title was transferred to the lender or the date possession and the burdens and benefits of ownership were transferred to the lender. This may be the date of a foreclosure or execution sale or the date your right of redemption or objection expired. For an abandonment, the date shown is the date on which the lender first knew or had reason to know that the property was abandoned or the date of a foreclosure, execution, or similar sale. Box 2. Shows the debt (principal only) owed to the lender on the loan when the interest in the property was acquired by the lender or on the date the lender first knew or had reason to know that the property was abandoned. Box 4. Shows the fair market value of the property. If the amount in box 4 is less than the amount in box 2, and your debt is canceled, you may have cancellation of debt income. If the property was your main home, see <a href="http://www.irs.gov/publications/p523/index.html">Pub. 523, Selling Your Home</a>, to figure any taxable gain or ordinary income.</blockquote></em> <code></code>

JB Feb. 16, 2008

Great blog ! We bought a house 2 years ago for $280k in CA. The current value is $255K. My work visa expired a couple of months ago and so I'm no longer able to pay for my mortgage. (also, I don't think I can get it refinanced). I've used up all my savings to pay for my mortgage since then. Do you think short selling is the best option for me? Will I be covered by this new law? Thanks.

Tom Feb. 17, 2008

Bob, Can you tell me if I understand this correctly. In CA, have recourse loan, refinanced at 90% LTV with PMI. I am moving this summer and am so far upside down decided to list home as short sale. This law will not forgive my tax liablity for and forgiven debt b/c I refinanced. Is that correct? Also, I have RESPA and TILA violation in my loan docs - can a good lawyer use this in negotiating a short sale - and how does the PMI come into play. If they pay a claim to lender does the lender 1099 me for that, or the PMI Co. - or does the PMI Co. have some other recourse. This is all so confusing!!!!!!

Jason Feb. 17, 2008

Bob- I have an option arm -1st and a heloc-2nd.(both are different lenders). Both loans were a cash out refi in California. I just lost my job, not behind in payments, and upside down on the home. 1. Since the refi makes the loan recourse, does that mean I will pay taxes on the forgiven debt? 2. Does being insolvent eliminate taxes on recourse loans? 3. Is it possible to do a short refi if another bank has the 2nd? 4. Since I'm not delinquent, are banks more willing to ignore me? Also, if you have any advice or recommendations it would be appreciated. I don't want to walk away or stop paying my mortgage. Thanks.

Bob Feb. 17, 2008

Tom, the law applies to the debt forgiven up to the amount of the original acquisition debt and any cash out debt used for "substantially improving" the property. I know lawyers are using TILA and RESPA issues as negotiating leverage. I don't know the answer to the PMI issue. Jason, if the debt is forgiven in a short sale, then recourse or non-recourse is not an issue. The confusion arises because many assume that a lender agreeing to a short sale is automatically forgiving the debt. That is not always the case. A lender can agree to release the lien and therefore allow the sale to occur, but not release the borrower from the underlying debt. If the borrower signs off on a short sale with those lender dictated terms, then the borrower is still on the hook for the deficiency. This can happen with either a recourse or non recourse loan, but it shouldn't if the loan is non-recourse. Insolvency is one way to deal with the tax issue. It's confusing and should be done with the advice of a tax attorney or CPA. It's possible to do a refi, but not probable. The answer to question #4 depends on the lender. Feel free to give me a call at 858-382-5820.

Bob Feb. 17, 2008

JB, with a non-recourse loan, you won't have a deficiency and because it is a purchase money loan, no Fed tax. There may be a state tax hit though, unless California changes the current law to mirror the Fed law, which they are trying to do. Your first call should be to the lender to see what options they can offer you.

Tom Feb. 17, 2008

Bob, Thanks, that is a great load of my shoulders. A bankruptcy lawyer advised me differently. I only refinanced for a better rate and didn't take any cash out. Once I learned about how I lost my 'non-recourse' status and then this issue it kind of felt like a double whammy. It's funny how none of that is in the closing documents. I am still confused on the PMI issue but I'm sure I'll see how it mangages to play out I presume. This short sale business appears to be my only hope to avoid foreclosure, I've heard the odds of success aren't too great but we'll see how it goes.

Bob Feb. 17, 2008

If its recourse, the lender can still seek a deficiency. With a foreclosure, it's up to the lender, but in California, it usually isn't an issue because they normally opt to do a non-judicial foreclosure. If there are two lenders, one of the lenders may go after a deficiency because they didn't get their one action (I'll explain this later). With a short sale or deed in lieu, it comes down to the terms you negotiate, but a deed in lieu doesn't work very often with two lenders because there is only one deed. One needs to agree to a settlement and to let the other take the deed.

Catherine Coy Feb. 17, 2008

Tom, what is avoided with a short sale is only the social stigma of foreclosure. In practically every other way, the two are the same. In addition to my duties as a mortgage broker, where I see the results of foreclosure and short sale on FICO scores, I currently negotiate short sales for short sale investors. In nearly all cases, we get the deficiency judgment waived but, make no mistake, there's little to no benefit to short sale over foreclosure unless you count avoiding the social stigma of foreclosure as a benefit (many people do). One can always say, "I wasn't foreclosed, but I still lost my home."

Tom Feb. 17, 2008

Catherine, I don't understand your reasoning. I am upside down but not behind on payments. I am well ahead of the ballgame on this; in foreclosure you are at least 90 days delinquent. I have an approval from my lender to negotiate a short sale and my loan is current and I hope to keep it that way. How is that the same as foreclosure? I realize neither is good, but the SS seems like the lesser of two evils for sure. Just curious.

Catherine Coy Feb. 17, 2008

Tom, here are some facts to consider: 1. Most lenders require a hardship letter as part of the short sale package. They consider hardship to be when the borrower is behind in payments. How were you able to prove hardship? If you're not behind and, most especially, if you have money in the bank, why should the lender approve a short sale? If you were able to negotiate a short sale without being behind in payments, your case is an anomaly; an aberration. 2. Most lenders report a short sale to the credit bureaus as Score Factor Code #22--"serious delinquency, derogatory public record or collection." They will also make a notation "settled for less than owed--short sale." This will prevent you from qualifying for another mortgage for at least 24 months. If you can negotiate that the lender will report your mortgage as "paid as agreed," you're home free. Absent that, ask them how they're going to report to the bureaus. If they report your mortgage trade line as SCF #22, the impact on your FICO score is exactly the same as a foreclosure. Trust me on this one. If all your other obligations have been paid on time, however, your "fall from grace" via SFC #22 will not be as devastating to your FICO score as someone who has let not only the mortgage but all his other obligations go to pot. The only way you can be guaranteed to come out of this unscathed is if you bring your own money to the closing table. Many people do this. My sister "bought high/sold low" on two occasions and both times she brought her own money to close. Thus, her credit was preserved and she easily qualified for another loan. If lenders routinely take properties back before the borrower is behind in payments and don't report that fact to the bureaus, then all any homeowner would need to do is call the lender and say, "Hey, I've got to sell, and I'm upside down, but you're OK with that, aren't you? You'll simply discount the note, right?" It doesn't work like that, unfortunately.

Catherine Coy Feb. 17, 2008

Bob is actively preventing the truth from being posted on this blog. I have posted many responses to explain how short sale and foreclosures impact FICO scores and what the lenders' criteria for those who short sale/foreclose, but they are being removed. Nice job, Bob.

Catherine Coy Feb. 17, 2008

Bob has also grayed out certain blog responder's names so they can't communicate with each other offline. Nice going, Bob.

Catherine Coy Feb. 17, 2008

Bob obviously seeks to get as many short sale listings as he can through publishing this blog. Where oh where can the upside down distressed homeowner obtain UNBIASED information? Well, not here, that's for sure.

Bob Feb. 17, 2008

Thank you Catherine. Thank you for taking what was intended to be an unbiased overview of a topic and hijacking it to continue to hammer your views. I allowed you to do so. You brought good info to the conversation, but you have also made a few errors as well. I have not been the advocate for short sales. I have simply presented information and options, and more than once made it clear that speaking with an attorney and tax professional is a must. The ONLY short sale listings I take have been either referred to me by their attorney, or I require them to speak with their attorney and/or CPA first. <blockquote><em>I currently negotiate short sales for short sale investors. In nearly all cases, we get the deficiency judgment waived but, make no mistake, there’s little to no benefit to short sale over foreclosure unless you count avoiding the social stigma of foreclosure as a benefit (many people do).</em></blockquote> You are telling sellers not to do a short sale, yet for your own investor clients, you do this. I assume so you can do the loan for your investor client. You also stated that you get the deficiency removed, however, there is little to no benefit to a short sale over a foreclosure. I would argue that getting the deficiency removed is a big benefit. <blockquote><em>Bob is actively preventing the truth from being posted on this blog. I have posted many responses to explain how short sale and foreclosures impact FICO scores and what the lenders’ criteria for those who short sale/foreclose, but they are being removed.</em></blockquote> No. I wanted to respond, but my time was limited, so before you hijacked this any further, I moved your comments into a pre-moderated mode. However, I didn't do it correctly, so you were then able to come back and post the last few comments before I could respond. I asked you to call me, but you didn't. All of your comments have been published. <blockquote><em>Bob has also grayed out certain blog responder’s names so they can’t communicate with each other offline.</em></blockquote> No. If someone leaves a link to their site, it is live. If they just leave a name, like you, then it is what it is. The email addresses of those who comment here are NEVER published and it would take a court order to get them. <blockquote><em>Bob obviously seeks to get as many short sale listings as he can through publishing this blog.</em></blockquote> As mentioned earlier, the short sale listings I have taken have all been referred by attorneys. I turn down most. It is only one option, and more often than not, not the best. When I do take a short sale listing, it is with the understanding that the client's attorney dictates what is the best course of action for their client. <blockquote><em>Where oh where can the upside down distressed homeowner obtain UNBIASED information?</em></blockquote> You have only one answer - walk. You cite laws you clearly do not understand. You have stated the one action rule, which can allow a recourse 2nd to seek a deficiency if the first forecloses and therefor the junior lien holder doesn't get their one action. Your advice is incomplete, and in some instances incorrect. Mine is to seek qualified legal and tax advice. Thank you for contributions.

Tom Feb. 17, 2008

I am in the military and have a security clearance that would be highly impacted by a foreclosure or bankruptcy. The JAG recommends short sale as the best option for the effects/affects that 'this stigma' will have upon my career. If it costs me some more money to negotiate that option I would be willing to consider it, dependent upon the amount and terms of course. I understand what you are saying though, it took three months of fighting with the mortgage servicer to get them to send me the short sale package, they have my hardship letter and I have a loss mitigator assigned. Nonetheless, I feel I do have some ammo to bring to the negotiating table with TILA and RESPA violations in the paperwork. They probably have some ammo of their own as well, and I understand it will be a negotiation and that they hold the cards. Buying another home is not on my immediate horizon - so that's not a concern, I've had so much luck with this one that I think I will put that off until I find someplace I will spend at least 10 years. Obviously, real estate wasn't a real good investment as of late. If they don't accept the short sale, then the property will go delinquent and eventually foreclose when I move. Therefore, my idea is to do something rather than nothing, I think it will bring more money maintained than it will spending months as a REO. Bringing six figures to the closing table is not something I can reasonably do. I have not one late payment on my credit report at all, but if I move that will change. Just the house. Huge mistake I made here and one I'm sure I will pay for in some fashion but chosing not to pay the mortgage when I have the money to do so isn't something I'm ethically positioned to do. However, when I relocate it will happen eventually regardless out of necessity. I am trying to do what I think is the right thing to do, absent of the fact that I probably shouldn't have bought this home to begin with. Thanks for your concern though.

Matt Feb. 17, 2008

Bob- Could you email me the attys info that you work with who practices in California and Florida. At this point, if I am having trouble paying on an investment property, should I stop making payments and keep collecting rent?

Bob Feb. 17, 2008

Sent you three names.

Bob Feb. 17, 2008

There are many situations like Tom's where a foreclosure is not the preferred course of action, even if the credit hit is the same. While the FICO scoring may not show a difference, many future onlookers to a credit report do draw a distinction. In addition to government agencies, including some sectors of law enforcement, many in the private sector, like financial institutions, make allowances for a short sale or even a deed in lieu, that are not made for a foreclosure. A short sale or deed in lieu requires a a negotiated agreement with all stake holders; simply walking away via a foreclosure does not. There is a difference there that is not accounted for in a FICO score.

Catherine Coy Feb. 18, 2008

Bob, I'm stupified how you could misconstrue my post(s). I never said to tell homeowners not to do short sales. My entire point is not to exaggerate to a homeowner as to what short sale will do for them or how it will impact (or not) their credit. Many people, upon hearing their options, prefer, for their own reasons, to short sale. When they make that decision, the file is turned over to me and I negotiate it. Would you like proof positive that short sale is NOT seen any differently to "future onlookers?" The only future onlookers that matter, of course, are lenders, and they absolutely, positively, without a doubt do not look at short sale any differently than foreclosure or deed in lieu. Please let me know what you would like to see that confirms this fact.

Catherine Coy Feb. 18, 2008

* You also stated that you get the deficiency removed, however, there is little to no benefit to a short sale over a foreclosure. I would argue that getting the deficiency removed is a big benefit. * Let me state again--and I hope I'm not misconstrued this time--the ONLY benefit to a short sale is waiver of deficiency but, under certain circumstances, mainly 2nds, the lender couldn't pursue deficiency anyway after foreclosure. Last I hard, most 2nd lenders aren't pursuing deficiency. There is no benefit to short sale vs. foreclosure as far as FICO is concerned. There is no benefit to short sale vs. foreclosure as far as seasoning for a new loan is concerned. I don't know how I can state it any clearer.

Catherine Coy Feb. 18, 2008

See page 75, first bullet mark. Mortgage accounts, including first liens, second liens, home improvement loans, HELOCs, and mobile home loans, will be identified as a foreclosure if there is a current status or manner of payment/MOP code of “8” – foreclosure, or “9” – collection or chargeoff. https://www.efanniemae.com/sf/guides/duguides/pdf/gtu.pdf If the short sale negotiator can get the short sale lender to mark the account "paid as agreed," all's well on the western front. I've never seen that happen, but miracles happen every day.

Bob Feb. 18, 2008

Catherine, no one here exaggerated the benefit to the homeowner. <blockquote><em>Would you like proof positive that short sale is NOT seen any differently to “future onlookers?” The only future onlookers that matter, of course, are lenders,</em></blockquote> Not true. Employers matter. Tom told you that his employer has already told him that it matters. Many employers look beyond the credit report, regardless of your experience. <blockquote> <em>Last I hard, most 2nd lenders aren’t pursuing deficiency.</em></blockquote> We have had many people call or write that after a foreclosure, the 2nd was pursuing a deficiency. There are comments on this blog to that effect. We have been told first hand by lien holders that they intend to seek a deficiency. The fact that you are not aware of that or that you have not seen certain things happen doesn't mean it isn't true or that it's a miracle. You have made your point loud and clear.

Rose Feb. 18, 2008

I personally went through the short sale process. After contacting HOPE I was able to move forward and contact my lender with different options. It took a long...time to get this all done but bottom line....I was able tokeep a home for my son for a longer period of time vs. starting all over right away. I als was divorced and was out of job for awhile so I bought time by staying contact with my lender... that is very important! Buy yourself some time and research extensively the best way out of this mess. I was able to list my home on MLS and had a cash buyer within 24 hours, we had the seller make an offer and then we worked on the settled price amount from the lender and once the lender approved the sale it was done! I do NOT have a foreclosure on my tainted credit history but I DO have peace of mind and what happens in the future will be fine. At least I tried to make the right decisions I also believe if I was to want to purchase another home in the near future I could make it happen! Hang there everyone! BELEIVE IN YOURSELF FIRST!

Catherine Coy Feb. 18, 2008

I missed the comment by Tom that his EMPLOYER makes a distinction. Well, then, that's a different story, isn't it?

Rich in California Feb. 18, 2008

Here is my situation that hopefully someone can assist me with. I purchased a home in 2005 as a fixer upper. The loan was an interest only loan that was good for about a year which should of been fine. Unfortunatly the market turned upside down so I moved into the home and refinanced the loan in 2006. I also got a Heloc at the time of the refinancing as I was going to use that money to move out of state. Fast foward to the present I've almost paid off the Heloc since I didnt move out of state but still want to. Im still upside down in the mortgage as homes are now selling for 220-250k and I owe between the 2 loans 320k. My question is what if anything can I do? I've been laid off and paying my mortgage out of savings so my account is still current but that will only last for a few more months at best. I want to leave the state but I dont know how to get rid of the home. If I do a short sell will I be faced with potentially owing my lender 100K since the home was refinanced? Will I be faced with paying taxes on the deficiet again because of the refinance? What would happen if I bought another house prior to doing a short sell? Would they come after me for that property too? I wonder because my credit took a long time to get in good shape and I know I will take a hit to it but I also know I need to provide housing for my children. Any help would be greatly appreciated.

Rich in California Feb. 18, 2008

Whats really the difference between a deed in lieu of foreclosure and a short sale?

Maria Feb. 18, 2008

Do you know if this applies to homes that are sold via short sale in Michigan?

Bob Feb. 18, 2008

<blockquote><em>I missed the comment by Tom that his EMPLOYER makes a distinction. Well, then, that’s a different story, isn’t it?</em></blockquote> Yes, it is. Rich asked: <blockquote><em>If I do a short sell will I be faced with potentially owing my lender 100K since the home was refinanced?</em></blockquote> Not if you get the lender to agree to forgive the debt. <blockquote><em>Will I be faced with paying taxes on the deficit again because of the refinance?</em></blockquote> The lender will send you a 1099-C next year for the amount of debt forgiven. Whether or not it is taxable will depend on a few things. The amount of mortgage debt forgiven that exceeds the original acquisition debt would not be covered by the new law. You should speak with a tax attorney about insolvency to see if that is applicable in your situation. <blockquote><em>What would happen if I bought another house prior to doing a short sell? Would they come after me for that property too?</em></blockquote> Not likely, but if you are still laid off, that would make qualifying for a new loan difficult. You would also have to account for the other property. The lender is going to want to know if you are renting it out or selling. If you say that you are renting it, a rental agreement would be required. Most lenders would give you credit for about 75% of the rent, which will impact your qualifying ratios. If you do rent it, you now have a seriously depreciating asset that will likely be harder to sell if rented. If you fake the rental agreement, you have now committed loan fraud - a federal offense. If you say you are going to sell it, they will want to see an estimated HUD-1, which would bring to light the upside down status of the property and you would have to explain how that is going to be resolved. <blockquote><em>Whats really the difference between a deed in lieu of foreclosure and a short sale?</em></blockquote> A deed in lieu is a voluntary surrender of the deed to the lender, saving them the trouble of foreclosure. A deed in lieu doesn't work if there are two lien holders, as only one can take the deed back in full satisfaction of the debt. In some cases where there is only one lender, many won't accept a deed in lieu due to the contract obligations they have with their investors. Wilshire is one such lender that doesn't want to accept a deed in lieu. A short sale is a sale of the property where the lien holder(s) agree to release the lien(s) on the property and allow the property to be sold for less than what is owed. They may or may not agree to release the note. They either agree to forgive the debt or require you to sign a promissory note for the difference.

Bob Feb. 18, 2008

Maria - The Mortgage Forgiveness Debt Relief Act is a federal law and applies to the entire U.S. If I misunderstood your question, I apologize.

Claire Feb. 18, 2008

Bob, Quite a blog; obvious that you know your subject matter inside &amp; out;. Thanks for being so clear with your information, making it easier for us going through this process to understand. I've had the same experience as another posting here - time consuming trying to find an atty (in separate state in my case) who will answer my questions. I thought a Real Est Atty would be appropriate, but the one I found from Findlaw appeared to have experience in cases for (a) lenders (b)large corporate business - &amp; not in assisting the individual/homeowner.(Paid him for phone consult with no advice other than 'work with the lender') My situation: Husband was trsf'd back to home state from 5 yr project in S.E. MI (same company). We bought home there in 2004 when houses were over priced &amp; supply low, oblivious to things to come- did much work/refurbishing - house now worth $50k less than balance owed with majority of homes in that area currently sold in distress). Questions: 1. Much has been ... 'discussed' - about foreclosure vs short sale - but how does deed in lieu play into the equation? (credit score-wise) 2. Have you found that a VA backed loan is more easily accepted by lender for short sale? 3. 6 months on market; options packet sent to lender 2 mos ago; just rec'd letter from mitigation dept saying in last phase of consideration. 4. Excellent credit/no late pmts til this month; stacking up credit card debt to maintain two households this long, wondering if more consideration given when past due (mortgage thru PHH/Mortgage Lender Assoc). 5. Good idea to have lawyer (or self) make contact with this new/last mitigation dpt - in hopes of presenting best case for short sale? 6. VA backed loan in husbands name only- title in both; in your opinoin, would this fact tilt the scales to one option over another? 7. Instead of continuing with current neighbor realtor -from the old school/handing out fliers &amp; only one picture on realtor.com - contract over now) -what realtor would you recommend to now list short sale with ((recommendations for Oakland Co in MI?) Also, recommendations for real est lawyer in that area who will truly fight for the homeowner? -Thanks

Matt Feb. 19, 2008

Since purchasing my home 3 years ago, it has fallen gretly in value close to perhaps 700K. I did refinance and take out very little equity; 16K, so both loans with the same lender. Currently a 5 year I -only on the first. Home was appraised at 820K 12/06 My name only on the loan. Wife is not. This was a stated loan and my credit history is excellent. I plan to simply let the lender foreclose on the property. Even though we can continue to struggle and with dual incomes pay the monthly mortgage, it seems quite a waste of our income. IN 5 months I would save nearly 21,000 We can simply rent for a year and purchase another home with 10% 40-50K) down on my wifes name, income and credit. 7 years should go by quickly enough, and they can't take away my credit cards. A short sale is a waste of time and we would end up having to possibly pay taxes on any forgiven debt. I transferred cars into my wife's name and plan on opening a new Credit card next month as well. Question: Can the lender come after my income at all or force me to try and pay back any debt, garnish wages etc?

Bob Feb. 19, 2008

Claire asked: <blockquote><em> Much has been … ‘discussed’ - about foreclosure vs short sale - but how does deed in lieu play into the equation? (credit score-wise)</em></blockquote> FICO score will end up in the 500s or worse, either way. <blockquote><em>Have you found that a VA backed loan is more easily accepted by lender for short sale?</em></blockquote> No. The lender is insured by the VA, so in many cases it's better for the lender to foreclose. <blockquote><em>Excellent credit/no late pmts til this month; stacking up credit card debt to maintain two households this long, wondering if more consideration given when past due (mortgage thru PHH/Mortgage Lender Assoc).</em></blockquote> None that I have seen. <blockquote><em>Good idea to have lawyer (or self) make contact with this new/last mitigation dpt - in hopes of presenting best case for short sale?</em></blockquote> Until you have an offer on the property, it probably won't matter, unless there are RESPA or TILA (Truth in Lending) irregularities. An attorney versed in those issues should be consulted anyways. <blockquote><em>VA backed loan in husbands name only- title in both; in your opinoin, would this fact tilt the scales to one option over another?</em></blockquote> No. <blockquote><em>Instead of continuing with current neighbor realtor -from the old school/handing out fliers &amp; only one picture on realtor.com - contract over now) -what realtor would you recommend to now list short sale with ((recommendations for Oakland Co in MI?) Also, recommendations for real est lawyer in that area who will truly fight for the homeowner?</em></blockquote> I would consult with an attorney and tax professional before I would go the agent route in any distressed situation. I'll see what I can find and email you a few names.

Bob Feb. 19, 2008

Matt asked: <blockquote><em>Question: Can the lender come after my income at all or force me to try and pay back any debt, garnish wages etc?</em> </blockquote> If you refinanced, you likely lost what ever non-recourse protection you had, so the lender may be able to come after a deficiency if they elected to do so and thought there was a chance they could get it. If you are in a community property state, they may take a look at the spouse's income. Since it is the same lender, a deed in lieu may be something they'll consider. An attorney could guide you through this and protect you from signing the wrong deal. Either way, consulting an attorney with experience in this area is essential. Let me know what state you are in and I'll see who I can find.

matt Feb. 19, 2008

Thank you. California A ton of Foreclosures out here, I bet Wells Fargo would take the deed. I owe about 756-760 inc tax, they appraised at 820, I am sure in 6 months to a year the lender could get close to 750 for the house. 3 years we spent over $181,000 in interest, taxes, ins. We even borrowed from 401K to pay mortgage. Originally we puy 5% down on 742k, so basically lost that 37,000 as well. All of our income goes to mortgage and we simply can not save or invest for the future, we want to start a family and need the money for INVITRO. You have to do what you have to do in life, so I hope others do not judge me too harshly by deciding to walk away from this house.

Bob Feb. 19, 2008

Sent you an email. You have to do what is best for you family. I hope it all works out for you.

jen Feb. 19, 2008

bob- my situation is tricky. i bought a home in another state a little over a year ago, but was unable to move there due to a slow shift in my industry. and my disabled mother currently resides there. over the course of the past year, we have had difficultly paying the mortgage and it is upside down. i then had to relocate to yet another state, once the job market picked up... but i now rent in a different state than my property. will i still benefit from the mortgage debt forgiveness if i chose to short-sale? help. or is there any other alternative?

Rich in California Feb. 20, 2008

Bob what exactly is insolvency? It sounds like bankruptcy to me but I'm assuming it is somehow different? I ask because you said that since I refi that the mortgage forgiveness law doesnt account for the amount of refi over the original acquisition loan. You said I could maybe claim insolvency to erase that debt. The difference between the 2 is only maybe 15000 or so. I could get a loan to pay that off if I had to from a friend I'm thinking.

Bob Feb. 20, 2008

The following is from the IRS publication <a href="http://www.irs.gov/newsroom/article/0,,id=174034,00.html"><em>Questions and Answers on Home Foreclosure and Debt Cancellation</em></a>: <blockquote><em>Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value ofyour total assets. Insolvency can be fairly complex to determine and <strong>the assistance of a tax professional is recommended</strong> if you believe you qualify for this exception.</em></blockquote> I added the bold to emphasize that even the IRS suggests that a CPA or tax attorney is strongly suggested when filing for insolvency.

Rafael Feb. 21, 2008

Hi Bob, one question: Must I have lived in the home (which is my primary residence) for at least 2 years to qualify for debt forgiveness if I do a short sale? We only bought our home in December 06. Thank you for alll your help... Rafael

Bob Feb. 21, 2008

Rafael, If your are still living in the home, then it would be considered your primary residence and qualify under the law.

jen Feb. 21, 2008

bob- my situation is tricky. i bought a home in california a little over a year ago, but was unable to move there due to a slow shift in my industry. and my disabled mother currently resides there. over the course of the past year, we have had difficultly paying the mortgage and it is upside down. i then had to relocate to yet another state, once the job market picked up… but i now rent in a different state than my property. will i still benefit from the mortgage debt forgiveness if i chose to short-sale? help. or is there any other alternative?

Jim Feb. 22, 2008

Bob, My first lien foreclosed for less than my indebtedness, but since it was purchase money, I am not liable for the balance. However, I made the mistake of refinancing my second over a year ago. I owe $54,000 on the second, and I am receiving calls from a third-party debt collector. Do you know the odds the second will seek a deficiency judgment if it is clear from my credit report that I already have plenty of credit cards and student loans to pay off? Surely the second must worry about having its judgment discharged in bankruptcy. Thanks, Jim

manny garcia Feb. 23, 2008

Hi Bob , I have 2 condos Im going to have let go by deed in liew .... One I bought for $150K owe $110 The other bought for $180K owe $150K both for 2 years as rentals if I give tittle in lieu.... will I owe IRS taxes?

Kris Feb. 23, 2008

Bob, Thanks for all the great information. I see so many people out there with similar situations to mine. Have appointment with BK attorney next week to discuss options, behind on mortgage payments, credit cards, shortage of income with my income and spouse. My situation, CA property, owe more than could sell for, bought high in 2005, Los Angeles. Trying to hang on to property but it is killing us, property taxes, etc. Am behind 30 days right now, calling 1st lender Monday to discuss options, have two different lenders for each loan. Seems like foreclosure is in the future, short sale just doesn't seem like the way to go for us. I almost think would be better off to save our money and find somewhere else to live unless lender is willing to work something out. Not sure if BK is right either, Chap 13, if we keep house what if we can't afford it down the road and cant keep up with terms of BK? I just tried to read loan docs on 2nd, mine is equity line so I am sure it is recourse. I guess I will just have to deal with what happens with 2nd loan. Do you have a CA attorney you could recommend - Los Angeles area? Also who is most important to pay 1st or 2nd Loan when you are in this situation?

Eileen Feb. 24, 2008

What qualifies as a "principle residence"? Does one actually have to have to live in the home? I obtained a non-recourse loan in CA for a construction of a home that I had INTENDED to move into. However, due to a divorce, I couldn't, and ended up selling the home on a short-sale in 2007 after it was built. I never lived in it. Does the "intent" to move into a home which is being built as a primary residence qualify under the "principle residence" rule?

Bob Feb. 24, 2008

Jen, Jim, Manny, Kris and Eileen - Excellent questions that illustrate perfectly why dealing with short sales and foreclosure issues cannot be approached the same way in every situation. Jen &amp; Eileen - The question is whether or not the IRS considers the property in your respective situations to qualify as a principle residence for tax purposes. Both of you need to consult with a tax expert. i'll email you both with the names of an attorney and a CPA who could advise you. Jim, the collector has no reason to stop. They make their money based on their ability to harass or scare you into paying something. If you have considered bankruptcy and have retained a lawyer, then once the creditor has been notified of that, then they have to stop. Manny - the IRS requires the lender to file a 1099 for each loan. If they are rental property, the new law won't apply. Kris - I'll email you a name.

Kristen Feb. 27, 2008

I am really confused. My husband and I lived in the Bay Area of CA up until 8/07 of last year, my husband was transferred to Northern CA. At the time we could not sell our home, so we opted to rent it out. We were able to purchase a second home in Northern CA. Money is tight, the rent we bring in does not cover our mortgage let alone our taxes. We have been thinking of trying to short sale, I am confused on the tax issue. Our loan in for 600K, which at the time was an 80% loan, now the areas is sellling in the 450's. Would the IRS "Forgive" a 1099, if it considered a 2nd home? We are trying to do the right thing, but at some point we are going to start sinking. Thanks for any help you can give. Kristen

Bob Feb. 27, 2008

Kristen, if the house was a primary residence until last August, and you moved to another city, it should still qualify assuming the loans qualify as acquisition debt. Your options are a short sale, a deed in lieu of foreclosure, or just let it go to foreclosure. Your credit will get seriously dinged regardless of which option you choose. The biggest hit is the potential for a deficiency. If you do a short sale, make sure you get legal advice as well. many agents out there are pushing the short sale as a cure all, when in fact it is only appropriate in specific circumstances. Let me know if you need the names of any attorneys or tax experts.

Eileen Feb. 27, 2008

Kristen, I sold a home in CA on a short-sale which closed in Dec '07. Loan was $826K and the home sold for $695. I received a 1099-C from the lender in Jan. Prior to the sale of the home my credit was in the 750-760s and when I last checked in early Feb '08, it was around 710-730. But then again, I had a great payment history prior to the short-sale and I think that may have prevented my score from dropping significantly. I have heard that if you have other delinquincies on your credit record or late payments in the past, you could take a greater hit. I don't know if my score has yet to drop more, I may have to recheck next month, but this is what I have seen thus far. I am not a credit expert, but this is from my personal experience.

Donna Feb. 27, 2008

I have read the info. above relating to the forgiveness of debt relating to a short sale. I lost my job August 2007 and fell behind in my mortgage payments. I immediately put my house on the market and applied for short sale. I am set to close on the sale of my house in a couple of weeks. Will I be required to pay taxes on the debt difference? I don't see a date that the debt forgiveness law became active and I am not sure what criteria you must meet to qualify. The above sections of the law are sketchy to me. Do you know of a website where it is transcribed into plain english? Please Help!

Donna Feb. 27, 2008

I have another question as well. I am scheduled to move into an apt. on 3/1/08. Do I have to live in my house right until the closing in order for it to qualify as my primary residence? The buyer was set to close this Friday, but credit has tightened and so she now no longer qualifies for a conventional and has had to go FHA. They have asked for an extension until 3/14/08 to close. Should I move or stay in the house? What if this person cannot get approved FHA and I have moved? I then am tied into a lease with an apt. and now have an empty home no one is living in. Please advise as to what I should do. Thank you.

Bob Feb. 27, 2008

Hi Donna, The law was retroactive to January 1, 2007 and is in place until December 31, 2009. The property has to be a primary residence and the debt forgiven has to be acquisition debt - debt used to purchase the property. Refi debt applies to the extent that it doesn't exceed the purchase money loans. Any that does that was used for improvements would also apply. Moving out of the house won't make a difference. With regard to your buyer, you need to have a frank conversation with your agent about the buyer's ability to qualify. FHA has different costs associated with it than conventional loans, so your lienholder will need an updated HUD-1.

Daniel Feb. 27, 2008

Bob, I see that you are very busy trying to help answering everybody's questions here. On Feb 12 I posted a question that was never answer... Can you take a look at it when you get a chance? Thanks

Bob Feb. 27, 2008

Sorry Daniel. I missed that. Here is the original question: <blockquote>We bought a townhouse for $352500 with 80/20 under my wife’s credit and name. This is our only and primary residence and I have not been late in any payment until today. However I am the one that makes the payments since my wife is home with our baby. Because of my financial situation, I am strugling and cannot pay anymore. In our situationm, can we benefit from “The Mortgage Forgiveness Debt Relief Act of 2007?? If we consider shortsale, will we end up owing taxes on the forgiven debt? Does this “Debt relief Act” help us to seek a loan modification not only on lower interest rates but lower the initial debt of $352000 to a current market value of the property? Some realtors have advice me not to pay anymore and stay in the property until the lender decides to shortsale, so we can take advantage of free home until it sells. After leaving home, will we still be able to rent an appartment or townhouse, after getting my wife’s credit hit for the shortsale? I will appreciate any advice or comment.</blockquote> First off, mortgage brokers and real estate agents should not be counseling people to stop paying their mortgage, That advice is outside our scope. You should speak with an attorney about the options and the ramifications. With a short sale, deed in lieu, or foreclosure where the debt is forgiven by the lender, the lender is required to issue either a 1099 A or a 1099 C. The tax issue is determined by whether or not the property and debt qualify under the new law. The “Debt relief Act” may help on a loan modification where the lender would lower the initial debt of $352000 to a current market value of the property. The difference that is forgiven would be result in a 1099 C and if the debt qualifies, then the law would apply. The existence of the law isn't likely to have any influence and the lender's decision to do anything though. You should expect a credit hit, so you may want to line up housing before the credit report reflects the derogatory.

Kevin Feb. 27, 2008

Bob, In Feb. of 07 I went through a short sell of my primary residence. I had a first and second mortgage on it. I received a 1099c and not for sure what to do. In reading all the post I am assuming the debt is forgiven and there would be no taxes on the 30,000 that was forgiven. The second mortgage was used to finish projects on the house. I lived in the house for three years. My questions are, your thoughts on if the debt is forgiven by the IRS and how do I treat this form when filing. Do I just disregard it or include it when I file. I had a tax agency do my taxes but after they finished they said I owed 4,000 because of the 1099c. After finding this site and reading all the post I now believe they didnt know the rules with the new law. Would like your thoughts on this situation and if you think I should consult someone else any help would be appreciated.

Kyle Feb. 28, 2008

Hi, I'm trying to find some info--husband and I live in Michigan and made a move from the Detroit area to the west side of the state last summer for a job reloc. We've had our old house on the market since August 07, no one has really expressed any interest in it, and we can no longer afford to keep up the payments, plus the vacant home insurance and utilities. We purchased a new home in our new area at the time we moved and the builder reimbursed us for 5 months of our old mortgage. We decided to pursue a deed-in-lieu on the old property so that it doesn't have to go to foreclosure. Can the mortgage lender on the old property take our new house?? I got nervous b/c I got a call today from a real estate appraiser wanting to see our new property, and that didn't make sense to me. Do you have any insight on this?

katie Feb. 29, 2008

My husband and I bought the house next door 2 years ago as a mother-in-law suite. It seemed like a wonderful investment at the time -obviously, we did not know that we were buying at the top of the market. We have a 1st for $180K and a 2nd for $20K. The house now appraises for about $175K. Because of the increased taxes and insurance rates in Florida, we are no longer able to afford the home. We are not late on any payments, but we have been "robbing peter to pay paul". We can only make the payment for another month or two. We have spoken to several bankrupcy attys and they are divided on whether we should file chapter 13 or try to short sale. I have had 2 different real estate agents tell us that the new debt-relief law would provide us tax relief even though it is not our primary residence as most people seeking short sale are people who are stuck with investment properties. One of the realtors told us that the debt relief only applies to the first 100K. After reading thru you entire blog - I believe that they are both incorrect and we do not qualify for any tax relief and that we are better off to file Chapter 13 to protect ourselves from the "deficiency". I get the feeling that getting a bank to agree to "write off" the deficiency is very rare and we should not expect this to happen. Please let me know what you think and I would love to have the name of a few Florida attnys that are well versed in the new laws. Thank you Katie

Les Feb. 29, 2008

I bought my home in MD as part of a lease option contract a few years ago. Now we're in a tight situation and we're considering a short sale. The realtor I'm dealing with is pushing the short sale and wants to sell it as low as possible to expedite the sale, but based on what's been written here it looks like we may be hit with a promissory note for the difference. Given that it seems to make sense to me to try to sell the property as close to what I owe as possible. That would seem to be an obvious statement, but my realtor swears that it is very unlikely that the lender will come back to us to get us to sign a note for the deficiency. He claims that though it's in the lenders' rights, he's not seeing that lenders are requiring that in this environment. What are you seeing? Do you have any specific information on how borrowers have been treated at Option One? Also, do you know if MD is a non-recourse state? Am I right in thinking that this means that the lender cannot pursue you for any additional monies after it has agreed to a short sale or completed a foreclosure?

Ed March 1, 2008

Bob, How could Rafael's primary residence qualifies under the forgiveness debth if it's not yet Dec 2008 and if he does the short sale before Dec 2008? Under section 121 you have to be in your primary residence for an aggregare of 2 years within the last 5 years of ownership. How then could he qualifies for the new law as you said below? &gt;&gt;&gt;&gt;&gt;Rafael on February 21st, 2008 8:40 am Hi Bob, one question: Must I have lived in the home (which is my primary residence) for at least 2 years to qualify for debt forgiveness if I do a short sale? We only bought our home in December 06. Thank you for alll your help… Rafael &gt;&gt;&gt;&gt;&gt;Bob on February 21st, 2008 8:47 am Rafael, If your are still living in the home, then it would be considered your primary residence and qualify under the law.&lt;&lt;&lt;&lt;&lt;&lt;&lt; Section 121 (a) Exclusion Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

Ed March 1, 2008

Must Rafael ensure that the short sale occurs after Decembe 2008?

Bob March 1, 2008

He hasn't owned it for 5 years. The section refers to property owned, but not always used as a primary residence.

Tom March 3, 2008

Will lenders reduce the principal so home owners opt to keep home? For instance in a bankruptcy where the option exists for the homeowner to reaffirm the debt. If mortgage company reduce the principal to at least market value it would provide incentive to keep the property. Seems it would be a good deal for both sides and limit the loss. Perhaps even issue a warrant if the property value recovers. Any thoughts on this?

Ed March 4, 2008

Bob, I have almost the same situation with Rafael, we close escrow on our house Sept. 15, 2006, on first and second loan, it's my wife's primary home, we live separately. She refinance in October 2006 because of the builders ugly loan. Do we have to wait until Sept 15, 2008 to do a short sale in order to qualify for the forgiveness debth? I'm asking this because of the 2 year requirement for primary residency. Please advise.

Just Looking March 4, 2008

Hi Bob, I bought a home in CA in 2006 at the very top of the market for $390k. The latest comp analysis from a realtor puts the value in the $279k - $365k range. I have an (80/20) 1st &amp; 2nd with the same lender (my loans has been sold 2 times since 2006: the first time, my loan was sold immediately after closing, and again after my first payment to the second lender). I have a 2-yr ARM scheduled to adjust in April 2008. On top of that, my original lender did not set up an escrow account to pay my property taxes, so in Jan 2008 I had approx $11k added as escrow "shortfall" to my payments. I began talking with my lender in Oct 2007 regarding my difficulty in paying. I put in a loan mod. request in Nov 2007. I learned approx. 2 weeks ago that my request had been denied, because I applied too early. (But in Oct. when I spoke with the service rep., she told me to get in my request a.s.a.p. to avoid the traffic jam before my rates adjust- totally contradictory). They really wouldn't talk to me unless I was delinquent (30 days or more), so for Feb, I decided not to pay so that I could get more "attention" from the company. To make my story even grimmer: I've abandoned other payments (credit cards - now in collections, student loans, etc) and I've even raided my IRA to maintain the mortgage payments, and my credit has been devastated because of it. I received a letter in Feb that my payments would go up over $2k per month due to rate adjust and escrow shortfall and escrow payments. I reapplied for a loan mod., but now am having reservations, because I KNOW I will not be able to pay whatever they offer me, because the woman I spoke with told me that my payment would not remain the same. I've been exploring so many different options, and I was wondering if you know of someone who I could talk with to help me sort out my options and make a sound decision? Here are options that some have told me: *Spoke with Credit Counseling service and her only advice was to get an apartment and a bankruptcy lawyer, because after bankruptcy, no one would rent to me (it was a less than 10 min phone conversation). I heard that filing for BK should be a last resort, and is a no no for people who work in Finance. *Spoke with friend of family, and she presented a "plan" wherein I pay someone $1,000/month to attach the house to an existing bankruptcy case and live in the house for 15 add'l months, but the final result will be that I will have a foreclosure on my credit report, but in the meantime I can clean up the other dings on my credit report and save money. Not to keen on this "plan". *My best friend, who is a loan originator/closer in MI, told me to just let the house go into foreclosure, pocket the monthly mortgage I'm paying right now and stay in the house until I can't any longer. But try to pay off the delinquent credit cards and get current with my student loan. (Similar to watering the grass while the house is burning down) Her neighbor is doing this right now in MI...they've been in their house for a year now. *I've been reading about short sale and deed-in-lieu...but I'm not sure if the lender would agree to this if the home only sells for $279k...that's a deficit of over $100k!! Have you heard of a lender choosing foreclosure over a $100k debt forgiveness??? I'm sure that foreclosure proceedings do not cost them $100k?? I would prefer to short sale over anything else, because it's the least damaging to your credit(so I hear anyways). But I'd go for a deed-in-lieu if I had to. *I'm exhausted - financially and emotionally. I really just want out of the house. I'm not emotionally attached to it or anything. What do you think?

Vickie March 4, 2008

I need some advice. I have been reading information about the law passed and I want to know how to proceed. I refinanced my home June of 2007 with First Franklin. At that time my house appraised for 395,000 and I have a mortgage of 335,000 9.95% 2 year arm. They sold my mortgage to Chase effective October 2007. Since I refinanced, I have been dignosed with a blood cancer and can not work and cannot afford my house payment. I have been here for 15 years and I do not want to loose my home. It will not appraise for that now. It probably won't appraise for the amount I owe on it. I am not physically able to move. With my husband income we can afford to pay 1500 more or less for a payment. I have contacted Chase and ask them for an interest rate reduction in which I have not heard back from. I am current but cannot make March payment. Should I go back to them and also ask for a reduction in the principal based on this new law? Please any advise is appreciated. Thanks Vickie

Jason March 4, 2008

Bob, because my lender isn't willing to assist me in keeping my house, they gave me no option but to deed in lieu, or short sale the property. I work in the mortgage industry and had my salary slashed. This has always been my primary residence for the last 10 yrs. I never filed it as an income property on my previous taxes. Im thinking about purchasing a different property to live in that is affordable. Can my lender 1099 me even though that was my primary residence? And if so, can I dispute it?

Jason March 4, 2008

Forgot to mention to Bob, I live in california, tried to refi 8 times, because I owe $488K and my neighbor just bank sold for $300K. No one wants to lend to me. No lates, 720 credit...What can I do Bob? The lender already suggested deed in lieu. Any advise would be helpful. Thxs Bob!!

Roxanne March 4, 2008

Anybody??? I live in california and just recently lost my job. No help from the lender to help me stay in the house. Im going to deed in lieu the house back to them, I did refinance 2 yrs ago, but nver ever cashed out. Im upside down already due to auction homes selling for $200,000 less then what I owe. I seen this " If you refinanced, you likely lost what ever non-recourse protection you had, so the lender may be able to come after a deficiency if they elected to do so and thought there was a chance they could get it. " so does the "non recourse protection" apply during any refinance? Or only if you cashout? Can they 1099 me? How long do they have to do so.Please anyone help. Thank you

Bob March 4, 2008

Tom - Fed Chairman Bernanke urged lenders to do just that. They are going to eat the loss anyway, so wiping out a 2nd that is under secured or would be negotiated away in a short sale keeps a family in their home and keeps another distressed sale of the market. Ed - No. The 2 year requirement doesn't mean you have to have owned the property for two years. Just looking - call me at 858-382-5820. Jason - a deed in lieu is a good option if you make sure the lender can't seek a deficiency. The lender is required to give you a 1099, but if the debt qualifies under the new law, then you file IRS Form 982, <a href="http://www.irs.gov/pub/irs-pdf/f982.pdf">Reduction of Tax Attributes Due to Discharge of Indebtedness</a>, with the 1099 on your tax return. Roxanne - Yes, you likely lose the non-recourse protection when you refinanced. That can be negotiated if you do the deed in lieu. If the property just goes back to the bank via a trustee sale, then the lender can't seek a deficiency. If there are two loans, that may change that though. They will send you a 1099 with a short sale, loan modification that involves reduction of principle, a deed in lieu or foreclosure. Feel free to call me with any questions.

sg March 4, 2008

Wow, this post has been really helpful! My brother had been living in home #1 for 5 years, he recently closed on home #2 (now his primary residence). If he does a short sale on home #1 will he qualify for the tax relief?

Bob March 4, 2008

The house would qualify. Whether or not the forgiven debt qualifies would depend on whether or not it was qualified acquisition debt or debt used to improve the property.

Vickie March 5, 2008

Bob, i forgot to mention I live in North Carolina.

Lynn March 5, 2008

Wow, there is a lot of info here that is quite helpful to my situation. Thank you. I do have a question though. I am currently in a short-sale of my home but the second is not happy since they won't be making any of their money. I bought for about 700k, the home is now only worth about 535k, the first mortgage agreed to the short sale and accepted an offer of 529k, the second has now asked me to pay $200 a month for 84 months in order for the sale to go through. Am I still going to be taxed on the entire amount of the difference? I had an 80/20 split for the purchase and have not re-financed. I just don't want to dump a bunch of money back to them If I am still going to be taxed on the difference? How does that work. Any help is greatly appreciated. Thank you!

Lynn March 5, 2008

I forgot to let you know I do live in CA. And it was my primary residence but I moved out a couple of months ago.

Bob March 5, 2008

Lynn, the 2nd can ask for a note. It is all negotiable. If you don't agree and they are not bluffing, then you then have to make some decisions. If the property goes to foreclosure and the 1st forecloses via a trustee sale, then because of the One Action Rule in California, they can't seek a deficiency. However the 2nd can seek a deficiency since they didn't get their one action if it's not a purchase money loan. If the 2nd forecloses on the first, the first gets cleared and the 2nd takes the property, so no deficiency. The value of the short sale is in negotiating away the deficiency. The problem though is agents have little negotiating leverage with lenders. That is where a good attorney comes in. It may be worth your while to try to get an attorney who is well versed in this to try and get the lender to accept something in the short sale and agree to not take a note or seek a deficiency. If you need someone, call or email me.

Lynn March 5, 2008

Thank you so much for such a quick response, you are right on it. I did speak to an attorney about some of this but I did not feel I received a straight forward answer. I wanted layman terms because this is really not all that easy to understand. I can afford the $200 if it is going to help the sell go through and not foreclose, and not tax me to death either. Thanks for your help.

sg March 5, 2008

sg on March 4th, 2008 10:01 pm Wow, this post has been really helpful! My brother had been living in home #1 for 5 years, he recently closed on home #2 (now his primary residence). If he does a short sale on home #1 will he qualify for the tax relief? Bob on March 4th, 2008 10:07 pm The house would qualify. Whether or not the forgiven debt qualifies would depend on whether or not it was qualified acquisition debt or debt used to improve the property What is the difference between qualified acquisition debt or debt used to improve the property?

Vickie March 6, 2008

Bob, This is the second time I posted this because I did not get a response from the first one. Could someone help me? I need some advice. I have been reading information about the law passed and I want to know how to proceed. I refinanced my home June of 2007 with First Franklin. At that time my house appraised for 395,000 and I have a mortgage of 335,000 9.95% 2 year arm. They sold my mortgage to Chase effective October 2007. Since I refinanced, I have been dignosed with a blood cancer and can not work and cannot afford my house payment. I have been here for 15 years and I do not want to loose my home. It will not appraise for that now. It probably won’t appraise for the amount I owe on it. I am not physically able to move. With my husband income we can afford to pay 1500 more or less for a payment. I have contacted Chase and ask them for an interest rate reduction in which I have not heard back from. I am current but cannot make March payment. Should I go back to them and also ask for a reduction in the principal based on this new law? Please, any advise is appreciated. I live in North Carolina. Thanks Vickie

Bob March 6, 2008

My apologies Vickie. I would try that route and I would speak with someone at HUD about the <a href="http://portal.hud.gov/portal/page?_pageid=33,717219&amp;_dad=portal&amp;_schema=PORTAL">FHASecure program</a>.

Vickie March 7, 2008

Thanks Bob, I think my mortgage is to high for HUD. I really don't know for wayne county, NC. Do you have any contact numbers? Do you know anything about Chase; how flexable the may be? Thanks again

Paul March 9, 2008

Hi Bob, I own a primary residence in IL with 600K loan from lender A, and a 95K 2nd mortgage from lender B. (equity 0) and I also own a 2nd home in AZ with a 350K loan from lenderB. (equity 100K) Primary Home is 36 days past due. Second Mortage and 2nd home is 0 days past due. I may need to turn over or go into foreclosure on my primary residence because of recent unemployment, but I am worried that lenderB will try to take my 2nd home if they don't get paid from the sale of my primary residence (which I believe that lenderA will dump for their 600K). Can lenderB go after my 2nd home because they also hold that mortgage? or will I be carrying around a 95K tab when I lose home 1? Thanks Bob!

Sam Chapman March 10, 2008

That is what CPAs who are also attorneys are for. Reading through and understanding all of this and similar writings by governmental bodies is a nightmare.

Considerate and Appreciative March 13, 2008

Bob, I think you finally got rid of her (Catherine) ! I certainly hope so! If not . . . CATHERINE -- Just GO AWAY! Go get your own blog site and have at it. Just please show some respect and keep some dignity and JUST GO AWAY!

Ellen March 13, 2008

Hi Bob, My husband and I have owned our home for 4 years and our mortgage balance is $308,000, with an equity line of credit taken out for repairs that we have NEVER used - still only has the remaining balance of our refi fees which is $9000. So overall we owe $317,000. Recently, my husband got a job promotion in September to a location 65 miles away. He has been commuting and having to pay two bridge tolls, and staying in hotels because of the commute, thus incurring more debt for hotels and toll fees. We have planned to move the entire time due to the relocation and his company has offered a relocation package, a buyout, and financial assistance. Now that we are ready to move, the market drop puts our house at worth of $250,000, hence we owe nearly 80,000. We cannot afford this amount of debt since we have about $85,000 we are indebted already and we are a one income family. Can we do a short sale in our situation and if so, will it be a debt forgiven and how badly will affect our credit?? Any feedback would be very helpful and much appreciated. Thanks!!! Ellen

Bob March 14, 2008

Ellen, what state are you in?

Ellen March 14, 2008

Bob, We are in California.

Ellen March 14, 2008

In the Bay area - Solano County to be exact. Not sure if that is helpful....

Doug March 14, 2008

I'm in a situation where I'm on title with my ex, but I'm on my loan. It's quite an unpleasant living situation and I can't afford to sell the house due to negam accumulation and drop in value (about 130K deficiency) , and worse if I did my ex would be insolvent and I'm sure I wouldn't be able to collect her half. She also doesn't pay to live here any longer, and I can't kick her out without taking her off title and releasing her of any future loss that is realized with an eventual sale. Since I can't "ride it out" because I'd go crazy living with my ex, I need to resolve the situation. So, I started looking into short sales, and what I realized, was I could afford the house at what the house would go for today, so I'd like to short-refi. I'm in california and on a purchase mortgage so there's no personal recourse, and I can't see any benefit of doing anything other than foreclosing if the bank won't consider a short-refi. I am not currently in default though, but I am digging into a hole each month that I realistically will never get out as my income is stable and should be in the future, so I don't see how I'd ever get on top of it. I own another piece of property that is currently a rental (month to month) and on a 30-yr fixed, so I have a place to live, so the damage of a foreclosure v. a short is really not that significant since either way i'm not buying property for the next 3-5 years. Sooo, my questions are: - am I missing anything here that I should be aware of? - I don't want to go into default before having a short-refi conversation since if they agree to it, i'll want my credit in tact for the new loan - will the bank consider it without being in default? - Any negotiating advise? Any help would be much appreciated! I do have an attorney and tax accountant, but neither have done short-refis before, and so I'm looking for some experienced advice please. Sorry about the long post, thanks so much for your help! -Doug

Bob March 14, 2008

Doug, would your ex even allow you to refi? Doing so would most likely require her to be off title.

Bob March 14, 2008

Paul, I don't know the answer to your question. Ellen, I'll get back to you on this. Is your relo company the one that appraised the property at $250k?

Ellen March 14, 2008

Our realtor (who was provided by the relocation company and the person we chose to work with) is claiming that's the most she can sell it for, due to the market. We've also done a ton of work to the house so that's why she is able to bring the amount "up." As far as the actual appraised amount, our 1st appraisal was done but we don't have a set buyout amount yet because our 2nd appraisal isn't happening until this upcoming Monday. Once they get the 2nd one's numbers in, we should get the exact buyout number (the company takes the average if the two as long as they are within 5% of each other). I'm guessing it will be around the same amount, give or take 10-15 thousand?? But I am really not sure. While I know the appraisals determine our amount it seems likely we will still be quite a bit under. Would it be more helpful to repost with the exact #'s once we get them?

Doug March 15, 2008

Hey Bob, I've got a co-ownership agreement in place that can force a sale if one party wants it (giving the other first right of refusal). I've made a deal with her since I was concerned about this very thing, and am working on getting limited power of attorney to do a sale to make sure she can't stop a short sale or refi at the last minute.

Ellen March 16, 2008

Bob, Just another question to add to my others above. How realistic is it, hypothetically, to be able to negotiate with our lender to find a home in the location we are moving to that is the same or around the same price as what we owe on our current loan/home?? So essentially, a "loan trade" if you will.??? Is that completely unrealistic?

Christine March 16, 2008

I have a big question. I own a home in Northern California and because my husband was unemployed for 5 months he had to take a job in Southern CA. I rented out the home in N.CA in Oct. 07 and we "rented" a home in So. Cal. I sell new homes as a living and of course have just not made any money. I have not made a payment since December 1st. I am going to file a chapter 7 BK and plan to include the home in the BK. My accountant says that since I am filing a BK I will not be liable for taxes on the $200,000. that I am upside down on from the "debt relief" My concern is it is not "currently" my principle residence. Is my CPA right still. She knows I rent it out but I just want to double check?

Bob March 16, 2008

Ellen - not very realistic. Christine - I always defer to the CPA.

Mike March 17, 2008

Bob/Anyone: A different type of question, I think: I have a VA secured first loan at 5% with about $186K left. I have a HELOC around $50K at over 10%. The VA loan is joint and the HELOC is my name only. We are looking at a move with job market so bad in Michigan. I want to keep the VA eligibility and intend to catch up on that loan (have a plan with lender now). The holder of the HELOC is not cooperative. What happens if they want to "foreclose" on theHELOC? Can a sale be forced on the whole thing? Any leverage to get them to realign the interest rate and lower the payments? Let them just go after me for the $50K if I sell the home for the $186K still owed on the VA secured loan?

Susanne March 17, 2008

Job related we had to move and tried for nearly two years to find a buyer, without any luck. Since December we couldn't afford to keep up both Motgages (we have a new house where we live now and a current with payments on this-have to). We finally found a buyer with an awesome offer 84,000 for a mobile home!! We owe arround 104,000. NOW, the lender, countride denies the short sale, stating that we are not allowed because the house is not our resident...(but it was at one point..) We even offered to pay the difference. Countrywide als states that the Investor on our loan-Fannie Mae also declines to approve to the short sale. They say the last resort would be for us a Dead in lieau... Is that correct? If so, than in the foreclosure they will never ever get so much money as offere right now and we will wind up and have to file bankrupty and loose verything. We apreciate any helpful suggestions. Thank you all.

Doug March 17, 2008

Any thoughts on my situation if I hold limited POA for my ex? Thanks!

Cynthia March 18, 2008

what if the mortgage company does not want to grant you the short sale and they want you to fully sell the house??? I am thinking of doing a short sale on my home, will I be responsible for the difference as a 1099 form? My house is worth 750 i owe 750.

Eve March 19, 2008

My husband and I are canadian working and living in CA. We bought a house in 2006 and refinance with Wells Fargo in 2007 (2 mortgages - second is an equity line of credit). We are relocating to another state and will no longer able to pay for 2 houses. What are our options? We are considering a Deed-in-Lieu but still don't know if they will accept that. Is there any deal we can do with them? Is there anything we can do?

Kara March 19, 2008

We are military family relocating at the end of summer. Our home has been on the market in Las Vegas for over 9 months with little traffic. Many of our friends are facing this problem like us, the military relocating us now-with a house not selling and rent houses a dime a dozen. We purshased at the top of the market and now our home has a fair market of 75-100 grand less than what we paid. If we are able to find a family to rent our home, we will be losing $700-$800 due to the rent not meeting the mortgage payment. Any suggestions? We are all just trying to make it and wondering how? We have no choice about relocating. Thanks.

Cat G March 20, 2008

Maybe you can shed some light on my situation. I completed a short sale in Nov. 2007. I had a firs and second loan, which both sent me a 1099-c. The first loan is no longer sending statments to collect any debt but the second loan is trying to collect the remaining debt. I don't know if I should file for bankruptcy because I can not afford pay the difference of the second loan. Also, I was considering in getting a lawer versus filing for bankruptcy. What would you suggest.

Bob March 20, 2008

Doug - It is still rare to see lenders reduce mortgage amounts and refi, but I would ask the lender and cite the news where government officials are pushing lenders to do that. In the next few months you will have a better chance as the Feds will be stepping in and buying up some of these mortgages at a discount, then allowing the homeowner to finace the discounted amount.

Marie March 20, 2008

Great site! Thanks for all of the insight. I need a referral for a knowledgable and reputable attorney in the Phoenix Metro area. Can you advise?

Sara March 22, 2008

Kara, your situation sounds just like ours... we are military, bought in 2005. Just putting ours on the market now, but our orders are to move in about 4 months. One question I have is this: In our neighborhood, of the 8 properties that are for sale, only one is a regular resale. 3 are short sales, and 4 are foreclosures. Do the foreclosures set the new baseline for the neighborhood, since that is what dominates the listings? Right now the majority of the listings are 150 grand less than what we bought for. We listed it high (psychologically we can't yet admit that our house is worth 150 grand less than our mortgage) but honestly since nothing is selling anyone I don't see any harm in listing it higher. We are considering deed in lieu after this -- to rent it out would be about 900 or 1000 dollars a month out of pocket, AFTER mortgage deductions. We have a great loan, fixed rate, under 6 percent, so that's not the problem, and the bank won't talk to us about mod since the loan is so good. We have not brought up principal reduction, though I liked the OTS plan about a reduction with a warrant to pay the difference upon selling. We don't want a handout, we just don't want to foreclose unless that is the absolute only solution for our family. Is is possible to negotiate on a promissory note with a deed in lieu? We don't want to be slapped with a 150 grand deficiency. Would prefer the deed in lieu, which can be explained better than an actual foreclosure (husband has security clearance) but we have no idea how the banks determine who is able to pay and how much . Kara, if you want to email me to chat too, about what I've found out so far, feel free. Legal on base has been no help so far, we're just kind of feeling our way as we go along. And Bob, thanks so much for this site, and all of your insight. It has helped immensely. This situation is so new to us, as to many people out there, and it's pretty tough to find people who are willing or able to give guidance.

Dan March 22, 2008

Bob, I have a condo in SoCal, that I owe 400K on and is worth 370K. Both the 1st and 2nd are with the same lender. I have also refinanced the 2nd loan, and thus my current loan is above the original purchase price. Since I am going through a divorce, I need to refinance to remove my ex-wife off the loan. I am unable to refi as we don't have enough cash to cover the loss and my lender would only refi upto 90% LTV. So I am considering a short sale or deed-in-lieu. I don't have a problem making the monthly payments if they can refinance the current loan amt, 400K. Would deed-in-lieu or short sale be better in this case generally? I understand from previous posts that the credit rating impact would be the same. Would the debt forgiveness &amp; tax implications be different? Would lenders prefer one over the other? Any other advice is appreciated. Thanks.

Bob March 23, 2008

Marie - I'm working on a list of attorneys around the country. Cynthia - By law, the lender is required to issue a 1099 if debt is canceled or forgiven. Whether or not that amount is taxable will depend on if it's qualified acquisition debt and a primary residence. Eve - a deed in lieu may get you out of the property, but you may be facing a deficiency. You want to negotiate with Wells to not have a deficiency. If they foreclose, there may not be one, but it depends on the 2nd. A short sale where a deficiency is negotiated away may also be a good option. I have a good attorney you can speak with since you are in California. Cat - if they sent you a 1099-C, then they are telling the IRS that they cancelled the debt. Speak to an attorney about the 1099C vs their attempt to pursue a debt. Kara - many agents will tell you that foreclosed properties are not comps, but think of it from the buyer's perspective. If they can get a bank owned property that is similar to yours for less, what will they do? If the REO (bank owned) properties are selling, then they are setting the market. Starting higher won't help you. You will just have that much further down to go to catch the market in order to sell. Deed in lieus can be done without having to settle for a deficiency, but many lenders are now requiring that the property be on the market for 90 days, so you may as well be aggressive with price and go after a short sale. You still may face a deficiency that can be negotiated away or at least reduced. Kara - a deed in lieu may be an option.

Bob March 23, 2008

Dan, Your situation raises a few issues you need to get answered. 1. Can you get the lender to have the co-borrower removed from the note if you qualify for the the entire amount? 2. If you do a short sale, can you negotiate your half in such a way that mitigates the credit hit? If you stay current and can present the lender with an acceptable short sale offer, you could look at taking a note for YOUR half of any deficiency and save your credit. feel free to call me if you have any questions.

Mike March 23, 2008

I own two homes in the San Diego area in downtown and clairemont mesa. As with most houses in SD, the value has dropped significantly since multiple neighbors have gone into foreclosure. I can afford payments on both houses, and I still have a six figure savings account, however from a pure business standpoint - I no longer want to keep these properties. So here is my plan, and please comment if this is feasible. 1.) Purchase a new home (more bang for my buck) before executing points 2 &amp; 3. 2.) Turn in the deed or default on my downtown property. This property only has 1 purchase money loan. 3.) Turn in the deed or default on my clairemont mesa property. This property has a 1st and 2nd used to buy the property. My questions are as follows... 1.) Am I subject to a deficiency? I do not have any HELOC's against the properties, but I do not know if my 2nd loan on the Clairemont property qualifies as a non purchase-money loan. Both loans are held by the same lender. 2.) Does California law protect me from this deficiency? 3.) Tax consequences? Total drop in value has been approx 300k. Thanks, Mike

Bob March 24, 2008

Mike - I would ask each lender about a deed in lieu. Don't be surprised if they tell you that they won't look at that option until you have marketed the property for 90 days though and attempted to do a short sale. A few lenders won't do a deed in lieu at all. Even though you have a 1st and 2nd serviced by one lender, the two loans could have two different investors. If that were the case, it could make the deed in lieu a long shot option. You will get a 1099 for each of the loans where debt is cancelled. The new law covers only a principal residence, so tax consequences on whichever property is not your primary residence are a safe bet unless you file BK or can claim insolvency. On the downtown property, if they foreclose, then no deficiency. On the other property, it would depend on whether or not the 2nd is purchase money. If it were me, I would attempt the short sales while keeping the loans current. If you move the properties, the credit hit would only be the report of the two short sale. Much less damage than the accumulated hits of a 30 day late, 60 day late, 90 day late, NOD and then the foreclosure/deed in lieu/short sale hit for two properties.

Steve Cruice March 25, 2008

We had our house for sale in PA, since we were moving to SC. The buyer backed out of the deal in the midst of our purchase of a home in SC. We had the house in PA on the market for a number of months with no success. We ended up renting it out for 18 months in the hope the market would come back. The rent did not cover the mortgage and so it was not an investment property by any means. We are looking at a short-sale on this home in PA. Is there any possibility we can avoid paying tax on the 1099? Thanks, Steve

HLF March 25, 2008

We purchased our home in Michigan in 2005. We have refinanced since then &amp; now owe more than the house is worth. Due to our own stupidity we have racked up a lot of credit card debt. We are not late or behind on anything but are worried as to how long we can keep this up. We are trying to avoid bankruptcy by all means. We have been contemplating short sale, and are still a little confused as to what the consequences may be. I have talked with our mortgage lender and they have said that they are willing to do a short sale as long as they approve the offer. They also said we would have to set up a payment plan to repay the difference. Does paying back the difference "look" any better on your credit than having the lender forgive the difference? And if they were to "forgive" the difference, how do you know whether or not you have to pay the taxes. We have no intentions of buying another home anytime soon. Any advice you could give us would be greatly appreciated. Thanks!!

Andy March 25, 2008

Bob--can you e-mail me the contact info of a good Los Angeles real estate attorney? Like many who have posted on this blog, I'm going through a similar short-sale situation. I'm way upside-down on a condo. My real estate agent said I probably don't need a real estate attorney to go through the short sale process, but from what I'm reading it certainly can't hurt to get appropriate legal advice. Also, anyone hear of youwalkaway.com? Is this a scam or a legitimate alternative if you're unable to short sell?

Bob March 25, 2008

Steve - the lender has to give you a 1099 by law. If the debt forgiven is acquisition debt and the house qualifies as a primary residence, then the new applies. If not, then bankruptcy or insolvency may be an option. Talk to a CPA or tax attorney and they can tell you for sure. HLF - If you refied for more than the original loan amount when you bought the property, then you could be faced with a tax liability. Agreeing to a note for the shortage will help you save your credit. The question is whether or not you can afford to do so. If you go the short sale route, talk to an attorney who represents sellers negotiate with banks to avoid deficiencies.

HLF March 26, 2008

Thanks Bob! Any good referrals to an attorney in Michigan??

Richard March 26, 2008

still need carifacation in ca. if I have refied since original purchase to get out of a arm loan to a fixed first ,no second; that I lost my non recourse status for my current 1st?

Bob March 26, 2008

HLF - No one i know. Richard - you likely lost your non-recourse protection with the re-fi. Read the loan docs, though.

Robert March 26, 2008

I purchased a lake home as a 2nd residence in 1996 for $200K. Moved into it as primary residence in 2001. Refinanced a few times taking out equity. Last refinance was in 2006 with balance of $650K . Put on market in 2006 and moved to rental unit. On market for 1 year, during which foreclosure started. Lender agreed to short sale and forgave $100K at sale end of 2007. Is the $100K exempt from taxes under this Act? The State is Wisconsin. Thanks

Bob March 26, 2008

The $100k would be part of the cash out refi that exceeded the original acquisition debt, so unless you can show that it was all put back into the property, it's all taxable.

Robert March 29, 2008

Thanks Bob, What if I can prove insolvency?

Bob March 29, 2008

The first thing I would do is talk to a tax expert about insolvency.

Evan in Florida March 31, 2008

Bob, Wonderful site. This is by far the best information I've found online thus far. My family bought a townhome in an HOA community in 2005 for $279k in a 80/10/10 fixed rate loan. We are up to date on the payments and have good credit, but because of the housing crash we are probably $30k-$50k negative equity in our home. We've tried to sell it using a realtor at a very competitive price, but we haven't even had any showings. Simply put, the banks aren't lending money to most buyers in our region. Foreclosures are all around us, our HOA is becoming insolvent, drugs and violence are on the increase. We MUST get out of this neighborhood to start a family, we feel we have no other choice to abandon the home and foreclose. Luckily, we have enough cash for down payment on another home in another state. I've read FL loans are recourse loans meaning the bank can come after us in a judgment. How likely is that? Also, if there is debt forgiveness instead how can we keep our foreclosed home as our primary residence so we don't accept a federal tax liability? Sincerely, Evan in Florida <em> @Evan - If the loan is recourse, the lender may choose to seek a deficiency. If you do a short sale or deed in lieu, you may be able to negotiate that away, or agree to a lesser amount on a note. </em>

Faith March 31, 2008

Bob, Good thread - some good information. I would like to ask your opinion of my situation: My husband and I were in the military and transferred into the Los Angeles area where we anticipated being for 5+ years so we bought a house in April 2007. We were soon offered an early-out and transferred out of the state (Iowa) where we have purchased another home. Our home in CA had been sitting on the market, continually lowering the price - we have an 80/20 loan for 615K total, both from Chase, 2nd is HELOC - listed at 479K and dropping. We have even rented it out to save our finances but our tenant has moved out with one week notice breaking the reminder of our 12 month lease. Since we have another home, we cannot continue to pay on the CA home with no rental income coming in. We are hoping for a short sale but will take the credit hit of foreclosure if that is what it comes to - we have no choice. Our questions are: do we qualify under the debt relief act since it is not our "primary" residence? Also, can they come after our home in Iowa - force a sale to get equity (although I don't think we have any)? What about 401K, IRA accounts, college funds (529s) and other investments? We have been smart financially just not with real estate! Any advice would be greatly appreciated. We are consulting a lawyer in Iowa and got a short consultation from one in CA. Thanks. <em>@Faith - If the two loans are purchase money loans, then if they foreclose they have no recourse. There may be a tax liability unless you can get the IRS to sign off on the concept that you bought the house as a primary residence, then moved out of state. A tax expert could advise you on that.</em>

Cindy April 2, 2008

Hi Bob, The information contained in these questions and answers are astounding! I looked through it all but didn't find a poster with a situation just like mine... I would appreciate any answer your may have. Situation: California owner occupied property refi'ed 1st (cash out) and 2nd loan (HELOC) with the same lender. The property value is higher than either loan but less than the combined. The loans are entirely in my name but the house is owned by husband and wife. We want to walk away without further liability (and minimize taxes if possible). I wonder how the "one action rule" is applied with the loans are with the same lender. If the lender foreclose under the 1st, can the 2nd "not participate"? (1st 350k, 2nd 180k, house at least 400k) If the second becomes a "sold-out junior", can a deficiency judgment reach my husband's property in another state? Thanks a lot! <em>@Cindy - Re: the one action rule - I have heard attorneys argue both ways on that. keep in mind that the 'lender' may only be the servicer, so one thing that may be an issue there is if there are two different investors. You would need to speak to an attorney licensed to practice in the state where your husband has property.</em>

jen April 2, 2008

thanks for your earlier reply to my 2/19 inquiry. i must say that after 2 lawyers, 3 CPAs, and 2 brokers ... this crisis is really a mess. i also found out that the interpretations of the mortgage crisis bill is changing weekly --- including some discussion of possibly removing negative credit rating due to these events (not confirmed). i also called hope now, which was tremendously helpful, and not as terrifying as speaking to the lender's loss mitigation department. they helped explain a lot in plain terms. &gt;&gt; all in all, 2 CPAs said that the 1099 can be solved simply by writing the IRS and telling them that my account says i am 'insolvent.' does this mean i have to file for bankruptcy? also, regardless of being a primary residence or not, the key word was residence, and i'm assuming there is more tax liability if my home was an investment property? this site is great, and you are doing a great job helping people out during such a difficult time. thank you... <em>@Jen - CPAs have told me the same thing about the 1099 and insolvency. I'm not sure what notification the IRS requires. insolvency doesn't mean you have to file bankruptcy. The debt forgiveness law doesn't apply to investment property. </em>

jen April 2, 2008

also, how does my 2nd mortgage factor in? is it an additional issue, or does the mortgage relief cover both mortgages? <em> @Jen - if the 2nd forgives the debt, the law applies if that debt was acquisition debt.</em>

mary April 2, 2008

I have a similar question. I have been pleading with me lender to modify my loan as my adj rate mortgage is scheduled to balloo in July to $2700.00 per month on the 1st not including taxes or ins. I still have a 2nd. I owe $429,900. The bank wouldn't accept a short sale 6 months ago and the buyers walk. I'm not left with many options. I am a single parent with a child and a job, but can't do the balloon payments. How would a deed in lieu affect me, only other option is for me is to foreclosure. <em>@Mary - A deed in lieu would have the same effect as a foreclosure, however, if the 2nd is with a different lender, a deel in lieu may not be an option. 6 months ago was a different world in the mortgage business. I would ask about short sale options again. You should also talk to an attorney to make sure you are aware of all the potential options and outcomes.</em>

Cin April 3, 2008

Lots of great info, Bob! I am looking forward to what you can inform me of. We are in CA and foreclosed earlier this year (January 2008 - Happy New Year). We were upside down, had a 1st and 2nd. After being on the market for over a year and falling out of escrow 4 times, we couldn't hold on anymore. Apparently, the 1st purchased the home at auction. I just found out the 2nd has sent us to collections. Their tactics have been brutal and they are trying to make me agree to many terms over the phone. The collector put me on hold and called the 2nd and they say the 1st purchased the home, only used the funds to pay off their loan, but the 2nd was left with nothing therefore *we* are liable and need to pay back. What should my next steps be? Are we really responsible for this balance? Thanks for any info you can provide! It is MUCH appreciated. <em>@ Cin - You need to talk to an attorney. I can give you the name of one in California who is well versed in this field.</em>

bek61 April 4, 2008

I am currently in pre-foreclosure on a condo we have defaulted payments on since 9/2007. We have tried negotiating with WAMU about restructuring our loan, short sale and not the deed-in-lieu which we have been trying to negotiate for the last 2 months. The bank is moving very slowly with this. We are at the point that we have an opportunity to rent a property owned by relatives in mid-April. We don't want this opportunity to slip away since we know our credit rating would have slipped at least 250 points with this foreclosure. We want to just abandon the property at this point rather than wait for the bank to decide about the deed-in-lieu since we know foreclosure is inevitable. My husband wants us to notify the bank that we will be moving out of the property shortly. Will this be considered abandonment and how will that affect our current negotiations for a deed-in-lieu. Thank you. <em> @ bek61 - I would speak to an attorney about negotiating the deed in lieu vs the foreclosure. If you are in a non-recourse situation, you need to make sure you don't give up that protection. On the other hand, if the lender does have recourse, you would want to try and negotiate a deed in lieu and get the lender to agree to not seek a deficiency. Do NOT trust the bank to do what is in YOUR best interests. </em>

Kara April 5, 2008

Hi Bob, We now have priced our home at what we think the FMV is and still attempting a short sale. If and when the short sale of the home occur, how long will it take us to be able to purchase a home again? Is it possible to buy a home now and then turn around and short sale the home we are in? Would we be faced with the 1099 taxes? If the bank turns down a short sale, what is the next step for us? A deed in leiu? How does the deed in leiu effect your credit score as compared to a short sale? Thanks for your help and knowledge. <em>@Kara - have you asked the bank about a short sale or deed in lieu? Some banks will not even consider a deed in a lieu, while others are now telling us that they want to see a short sale. As for buying a home again, it depends on whether you can get a loan. The new lender will want to know about your current property. A deed in lieu will have a similar impact as foreclosure. I have heard from people at FairIssac that they are looking at treating short sales differently in their credit scoring. How well one maintains the rest of their credit lines has an impact as well. The 1099 question you can determine based on the law. Primary residence and acquisition debt and the law covers you. If not, insolvency or filing BK are potential options.</em>

JD April 5, 2008

Bob, my home is currently listed on short sale for $900K in Orange County, CA but I owe approx. $1,100,000. My agent is about to bring in an offer for $825K. The party offering the $825K wants to begin a negotiation with the two banks involved in the short sale so he's starting with a low-ball offer on purpose. There is one other offer expected to come in within a day or two, and lots of "traffic" viewing the house. My primary question is this -- is it wise to even accept the first offer and pass it to the bank even though comps are all in the low $900's, or should I reject it outright? Even though I've been trying to sell the house since last June, it has only been on the short-sale market for about a week. Also, based on the advice of this website, I feel as though I should put the following two criteria in any acceptance of an offer: 1) Acceptance contingent upon the seller’s approval of all lien holder conditions; and 2) Acceptance contingent upon the seller's qualification for the Mortgage Forgiveness Debt Relief Act of 2007 I have to be honest and say that I'm still not clear on whether or not I qualify for #2. Is it as simple as 1) This house is our primary residence, and 2) Our debt that is being "relieved" came about by the purchase of this residence (without any refinancing ever) Is it really that easy and straightforward of a ruling or am I oversimplifying things? Thanks ahead of time for your guidance. I'm loving this blog and it's helping me a great deal! JD <em> @ JD - The sentence concerns me - "The party offering the $825K wants to begin a negotiation with the two banks involved in the short sale so he’s starting with a low-ball offer on purpose." The buyer should NOT under any circumstances be negotiating with YOUR lender. If your agent doesn't know what to do, then get someone who does. I have an attorney who oversees the process and reviews all documents to make sure that that the seller is protected to the extent possible. The debt forgiveness issue is pretty straightforward - primary residence and acquisition debt.</em>

Nikki April 6, 2008

Hi Bob, I bought my primary residence in 2005 for 369K with the 80/10/10 loan. In 2006, the value went up so i was able to refi and combined 2 loans into 1 as 80%LTV with some cash out. Prior to refi, i owed about 333K and currently owe 375K with CW. I'm planning to do short sale on this home due to loss of job. The value of this home is now 265k to 270K. Here are my questions: 1) would the lender go after my savings for 100k difference if i short sale my home? 2) would i be liable for tax on 100K? Note: I did use small portion of the cash out from refi to do home improvement and i live in riverside county, CA. Nikki <em>@ Nikki - the lender may stipulate that they will approve the sale and release the lien, but still hold you responsible for the balance of the note. The terms of the short sale are important and you should have an attorney review them before signing anything. Only that amount that exceeds the original acquisition debt and not used to upgrade the property is subject to being taxed by the IRS. I have a handful of short sales I'm managing in Riverside County, so feel free to call me with any questions.</em>

Summit New Jersey April 6, 2008

Great overview Bob.

Laura April 6, 2008

Hi, Bob I purchased a second home in FL 2005 as vacation home , and the market value is dropped to 150K but I have a loan for 200K. The HOA fee is increased 50% from 2005 and the short rental income couldn’t cover mortgage and expense. It used out of my saving to keep this property. Unfortunately I lost job last month, the payment is behind one month. I called lender to request help, they strongly recommended to short sell and told me they will file 1099 to IRS after short sale, I just found the lender had filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. My questions are: 1. If I do short sell and pay 1099 tax to IRA, does lender still come after me for a deficiency judgment ? How I can deal with lender who filed bankruptcy ? Is it easy or difficult ? But I already knew their service are very bad right now. 2. I put my second home for sale in market for more than one year, but the market price keep going down, no one interesting. Does my home qualifies for deed in lieu of foreclosure if I file the package lender required ? 3. If the home goes to foreclosure , Does the lender will come to my primary home for deficiency judgment ? I only used my name to loan primary home and second home from different lenders. My primary home is in another state and it has equity. I am looking for lawyer in FL who is familiar with real estate law and tax, could you introduce someone ? Your advices will be helpful and I really appreciate it. Laura

Sarah April 6, 2008

Hi Bob, I was wondering if you can give some advice on my current housing situation. Back in Sept. 2006 we purchased a single family home in the san diego county for 600K. Unfortunately we were suckered into a 1st and 2nd (80/20) mortgage with high interest rates. And the first loan is even an option ARM that is currently building neg. am. where our current balance has now increased to a total of 621K. Both 1st and 2nd loans are with the same lender. And we haven't refinanced any of our loans as of today. Two months ago my husband got laid off and we have been barely squeaking by, keeping both of our mortgage loans current. We have been really considering doing a short sale, but have mixed feelings about stretching our financial capabilities by keeping up with the mortgage payments until the house can be sold. We think the current approximate value may be around $435K Questions are: 1) Do you think it is in our best interest to do a short sale and continue to completely deplete our financial resources to keep our loans current? 2) How much does a delinquent payment in combination with a short sale hurt your credit? My husband and I both currently have excellent credit scores in the 700s. And within a year or so we will need to purchase a second car thus have concerns about our credit. 3) How long can we expect to get back into the housing market after a short sale? 4) My husband has one potential job offer, but it will result in a 22% paycut. If he accepts this job will it hurt our chances of getting a short sale approved by our lender? 5) I have heard casually from a friend that the Bush debt forgiveness will also forgive unpaid property taxes with homes subject to short sale/foreclosure. I personally don't believe this is true thus have already paid our property tax, but thought I'd ask. 6) Have you heard of a relatively new concept, "short refi" and if lenders are actually going for this new process? 7) Lastly, any other issues or options we should consider? Our principal balance is increasing every month while our value is significantly decreasing. We simply do not know what to do. Thank you greatly for any advice you can give! <em>@Sarah - 1) I can't legally advise someone to stop paying their bills. The lender may answer that question for you though if you talk to them about your options, including a loan mod on the option arm. 2) FICO doesn't disclose this info, but in a story in the <a href="http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/09/11/BUVUS2U88.DTL">SFGate</a>, a FairIssac rep said the following: <blockquote>The problem is, there is no category on credit reports for short sales or deeds in lieu of foreclosure, which until recently were rare, says Craig Watts, a spokesman for Fair Isaac. “We’re not sure how the credit bureaus are representing those transactions,” he says. How they affect a credit score “depends on how the lender has chosen to report it to the credit bureau.”</blockquote> 3)2 years 4) doubtful 5) i have seen property taxes rolled into the forgiven debt via the 1099, but I would never presume how the IRS could or will treat this if they itemized this via an audit. 6)I have seen only claims of a short refi accomplished. What I have seen is loan mods for ARMs where the loan is changed to a fixed amortized over 30-40 years and the interest rate reduced, but rates are not reduced below the initial start rate. 7)Start with the lender, then run those options by a tax guy and/or attorney.</em>

dan cincera April 6, 2008

How long do the lenders have to issue the 1099a or 1099c? I had a property tha was foreclosed on in 3/2007 and i have not received any 1099's from either lender yet? Don't they have to have issued the 1099's to me by 1/31/2008--and they have my new correct address as i received other info at my new address from them. <em>@Dan - I would assume by Jan 31, 2008. Are you sure they forgave the debt?</em>

Jennifer April 7, 2008

I apologize for the long email. My husband and I closed on our home in New York on Dec. 17, 2004. We paid $460,000, put down $47,000. Our closing costs were $22,000 which we paid for out of pocket. We got a 2 year interest only that was set to adjust in Feb. 07. During the second year we tried to refinance the home, but our credit wasn't so good. We knew we wouldn't be able to afford the rate increases so we tried selling the home in the summer of '06. Each buyer backed out for different reasons. In the fall of '06, there was a death in my family and my husband and I decided to hold off selling. We put the house back on the market in the spring of '07. At that point, we received an offer for less than what we owed on the property. We were afraid to do a short sale, so we stuck it out. In the summer of '07, we were told by our mortgage co. that there was a possiblity that they would be willing to modify our rate (it was New Century which sold to Carrington Mort. Services). At this point my rate went from 7.1 to 8.6. In August, the rate was scheduled to increase to 10.1. The catch was that we had to be behind on our payments. We didn't pay the mortgage for 2 months, spoke with loss mitigation and the lowest they would modify our rate was 8.6. We pleaded to get it lowered to no avail. We agreed to the 8.6 rate and they put the late payments at the end of the loan. My husband was able to get a second job, so we did our best. He has now lost the job and we are having great difficulty making our $4400 monthly mortgage payment. We both work full time jobs. I tried to get the new FHA loan, but was told that because of the late payments, I am only allowed to borrow 85% of the value. Our fico scores are only around 520. My house would have to appraise at $500,000. It would only appraise at $440,000. I owe $431,000. my question is, should I short sale it? The mortgage co. told me that because they already gave me a loan mod. in Oc.t '07, I wouldn't be able to get another one. I really don't want to lose my house, but don't know what else to do at this point. Do you know of any other options? I also called 1-888-HOPENOW and was told my origination date would have had to have been Jan. 05 or after, and as I said, I closed on the home in Dec. '04. They were unable to help. My husband and I put it up for sale yesterday knowing we'll lose it. Is there any thing else we should do? Any way to keep it? Speak to an attorney? Please help! Thank you so much.

Faith April 7, 2008

Thanks for the advice. I made an error in my 1st blog - we purchased in April 2006 and lived in the house until August 2007 - put it back on the market in April 2007. Would we have to prove that to the IRS when filing for the tax forgiveness? We have military orders that could prove it...

Alex April 7, 2008

Bob, I currently have two homes 1 mile apart from each other. I'm currently taking a lost on the rental and the value has gone down ever since the market fell. My mortgage will adjust in a year, but I would like to sell it before it adjust. I've never been late on payment. How would I intiate a short sell and have it forgiven, under the Mortgage Forgiveness Act? What are my options? <em>@Alex - The Mortgage Forgiveness Act doesnt apply to investment property. </em>

Alex April 7, 2008

Bob, Also, would a short sale ruin my credit. <em> @Alex - it would negatively impact it, but that would only be one line of credit.</em>

Sarah B. April 8, 2008

My parents have their name on our home loan and our rate will be adjusting higher and my husband and I will be unable to afford our mortgage at that time. We are unable to refinance because of our debt to income ratio, and our credit is not good at this time. If we foreclose on our home, will the lenders attach a lien on my parents home? Our loan was financed with zero down, 70/30. Is there anyway to remove my parents name off the loan? The deed is in our name only. I am just affraid that a lien will be placed on their home if we foreclose. Please help. Thank you. <em>@Sarah - that depends on a few factors. This is a question for an attorney.</em>

warren April 8, 2008

Hi Bob, We own two homes in nor cal. Our first home (primary) is not worth what we owe on it. The lender offered a loan mod a few months ago but the the payments would've increased and it would only be an interest only loan. Bottom line, is that it's an 800K loan and maybe a 650K house. We're thinking of attemtping a short sale and moving into our rental property and making that our primary home. We hope that the short sale amount is enough to cover the first loan and hopefully some of the 2nd loan. If the 2nd lender accepts the short sale, can they go after me for the deficiency? The 2nd loan is a heloc. My understanding is that if the lenders agree to the short sale, then they HAVE to issue a 1099. Is it true that they can't issue a 1099 AND go after the deficiancy (one action rule)? Does a short sale neccessarily equal debt forgiveness? If the home is foreclosed, then there is no cancelled debt and therefore, no 1099 correct? Then I assume the lender will go after a deficiency judgement. I don't have many assets so can they put a lien on my new primary residence? <em>@Warren - short sale approval involves two issues on the part of the lender: 1 - releasing the lien to allow the sale 2 - forgiving (canceling) or not forgiving the unpaid balance of the note The 1099C is issued only when debt is forgiven. They can agree to forgive all or part. A foreclosure can result in a 1099A - abandonment of debt, depending on the state and type of foreclosure - judicial or non judical. I don't know what assets can be attached with deficiency judgments.</em>

Kara April 8, 2008

Bob-do you know anything about the bill in Congress to protect persons that are having to short sale their home due to job transfers? I am just hearing bits and pieces of this. Thanks for your time and knowledge. <em>@Kara - No. I haven't heard of it.</em>

Hurting VET April 9, 2008

Hi Bob, I own a TH that I am 3 payments behind on - VA Loan The home is upside down about 50k and I am interested in short sale. 1. My FICO score middle is 500 how much worse can it get if I short sell? 2. I would like to purchase another home - VA will this be possible? 3. Tax implications this is my primary residence. Please advise Hurting VET <em>@VET - the last VA short sale I did was mid 90s. At that time VA required the loan to be paid off in order to regain eligibility. You could check with the VA to verify if that is still the case. </em>

Gail April 10, 2008

I'm in Michigan and am on the verge of losing my home. As of May 2nd, my home will go to foreclosure if I don't make a payment or get a buyer and get the bank to agree to a short sale. I have an 80/20 loan and probably can't even sell the house for what I owe on the first loan. With a short sale, or a foreclosure, how do the two mortgage companies split up who gets what out of the sale? If it goes to foreclosure, I'm responsible to pay the difference between what I owe and whatever they sell it for right? How does that work with paying that amount back, do they garnish your wages? From what I've read, it looks like I'd be covered under the Mortgage Forgiveness Relief Act, so that is one good thing atleast. I don't know if I should try for a short sale or just let it go to foreclosure, since it seems to be just as bad on your credit. If I can be forgiven the debt instead of having to pay that back though, that is what I care about, but you also said that sometimes the bank will still come after you for that money. If that is the case, what would motivate homeowners to want to go through the whole short sale process instead of a foreclosure? I don't know what to do and am running out of time. I have lowered the price on my house several times and still am not getting any showings, it's so frustrating. I've already got it priced $20,000 under what I owe on it, and we totally renovated it when we bought it, so we're losing that money too. I wish I could stay in the house, the bank offered a loan modification, but we need to relocate out of the state because my husband is working in Kansas. Thankfully we're able to get an apartment through his work, so that won't be an issue with trying to get a new place to live. Any answers or advice will be appreciated. Thank you, Gail <em>@Gail - I have no idea how Michigan law treats foreclosures. Any Michigan tax or real estate attorneys out there?</em>

Cheryl April 10, 2008

When you are working with a short sale, how often do you need to by the difference? Our house is on the market and not selling and the realtor said we should go $20,000 more than what we have it for now. The house is already $60,000 less that what it was appraised in '06. We are getting a divorce and the house is passed +190 late and in foreclosure/short pay. Can anyone give me advice? It is appreciated.

Neela April 10, 2008

Bob - Without giving too much details on my financial situation, Here's the situation I'm in: Bottom line is we can't afford the condo anymore. We have already used all our savings and retirement funds. My husband and I signed up the paperwork to have an agent help us do the short sale (it was before I found this blog). Since we have signed up with them (about a month ago), they have already lowered the price three time. We bought it for $425,000, we owe $380,000 and currently its on the market for $329,000. We have our 1st and 2nd with the same lender. We refi 2nd but it was rate and term only, no cash-out. We had send a hardship letter to our lender prior to having an agent involved. We have recently received a letter from the loss mitigation department to contact them regarding the loan. My questions are: (1) If we can provide all the financial statements to our lender to show that we are incapable of making the payments AND if the lender agrees for us to do the short sale, is it better to handle the short sale on your own OR through the agent? Our agent is not asking for any money upfront but they will include their fees in the loan. Since we are already paying lender less than what we owe (thru. short sale) and they will also have to take a hit on buyer's real estate agent fees, closing costs, etc. Are we better off doing the SS on our own or thru. an agent? I would have to assume they would add their fees in the contract with the lender which they may not like it too much. (2) Since I never refi. my 1st, the debt relief act will only apply to my 1st and I will have to pay taxes on the 2nd??? Is that correct? Please note, its the same lender for both loans. (3) Is this common for them to keep lowering the price from $379,000 -&gt; $359,000 -&gt; $329,000 in less than a month? We have been getting more prospects now than ever before, but I feel more they lower the price, the more we would have to owe for our 2nd. Am I correct? I will REALLY appreciate your response. Thank you.

Susan Luna April 10, 2008

I have an investment condo in Orlando, Florida. I live in California. I owe $369,000. I believe it is worth $200,000 now. If I do a short sale will I have to pay taxes on the $169,000? I hope that the Foregiveness Law would help me, but it isn't my primary residence. Thank you

shawn April 12, 2008

I need help fast, I have been relocated and I needed to short sale my house through HUD in order to move, I close on April 14. My relocation is stating I can not have a completed HUD-1 and we are trying to figure out how to draw the closing docs. I was offereed 150k the min the bank will accept, my compnay is paying commiesions and closing costs, how do I bring this to the table? Can I ask the bank to bring 15k to the close myself so the buyers still pay 150k? Can I pay everyone through the title company? This is a short sale through FHA and everything is approved, the relocation company is mucking everything up. I have no clue what to do, this is going to fall through becuase of a HUD - 1 Cert

Barry Cunningham April 13, 2008

Hey Bob..WOW! Glad to have some discourse with you over at BHB...never been to your site here...lots of good stuff here..and I see a BIG discussion on the MDRA as you stated. this is so very refreshing! Thanks for the dialogue and a lot of great information

Tom Baker April 15, 2008

I have a 1st of 479,000, an interest only for 5 yrs with a $50,000 second. It was rented out for about 3 years after my divorce and now sits empty. I moved to the Bay Area to be near my son as he groes up. So there is noway I am moving back. I put it on the market last year only to see it drop in value like all the others. Currently, it is listed as a short sale. My lender (B of A) tells me that they will 1099 me reguardless of what I do. I was thinking of just walking away from my payments and foreclosing. I can't afford to keep paying for an empty house that I don't want. It seems that I will get killed in taxes next year no matter what. Your thoughts would be great.

Tom Baker April 15, 2008

I have to add that since the refi, I have been paying PMI on the first. Does this help me in anyway?

Sorin April 16, 2008

Bob, I need your help ASAP... The situation is very similar with others We bought the house in 04(MI) for 179K on a 80/20 loan. We did not refinance and all the payments are current. Last year my wife got a job at 95 miles away(I commute 30 miles same direction) and we've tried to sell the house for year now. Meanwhile.. we commuted on the past winter and it wasn't fun, but we cannot do it anymore(we have two small kids). I have talked to the bank for a short sale and we've got an offer, but after fees, taxes ... net will be 132K, and I own the bank 175K. The 1st mortgage approved the the offer 150K, and the 2nd pending... From what I read I will get a 1099, but will I be paying taxes after it? We cannot afford to pay the taxes and we have about 50K in CC debt most with a low fixed rate and with very little in savings.. If we need to pay taxes on the 1099, can I reject the offer and walk away? What exactly do I need from the bank to make sure they do not come after us for the difference? Should we BK, foreclosure?

Tshader April 17, 2008

My mother in-law can not keep her house after her husband died Sept. 2007. She as a first and second mortgage, and is hoping to do a short sale as she has a buyer. Can she use the life insurance money to buy another home out right, or is she required to use that money to help with the short sale? Thanks

MISSY April 19, 2008

BOB or anyone else who may know... My situation is: -Original loan in 2004- $280k (State of CA) -Refinance loan 2006- $337k ($50k used for downpayment of spouse property in legal separation) -loan is current but can't afford to keep paying $1933 month interest -would be ok taking a hit on credit if lender can't take action other than foreclosure (This is my primary concern...recourse vs. non-recourse, and how frequent to they do judicial vs. non-judicial and mostly how to find it in your loan docs) -State tax debt relief is only through 2008 under SB 1055 so I need to decide quickly -cost and contact information for a CA attorney that can deal with the real estate and tax issues -any feedback on youwalkaway.com???

Jaclynn April 24, 2008

We need some clarification on our situation as to whether or not our current HELOC is a recourse or non-recourse loan based on our situation. Our primary home was 90% financed with a 1st and HELOC with a downpayment of 10% cash (which we borrowed from our 401k - about $70K). In one year, we refinanced with the same lender a 1st and HELOC (as the home's value went up and the rates are better). There was cash out of about $65K with this HELOC to repay some of our downpayment debt (to our 401k loans) and landscaping/home upgrades. We then paid back $150K into this HELOC in one lump sum to lower the balance. We then obtained a new HELOC with another lender (better rates) about a year later. With this new HELOC, the new lender paid off the old lender's HELOC in full (about $170K) and we took cash out of $80K which maxed out our HELOC of $250K. My question is how do I tell if my current HELOC is a recourse or non-recourse loan in CA. What language do I look for on the HELOC loan document to indicate one way or another. Thank you.

Curt Ellis April 25, 2008

Hey Bob, Looking for advice on our situation. I am in construction and my wife worked in the mortgage industry. We realized what was happening before it happened, put our house on the market and started to speak to our mortgage company. We were upfront and honest and they were no help. They wouldn't speak to us until we were late. In Dec. I was put on temp. disability which is up in two weeks. The house is listed way under and have had decent offers, but the bank wont work with them or us. We had 5 offers ( since Jan) and now none because the bank. What options do we have when the bank (WAMU) wont deal. We have done what we feel is right and really dont know what options we have at this time. We have been trying to do a short sale, but the mortgage company will not respond to our agent or us. Should we give the keys back? Or should we BK or go directly to forclosure? Just lost, when you want to do the right thing and really don't know what to do next. The only thing the bank did ask for was our tax returns and proof that we made the money we did when we first got the loan? We have complied with them, they just are not very helpful. 1-800- hope # was a joke, and went straight to WAMU litigation with no hope.

Monica Cespedes April 26, 2008

Question: We owe a total of $580k on our principal residence. It is worth around $325k. The loan is in two parts, with the $80k second held by Chase and the first held by ING. In addition, we own an investment home that was formerly our principal residence. We are probably slightly underwater on this property (we were well in the money when we moved out). We are able to make this monthly payment. We have few assets..perhaps $30k in cash in my name. The house is in my husband's name only. We were able to renegotiate the loan down to 4% interest only, so we can make the payment. The problem is that we will certainly be working for the bank for a decade. We would be infinitely better of to short sale this house (if there are not significant tax implications) and buy another for market so that we can start to build equity again. We only "cashed out" $8k in the initial purchase, so I believe that avoids big tax implications? What is unclear to me are the tradeoffs between a short sale and a foreclosure. 1) which is better overall? 2) is a short sale with two lenders where one is totally out of the money hard to negotiate? 3) do they have different credit rating implications (we have good credit) 4) Am I better off to just stop paying the second? It seems like we are just flushing $ down the toilet. I don't know what Chase's response would be if we stopped paying. As an aside, it probably costs about as much to rent the house we need as we are paying in mortgage interest right now. Thank you so much for your help. This site is terrific.

Zameera April 27, 2008

Bob, It was very helpful to go through your web-site. Learned a lot. We are in a terrible situation. Found we had been tricked into a mortgage where they were adding on the interest to the Principal and 2 years later we owed more than we had borrowed and the interest had skyrocketed. Spent all my savings on renovating the house trying to sell it at a good price. Did not work. Wanted to talk to Bank. They said they would only talk if we stopped paying (we had never missed a payment). So we stopped. Then they made us wait two months to talk. A community lawyer helped them agree to consider a Deed in Lieu. Now they say that the title search is backed up and so it couldl be delayed and they might have to foreclose. They encouraged me to do a short sale---obviously in their interest. The question is: is a short sale or deed better/easier for me (My husband is old and ill and I am totally exhausted). I just want it all to stop. Second question: In either case, I will be issued a 1099 for the difference. For a short sale, what do I need to ensure that I ask the Bank to agree to to make sure they will not come after me later to collect anything. Third question: If I have re-financed 2-3 times (for hardships mainly, but also to work on the house), does that mean I have lost the right to take advantage of the President's Bill and not pay on the 1099. Can I ask the Bank to word it in such a way that I am not liable for anything more? Please help asap, since i am finalizing things for a short sale with a Broker tomorrow (fearing the foreclosure, that is already in process, but held up because of the title). If I sign the contract with the Broker, what do I need to make sure I put into it to protect myself? Or else, if they bring me a buyer, and the Bank refuses the short sale, what happens? Can the Broker hold me liable and force the sale and demand the commission?

Christine April 30, 2008

HELP!!! My husband and I live in PA. We lived in a bought a double home in 2001 and lived there until the beginning of last year. We moved out and are living elsewhere. We helped the double and rented it out. In the process of renting it, extensive damage was done to the home (by a tenant who was going to buy the home from us and jumped the gun and started remodeling). We had renters leave with no notice and are left with an empty double, no rental income and an urgent need to sell. We have an offer that is about $50,000.00 under what we owe. I just wrote a hardship letter and am crossing my fingers. I stumbled upon this webpage and wanted some imput. Are we going to owe taxes on 50+ grand? Is the lender going to after us for 50 grand?

Christine April 30, 2008

Oh, and I also wanted to mention that we have a first and second mortgage with different lenders.

Counselor April 30, 2008

If some of you would READ alot of your questions are being answered over and over again. Take some responsibility for your situation and help yourselves.

Kathleen May 5, 2008

I'm located in Orange County CA and own a condo I purchased for $709,000 with an 80/20 loan (2 separate lenders) three years ago. I'm self employed and my income is coming down and my payments are going up. Also my property has lost at least $100,000 in value so I'm upside down on the property. I would like to talk to an attorney as to my best option. I've made all my payments on time but now I'm considering a short sale versus foreclosure. One of my concerns if I go for foreclosure is not being able to rent because of my trashed credit report after the foreclosure. Your comments would be appreciated as well as the names of some attorneys who can provide advice.

Andrew May 7, 2008

Hi, I have a question that has probably already been asked . My wife has been disabled for many years. Our primary residence is her sole and separate property. I was making the mortgage payments on it and became permanently disabled in an accident. I am now on social security and their is no way we can meet the mortgage. In the current market our house is worth less than the note. What course of action should I take ? Is it better to return the deed in liew of foreclosure ? Are any additional assets at risk ? Will there be tax ramifications ? at my wits end Thanks Andrew

Gale Freed May 8, 2008

I need some advice and would like it to be private. Is there a way I can send you an email directly without it being posted?

Michelle S. May 9, 2008

Hello Bob, I have 2 mortgages on the condo with two different montages companies provided by the developer whom I purchased the condo from in 2005. Both are Purchase money loans for my condo in San Diego. I paid 350k for the condo and it is now appraising around 199k. I’m two months behind my mortgages payments. I sent letters to them requesting loan modifications, but were denied. It is my primary residence. I can see that I’m heading for a foreclosure. Please kindly help and advise me 1. Can the two mortgage companies come after me by law for the money that I owe them after they foreclose my condo? 2. Can the two mortgage companies continue to use collection agent to call me for money? Like what they are doing to me now? 3. Will I owe California State and the Federal any money or tax after they foreclose my condo? 4. Will I be forced to file a bankruptcy? Thanks immensely for your guidance. God bless!

stanley May 11, 2008

I'm in Virginia and am facing a non-judicial foreclosure on a recourse loan. So an extra effor tis required on the part of the lender to seek a seperate action against me for what could be a six-figure (small) deficiency. As I see it, it's a cat and mouse game. As part of ones discussions with the lender, you can hardly ask 'if you don't restructure me into more favorable terms, and I accede to the foreclosure, will you come after me with a DJ? " What are they going to say? No? Even if that is the right answer? The catch-22 is that you wont know if you're going to get chased until the foreclosure is a fait accompli. I keep hearing a DJ is 'rare', for all the cost/benefit reasons we already know. That's why I've been asking til I'm blue in the face. What's the demeanor og the big banks right now, Suntrust being the one of primary interest to me? thx

Paul May 16, 2008

State is Oklahoma: I was single and bought my home in April 2006, solely in my name. There is only one mortgage on it which was FHA. I got married and moved into my wife's home in September 2007. She has one mortgage on it and it is solely in her name. I put the house up for sale in October 2007 and had one offer that fell through since then. I have it listed for less than I owe and have been lowering the price steadily due to the terrible market. The price is below appraisal value. I was advised by my realtor that in order to process a Short Sale, Wells Fargo requires that the loan would have to be past due. I stopped making payments and I'm currently three payments past due (March, April, May). Making the payments was putting a strain on us, financially. Wells Fargo is the lender and they were processing a short sale and then denied it stating it was because I voluntarily vacated the home. I only found this out from speaking with my realtor. My realtor is able to speak with Wells Fargo on my behalf and can get more information on my account than I can when speaking with Wells Fargo. This is a quote from the letter I received from Wells Fargo: "After reviewing the information you provided, we must advise you your request for Pre-Foreclosure Sale has been denied for the following reason(s): We are unable to come to a mutual agreement regarding your request for a workout. There may be other alternatives that will assist you but are contingent upon agency investor approval. They are, but may not be limited to: *Based on the information you have supplied we are unable to identify an alternative workout program at this time. If you would like to discuss this decision or would like to consider other options, please call us at (800) 416-1472, Monday through Friday, 8AM to 8PM, Central Time. For additional assistance, you may call Consumer Credit Counseling Services at (800) 569-4287. Sincerely, Borrower Counseling Services" Please bare in mind that I don't have a fortune to spend on attorneys. My questions: 1. Will the Debt Forgiveness Act cover me considering the fact that the house was not my primary residence for two full years since I moved into my wife's home? 2. I have contacted Wells Fargo about Deed in Lieu of foreclosure and they said they would get back with me within 30 days. They did not sound too promising while on the phone with them. They have been very nice through all of this but they are calling to collect. I do not understand a lot of the jargon of the laws and such. If Wells Fargo initiates a foreclosure, how apt are they to garnish my wages for the difference after the home sells at auction? 3. How can I get them to settle outside of court in order to forgive the debt (difference) and to not pursue collecting the balance? 4. If they do not collect the difference and send the 1099, how can I prove insolvency or not pay taxes on the difference when I was not living in the home for the full two years? Sorry about the very long post, I am just very confused. Thanks, Paul

Esther May 20, 2008

Hi Bob. I've read through all the blogs. Thanks for doing this. I have a construction loan for $176,000. The house is only about 30% complete even though the inspector reports (bank hired the inspector) show 70% complete / they have given out 70% of the loan. The contractor walked away with most of the money and most of what he built needs to be redone. New appraisals value my property and the structure to be about $85,000. The bank has agreed to a short sale and I am currently trying to find a buyer. This is in South Carolina. If I sell it for $85,000 the bank will forgive $91,000. The house was going to be my primary residence (but obviously is not anymore). Will I have to pay taxes on this money? I should be suing the builder, but about 10 other people are already doing that with no luck. I will get no money from him so I am screwed in every direction. Any advice from you is very very welcome. I just want out of this the cleanest and quickest way possible. Thanks! Esther

Alain May 29, 2008

Hi Bob, I live in Arizona. I bought a home in 2005, refinanced in 2006 10yr intrest only. Got married in 2007. Put the house up for sale for $265K (what is owed on it), no one willing to purchase at that price since I owe more then the house is worth. An investor contacted me and purposed a solution. They would find buyers for the home as a lease purchase 18 months. I agreed to this and my husband and I bought a new home together. In the mean time the investment company has gone out of business, the tenants still live in the home however have indicated they may not be able to qualify for financing. As of now they are still making the payments. In the event they were not able to make the payment or were to move out, I would not be able to carry both mortgages. My husband has since been laid off , and I am working overtime just to make ends meet. His name is not on the home that is being rented however both our names are on the property we live in. What are the possible consequences if the home we are renting goes into foreclosure? Are we at risk to loosing the home we live in? Will it damage both of our credit or just mine? Would I still be able to qualify for the tax relief? Which would be better a short sale or foreclosure, as far as repayment of any deficiancy goes? Any advise you could offer would be greatly appreciated!

Herb &amp; Harriet Dahlquist May 29, 2008

Bob----We own a condo in a Detroit suburb--have had it for about 2 1/2 years so very little equity. I lost my job in 01/08 &amp; because of my age, my wife's age (63 &amp; 68) and the fact that she had a very serious back surgery on3/04/08 to us the true likliehood of our being able to keep up is not good. We have a fixed rate until 11/08 and because of our state's economy &amp; current property values a re-fi is not looking good. We've heard about a program that involves deeding the home back to the lender. Are you able to offer any suggestions? thanks. we've heard

WirelessDJ June 10, 2008

************************************************* ***** PLEASE GIVE POOR BOB A REST ***** ************************************************* I would imagine that answering these questions has become a full time job for the Bob. I read the entire thread, learned a whole lot, and found that most of the questions are about the same with exception to the personal information. I am amazed at how many people are going through the same situatuion as I. We are in troubled times my friends but things will get better. Take the time, read the posts and chances are, you will have your answer. I feel much better now that I know more about the process. This is the longest thread I have ever read, I dare not print it but I did save it to my hard drive for reference. WirelessDJ

Susan June 11, 2008

I moved to CA in October 2006 for marriage. I owned a home in KY and now, after almost 2 years on the market, have a cash offer which I plan to accept although I will fall into the "short sale" category. I spoke to my lender about this and have the short sale forms from the lender. My question is: If the lender forgives the indebtedness, will I be liable for taxes on the amount forgiven OR will I fall under HR 3648, the Mortgage Debt Forgiveness Relief Act of 2007? Although I have not lived in the home it was purchased as a principal residence; also, I have made all the payments in order not to destroy my credit. Any help you can give is greatly appreciated.

Julie Westrick June 16, 2008

We have a house in Southern California that we moved out of in Nov., 2006, and has been on the market the entire time. We moved because my husband was transferred out of state. We finally could not continue to make both payments and stopped paying in December. We already have another house in Nebraska. We have a short sale offer on the table. Will we have tax liability? Is it better to foreclose?

Jane Campbell June 17, 2008

Hi Bob: I have read through your responses to the many questions, but there is still a lot I do not understand. Every time I contact the mortage company, I get different answers. We lived in our house for approx. 18 years. We refinanced the last time about 2 years ago, so there is no equity. I became disabled shortly after the refinance and was the primary breadwinner (I do not receive any disability income). My husband is a teacher and makes barely enough for us to survive. In Sept. 2006, the foreclosure began. In July 2007, our electricity was turned off for non-payment. In Nov. 2007, we moved out to stay with family because we could not afford the fuel for the winter. I am in contact with the mortgage company each month. The mortgage at the last refinance was approx. $120,000. We are about $28,000 behind in payments now plus attorney fees on their end. The last time I spoke with the mortgage company, they said it would be better if we attempted to sell the house for 3 months (with proof) and that there were 3 steps that get worse as follows: 1) short sale 2) deed in lieu of foreclosure, and 3) foreclosure. My questions: 1) If the foreclosure continues until the end, will be be liable for any fees/taxes? 2) Is it more beneficial to ask for a deed lieu of foreclosure and what will we be responsible for financially in this case? 3) How will attempting to sell the house for 3 months help us? 4) With other outstanding credit debts, would it be better to attempt to save enough money (somehow) for a bankruptcy? Your assistance is most appreciated.

Jackie June 17, 2008

Catherine, Your information about short sales and FICO scores is not necessarily correct. I did a short sale and was able to get the lender to report "paid as agreed" on my credit report. I came out of the short sale with no dings on my credit record and a FICO score of 737. Not too shabby! I was current on my mortgage and all other debt when I did the short sale. I was able to prove "financial hardship" to the lender by showing them bank statements showing that I had exhausted my savings to keep my payments current, and with no savings left, my monthly income was not enough to keep up. My short sale was for about $80,000 less than I owed. I had a buyer already lined up when I negotiated with the lender, so I think they saw that it would be easier to give me a free-and-clear credit report than to let it go into foreclosure. Afterall, they really have no vested interest in ruining my credit. They just want to do what is best financially for them and short-selling cost them less than a lengthy foreclosure proceeding. The really cool part is, I was able to turn immediately around and buy an equivalent house (somebody else's short-sale) that I can easily afford.

Kim June 18, 2008

I lost my job of 15 years and have had my condo for sale for 9 months. I have not found another job and have an offer for $75,000 and I owe $110,000. I have owned the unit for 1 year and 9 months and the buyer is a cash deal and wants to close asap. The lender has indicated they will accept, but will issue me a 1099. Will I be liable for taxes on the difference? If so, is a deed in lieu of foreclosure treated any differently by the IRS ? Thanks so much

Glenn McCombs June 23, 2008

I have a home in Cape Coral, FL. I refinanced some time ago with Citi Residential and a second with Citi Financial. I owe approximately over $250K. With the market downturn I cannot sell house for more than $140K. After the shorts sales and the commissions for the realtor the bank loses big time. I am upset as I was lead to believe, under false appraisals that my home was worth $320K at time of refinance. I was not obviously. I am now over $100K upside down. I want to short sell but would be willing to keep property for a premium of the $140K the house will draw. Possibly $160K. I may be able to rent it for that price. This is still my principle address as I am renting now in PA. Would Citi consider allowing this to happen or would they rather go through with the short sales or foreclosure. I am offering a premium to the amount they could get without realtof fees. this is a winner for them in my opinion since it was them that misled me!!! Thoughts on this. Thanks for the help

Connie July 1, 2008

I just finalized my divorce, and of course am stuck with a house in California that just won't sell. My realtor tells me that if we can short sell the property that I won't be stuck with any tax responsibility, but my bankruptcy lawyer isn't so sure. My first mortgage is for $249,000 and my equity line of credit is for $50,000. My ex-husband just moved out of the home, and we can finally put it back on the market, but will probably have to sell for around $200,000 to get it sold. We used the equity line of credit to consolidate credit card debt, and purchase a car. I am currently living with friends, and don't even own a car. Can I still get stuck paying the second mortgage back? If that's the case it seems like it would be better to just go ahead and claim bankruptcy now. <em>@Connie - I think your Realtor is incorrect, as your a dealing with a cash out refi and there is the issue of Califonia state income tax. If BK is on the horizon, I would think your attorney has probably suggested that you include the house. I would listen to the attorney over the agent.</em>

Andrew July 8, 2008

Ok, so let me throw some economic reality into the equation: If you do a SHORT SALE on a NON-PRIMARY residence, AKA an investment property: If you bought the property using a mortgage for say $300,000 and are forced to short sell it for say $200,000, the lender will 1099 you for the $100,000 in debt relief (which for tax purposes would count as income) HOWEVER since you sold the house for a loss, ($200K) from what you paid for it. wouldn't that offset the income from the 1099, thus resulting in a ZERO net gain? How would this be reported as income on a tax return when effectively it was a WASH? <em>@Andrew - My understanding is that you can't deduct the loss on a personal residence. It is a good question though and one reason why anyone in a distress situation should get legal and tax advice.</em>

Brian July 13, 2008

Ok heres a good one. I own a total of 8 properties. I live in one, my primary residence. All the others are rental properties. Most of the the total properties have HELOCs on them with a separate lender then the first mortgage. All 8 homes are worth less than what is owed by the first mortgage and HELOC combined. If I walk away (stop paying) from all homes but the one I live in, will the first mortgages forgive the debt and therefore I will have a tax liability, or will they make a deficiency judgement? What about the balances owed for the HELOCS? Will those lenders forgive the debt and therefore have a tax liability? Or will they give a deficiency judgement? All properties are in Florida. It seems at this point it would be better to just have astronomically bad credit for many years than to owe taxes. I am assuming I would be forced legally to pay the taxes, but no legal action could be taken for owed debts. Also when it is all over, should I file bankruptcy? Please advise.

James July 16, 2008

I have a house in GA, where I lived for 9 years and in Nov 2005 I took a job in DC and placed my house on the market. It is now 2 years and 8 months later and the house has not sold. I have lower the asking price 3 times, it is now down to pay off, with a 1st and 2nd mortage. I have stayed in contact with the two compaines, with the 1st acting like they would consider a short sell or a deed in lieu but the 2nd wants no part of this. If the house goes un-rented I will not be making any payments, it rents for less than the payments (I add 500.00 each month to make the payments). Can you give any advise on how I can resolve this? <em>@James - you need to know what your options are with regard to GA law. I cant help there. You need to speak with someone who can give you legal and tax advice in context of GA laws.</em>

Julie July 18, 2008

Rather than having to pay taxes on the gains from a short sale, aren't there instances where its just smarter to walk away and let the lender foreclose? My credit will recover, but the tax bill could be a big impact on our finances that I'd rather just deal with foreclosure and be done with it. Am I missing something? <em>@Julie - No, you have it right. Foreclosure can be a better option for some, but you should talk to an attorney to make sure there are not any unintended or unforseen consequences. </em>

Neela July 24, 2008

Looks like Bob has stopped responding to everyone's question. I had posted a comment for Bob on this site last month. At that time, we were going through the short sale and needed the advice. Since I'm done with the short sale process with Bank of America, I thought I would share my experience with you all. I live in California. We had both 1st &amp; 2nd mtg. with Bank of America, so the process was little easier than having two different lenders. We had our condo for sale for about one year with no offers. At last, we appointed Real Estate Broker who specialized in Short Sale. We owed $380,000 total (1st &amp; 2nd) and sold the condo for $325,000. With the difference in price, agents costs, closing costs, title/escrow costs etc. the difference was about $90,000. In the beginning of the transaction, we were told that the agent would negotiate with the bank to try to remove the charge-off from our credit and show the balance paid in full. Since Bank of America is the strict lender, they accepted the short sale offer but DID NOT remove the charge-off from our credit. The transaction went very smooth once we had the buyer and BOA accepted the offer. We close the escrow within 30 days. At that time, we were 60-90 behind on our payments. We could have make the payments, but BofA like any other lender, wouldn't rush unless there's lates on your credit file. My advice to everyone is to either you are considering short sale, deed in lieu, or foreclosure, skip the payments. The only way lenders consider looking at your request when there's pattern of late payments. Your credit will be effected anyways, so why not try to close the deal asap. Also, Bank of America told me that they would completely forgive the balance if we foreclosed as opposed to short sale. We didn't want to effect our credit with the foreclosure stamp, so we decided to short sale. Now at the end of the year, BofA advised us that they would either try to collect the charge-off/balance OR they would report it to IRS (1099). They can only do one or the other. I'm hoping that they report to IRS as opposed to try to collect it because with the debt relief act, I'm entitled to receive the forgiveness of the debt since we never refianced our condo since the purchase date. I do not know what will happen if they try to collect the unpaid balance because we actually have NO MONEY to pay them. The charge-off stays on your credit for 7 years. I still haven't looked at my new credit report to see how much it has affected our credit. FYI, someone we know who lives in a very high priced location, haven't made the mortgage payments in two years. The bank still hasn't foreclosed their home. So if you are deciding to foreclosed in the event the bank not co-operating with you, stay at the place as much as you can. Save some money for the future place. But Remember, if you try to rent a place after that, it may become difficult because the apartment/creditors would want to see last 12 month mortgage/rental history. Its tough time for everyone. It will get better. Being stressed won't help. I know its difficult when you have to make a choice about leaving your house or not especially if you are in love with your place. My situation was little different. We WANTED to get out that house because the layout didn't work for us (two stories and have a 18 month old). We hated our downstairs neighbor (alcoholic/smoker) and we just wanted to have extra money instead of wasting on the mortgage payments and at a place we didn't even like. We are now in a better place, more room for my kid to run around, dont have to worry about big mortgage payment, and have little bit extra money for savings. I will come back to post a comment once I know how badly it has affected my credit and if any. Good luck to all of you. <em>@Neela - Thank you for sharing your experience. One thing that is important to understand if you are a distressed seller is that prior to moving forward with a short sale, <strong>IT IS IMPERATIVE TO GET LEGAL & TAX ADVICE FIRST</strong>! BofA has taken a rather tough stance on deficiencies. With purchase money loans in California, they have no legal ability to pursue a deficiency, but it is negotiable if one asks them to do a short sale. My bet in this case is that they go after the deficiency. Expect them to ask for at least 10% to settle the debt and forgive the balance.. Don't wait for them. Call and start to negotiate.</em>

Kim Goodling July 25, 2008

Bob, I live in Orlando, FL and I have two properties, one is a house, which I am fine with and the other is a (condo) rental property that I am loosing money per month in. I was loosing $1000 a month and will be loosing $500 a month after special assessments go away. My HOA fees are $380 a month and these speical assessments are $380 a month. EMC (Bear Sterns) is my mortgage company AND I have PMI on the condo. I currently owe about $174k on the loan. I put the condo up for sale, doing a short sale two months ago. I had to not pay my mortgage to show hardship so I am about $2700 past due right now. We had a buyer for it at $105k and it was accepted by EMC and the PMI company, but the PMI company wanted me to sign a loan for $35k at zero interest for 10 years to recoup half of the money they are insuring EMC for. That deal feel through and now we have another deal ready to submit. What are your thoughts on this? Should I go for the sale and sign the papers for the loan if they forgive the rest of the deficiency balance? Is this happening a lot and are people doing this? My credit WAS a 740 and has droped to a 677 becuase I am behind in my payments. <em>@Kim - I am not familiar with foreclosure and deficiency laws in Florida, so I don't have any understanding of your options. Asking for a zero interest note over 10 years is not uncommon. I can't tell you what I would do because I don't know what leverage there is. If the lender or pmi company can go after you for the deficiency regardless, I would look to cut the deal that limits my financial exposure the most. </em>

MJ July 26, 2008

I live in VA. I have a townhouse that I have a $288K loan for, and now several townhouses (same size) are short-selling for $135K. I've been advised to short-sale, but I've never been late, and I'm not experiencing any financial hardship (yet). My mortgage just went up $400 (adjustable rate) and I can't refi because I'm upside down...right? I'm engaged to be married in a couple of months. We plan on buying a single family home. What's the best way to get out of my loan and into a new home with my new husband and avoid losing so much? If I sale my house for $145K, will I still have to pay back the difference? Or, does that depend on the bank? <em>@MJ - Without a hardship, I would expect it to be tough to get approval on a short sale. Once you are married and show two incomes, that would make it even harder with some lenders. If you sell for $145k, or more likely, $135k, you will need the lender to release the lien in order for the sale to go through. The key is how they are willing to deal with the balance. </em>

EmilyM July 29, 2008

Bob, thank you for all the info! Husband and I in similar situation: bought in 2002 at $179,900 and refied in 2005 to make our loan balance today at $317,000. Trying to relocate due to husbands job but property is appraising at $189,000. House has been on the market since Feb. of this year. We used the money we got out of the refi for home improvements but also to help me stay home with our kids. We're both working again to pay the mortgage. Can we refi to readjust our loan to the current value? If so, how long before we can turn around and sell it for that value? Will that depend on the lender? Thanks! <em>@Emily - Yes, it depends on the lender. I have seen lenders reduce rates, but i do not have first hand knowledge of lenders reducing principle. </em>

EmilyM July 29, 2008

By the way, we're in CA also. :)

Kristin July 30, 2008

I had a primary residence that we lived in for 30 months. We borrowered $400,000 on a sales price of $500,000. We put $100,000 of our own money down on the house (which were the proceeds we received from our previous home) After close, we took out a HELOC for $150,000 and started removing OUR money we originally put down. We were rennovating an investment property at the time which was where over half of this money went. The value of this house at the time escalated to $800,000. We put this home on the market in March 2006 for $629,000. It ultimately ended up taking 14 months to sell for a contract price of $450,000. We shorted the HELOC $150,000 after realtor fees were added in. Later, we settled with the bank for $10,000 to remove this unsecured debt so that it would no longer follow us. My understanding of the mortgage forgiveness act is, because we put 20%of our own money instead of mortgaging 100% when we originally closed means that we are penalized by the IRS and owe taxes on the HELOC taken out after purchase...even though it was our money to start with and the house value fell. (In other words it was our money that we retrieved and not free money from the bank.) Is this correct? We would not owe taxes if we originally borrowed 100%? How does the government see this as fair? Question #2- We wanted to be as ethical as possible and do everything we could to assure it did not go to foreclosure, however, it took 14 months to sell. We had already moved states and could not keep paying on two mortgages. The only way we could continue to keep trying to sell it was to have someone living there to help pay the mortgage until it sold. My question is- since we lived there for over 2 years as our primary residence, and we never meant it to be an investment property, would it still be considered under the mortgage foregiveness umbrella because we had to have someone help pay the mortgage until it sold? Thanks for your advice!! <em>@Kristin - The Feds don't differentiate on the cash out when it comes to removing equity, whether it was because you put money down or because the property appreciated. You should probably talk to a CPA or tax attorney about how to demonstrate on your tax return that the property qualified as a principle residence so that you benefit from the debt forgiveness.</em>

Robert J Pietsch Jr Aug. 2, 2008

I had two homes, I had a heart attack and was unemployed for a year.. Next to no income.. We were forced to sell the second home at a loss. The mortgage lender agreed to the sale and the sale proceeded. We received nothing form the sale of the home after the real estate sale was completed. About one year later, I got a letter from the IRS stating that I owe them for the difference in the mortgage value and the short sale. $20,000 dollars. I AM now being asked to pay this amount from my current job income which is significantly reduced. Making these payments with significant increased gas, food, shelter, insurance costs are leaving me with major short comings in being able to provide for my family. On top of that, the capital gains also applied to Sate taxes so the total is $24K... Paying interest + Principal. I have alway paid my taxes. But this is somewhat beyond belief that when an individual is down and out, you are asked to pay capital gains on income not received... Now it is made worse because there has been some relief granted to short sales within a certain time frame.. A real slap in the face...to me Can anyone help me to determine a path to get this tax issue re-evaluated. Bob <em>@Bob - you need to speak to a good tax attorney.</em>

gary demers Aug. 13, 2008

What is the IRS definition for a short sale, principle resident? I have owned the house for 7 yrs but have not lived in it for 1/1/2 yrs. If I short sale below what I owe will I be responable for the taxes? i live in Calif. <em>@Gary - there is an ongoing debate over that definition. Many argue that you would qualify, but once 2 years has passed, it may not be considered a primary residence. if that is the case, you would need to close escrow before the 2 year anniversary date. Check with a tax guy to be sure. </em>

Lorraine Aug. 16, 2008

Can you recommend the name of a good real estate attorney and CPA in Sarasota, Florida? I own a condo in Sarasota on which Wells Fargo Home Mortgage holds the 1st mortgage and Wells Fargo Bank holds the 2nd mortgage (I don't know if these 2 entities are one and the same). I have asked both Wells Fargo entities for a deed in lieu of foreclosure. The condo is worth less than the 2 mortgages. It has been listed for sale for over 1 year and even offered for short sale for over a month, with no results. I am current on both my mortgages, but after making September's payments, I won't be able to remain current. What else can I do to increase the odds that Wells Fargo will take this property back and grant the DIL? I am losing hope of even getting a short sale, and need the DIL to get out from under these loan payments. Thank you.

Brian Aug. 20, 2008

Bob, I purchased a residential acre one year ago for 189,000. It is now only worth 80K. The monthly payment is killing us considering it is only a peice of dirt and the value will not go up anytime soon. The bank is willing to do a volunaty surrender with debt forgiveness. I have perfect credit but am thinking of letting it go. I was told that a 1099 will be issued but we can right off the original purchase amount which means we would claim a 9K loss over three years? Is this true? Should I let this headache go? Brian <em>@Brian - land is not within my expertise. You need qualified tax advice on that one.</em>

Aaron Aug. 27, 2008

We had a home in Colorado that we refinanced using Colorado 125% allowance. It allowed us to take out more on the house than it was worth to make improvements. Unfortunately, I lost my job soon after and had to relocate to Texas for work. We put our house in Colorado on the market and had to do a short sale to avoid foreclosure. The short sale happened in 2007 and we received a 1099 for over 80k from the mortgage company at the end of last year. Would we be eligible for the debt forgiveness act in this scenerio? <em>@Aaron - any amount over the original acquisition debt wouldn't qualify, but a tax pro may be able to deal with this via insolvency.</em>

Connie Aug. 31, 2008

Bob, Can you refer me to a real estate attorney and/or CPA that can help me in Colorado? I'd appreciate any help you could provide. <em>@Connie - I cant, but Larry Hotz may. He is a broker in Colorado and may know someone. Try his <a href="http://www.larryhotz.com">Denver web site</a>.</em>

jason Sept. 3, 2008

i keep hearing that this "Short Sale and Phantom Tax Debt Relief" is only good until the end of 2008. Is this true? If not, how long is this good for? What's the expiration date? Are there any extensions pending if it is scheduled to go away this year 2008? What lies in the future? Thanks, Jason <em> @Jason - The Federal law is good through December 31, 2009.</em>

Mike W. Sept. 7, 2008

Thank you very much for the blog and the information. My situation, CA property, owe more than could sell for, bought in 1996 &amp; refinanced a couple times to do some improvements to the home. After I received a NOD back in May of 2007 on my 1st mortgage, I moved out of the house, got a realtor and put the house up for sale. It has been up for sale for a little over a year and we finally have an offer. It will amount to a short sale. I also have a small second and they have agreed to take a smaller amount. I am also in a Chapter 13, less the house, that is 100% repayment of other debt. Should I short sale or just let them foreclose? If I do a short sale, the property was my primary residence and the refi's were for improvements to the property. Will I have to pay taxes on the difference? I want to be sure on the taxes. Do you know a San Diego area tax attorney that you could recommend?. One other question. Since I moved out of the house, I owe back HOA fees amounting to about 6k. Can they come after me for this? I am in a chapter 13 bk now. Does that make a difference? Should I go to the HOA and request they drop any lien on the property so it can be sold and they will at least start getting paid HOA fees by the new ower? Thanks Bob. Feel free to email me and I look forward to your reply...I have been so confused....

Bob Sept. 7, 2008

OK, I'm back. This blog took on a life of its own and more time than I had between managing business and family. I'll do my best to catch up and keep up. A few points - I am not an attorney nor tax expert and while I will address each comment, many of these questions require that you consult an attorney or tax pro. My goal is to point people in the right direction, dispel myths (which tend to take the form of absolute statements), and provide as much info as possible so that you can have a strategy moving forward. <strong>I CANNOT STRESS ENOUGH HOW VITALLY IMPORTANT IT IS THAT YOU SEEK QUALIFIED TAX <em>AND</em> LEGAL ADVICE IF YOU ARE IN OR FACING A DISTRESS SITUATION</strong> I will address each of the questions here that are unanswered, with my responses at the end of each individual comment, and then I will start a new Q&A and FAQ (Frequently Asked Questions) post.

Sarah Sept. 9, 2008

Hi Bob - Due to my husbands job loss, we are currently in negotiation with our two lenders (through our realtor) for a short sale on our property in Orange County, CA. It should hopefully be finalized this week in terms of the lenders approval. We bought our house in March of 2006 for $780k, then refinanced in September of 2006 with two loans - the first is with National City Mortgage (approx $650k owed) and the 2nd is a fixed rate mortgage with B of A (approx $167k). We have three offers on our house, the one submitted to the lenders was for $620k. The latest negotiation was that National City would give B of A $2k to release the lien, and they said they would accept no less than $14k. Our realtor is trying to get the potential buyer to come up on her offer to satisfy both lenders. (getting the offer up another $10k so that National City would agree to give more to B of A). We are optimistic that it will go through. Our question(s) are regarding what is coming up next for us. I know that B of A will release the lien on the house, but not necessarily any potential liability on what we owe them. I have been informed that they will most likely sell our liability to a collection agency who will go after us until we declare bankruptcy. Any advice on how to get B of A to release the lien AND any potential liability? Does it make a difference if the 2nd is a fixed mortgage vs a HELOC? Also, how much could we be liable for to B of A? In other words, does the purchase price/home improvements effect the amount we are liable for? (Anything above $780k)? Any help would be appreciated. Before my husband was laid off, we have never been late on any credit obligation. We are now unfortunately facing bankrupcty and bad credit for years to come... Thank you for returning to your blog...there is few out there answering questions. <em>@Sarah - I have heard from others that Bank of America is now seeking 5% or $10k, whichever is more, when dealing with short sales on their 2nds. What you are saying is consistent with that. If you are considering bankruptcy, you may want to talk to a BK attorney soon, before you complete the short sale, as the BK may be your best bet if you have to pay the 2nd a significant amount of money AND still be facing a deficiency judgment, not to mention debt forgiveness on the amount you refi'd over the original acquisition debt. Your agent may not like this, but my advise is to speak to an attorney and/or tax expert before you go any further.</em>

Sarah Sept. 10, 2008

Thanks Bob - we really don't want to file bankruptcy. The offer indicates that B of A will "release the lien and charge off the remaining debt as a collectable balance" and that their "recovery department will be in contact with you to make arrangements on this balance". It will also be reported to the credit bureau as "charged off". Are they willing ot negotiate down the amount you owe them after close of escrow? We were hoping to go to a federally recommended housing counselor and work out a deal with all our creditors (including B of A) after the house closes. I don't think we are facing tax implications due to the fact of the recent law passed and living in the house for more than 2 years. The attorney told us to stop the short sale, and file bankrupcty. I'm not sure if this is a good idea. Thanks for your help

Bob Sept. 10, 2008

Sarah, Everything with creditors is negotiable. With BK they get nothing. It also helps to understand how credit collections work. Debt is sold as a commodity, and as such, all debt has a market price based on the type of debt. BofA has several options, including: 1) Settle prior to close of escrow 2) Close w/o settling, keep the debt and hound you until you agree to some type of settlement 2) Sell the debt to a collections company 3) Get a judgment against you and still hound you The issue here is the value of the debt. I have been told that this is worth maybe 3-5 cents on the dollar. BofA will want 10 cents or $5k, whichever is more. They may feel that they can sit on it for years and come back at you later and make more. I have seen credit cards companies agree to settle defaulted accounts for 15% of the balance in a 5 minute conversation. Some companies make a pretty decent profit "negotiating" for you to reduce balances to 30-60% and they keep half or better. While they certainly save you money, you could quite possibly do better on your own. Knowing that and approaching your creditors may give you the ability to negotiate the debt to a point where BK is not needed, but you should talk to a CPA regardless. I am going to ask an attorney I know who is well versed in collections to write a consumer overview. If he does, I'll post it.

Sarah Sept. 10, 2008

Thanks Bob - The credit counseling is a non-profit organization recommended by HUD, different from the money making scam artists out there. I think we are going to sign the papers with B of A and hope and pray that they will work something out with us and avoid bankruptcy. Thanks for your help and I look forward to the collections information if posted.

Bob Sept. 10, 2008

Sarah, today we just got BofA to settle on a note with no deficiency. Give me a call at 858-382-5820 if you have a moment.

HELEN Sept. 10, 2008

THIS IS MY FIRST HOME I BOUGHT 10 YEARS AGO, I OWE 412,0000 IT APPRAISES AT 350,000 OR LESS, I BOUGHT IT IN 1999 REFINANCED 6 OR 7 TIMES, I CANT SELL IT HERE, I CANT RENT IT OUT FOR THE PAYMENTS, I AM FACING AN ADJUSTABLE IN ONE AND A HALF YEARS, REALTORS SAY NOBODYS BUYING HERE NOW, SO NO SHORT SALE, IM FORCLOSING. I HAVE A FIRST AND A SECOND, WHATS GOING TO HAPPEN TO OUR FAMILY? ARE WE GOING TO OWE ANYONE BUNCHES OF MONEY?? ARE THEY GOING TO GO AFTER MY HUSBANDS INCOME FOR WHAT THEY DIDNT GET OUT OF OUR HOME, OR JUST GIVE US A BILL FOR 200,0000 OR MORE, DO WE QUALIFY FOR DEBT. FORGIVENESS??? HELP! I AM SCARRED, I CANT SLEEP!

Bob Sept. 10, 2008

Helen, what state and city do you live in?

Janet Sept. 11, 2008

Hi Bob, we are contemplating a short sale on a primary residence in Calif. Our loan is about to adjust. I have a first and second with the same lender. The value of my home has dropped 150k. I owe 5OOk so in the minus 150K. I asked my lender if they would reasess the value and give me a better fixed rate. Basically they told me my best optio would be to short sale. They have a program that drops the value to existing comps but he has never seen that done within his Company. I live in Ca. What would my tax implications be if I did a short sale. This home has never been refinanced. What verbage should I use in the purchase contract Thansk, Janet

Helen Sept. 12, 2008

I was sold a condo/hotel as a 2nd residence in Kissimmee FL that has turned out to be securities fraud. I have an attorney who has filed against the parties involved (state and federal), but the attorneys have chosen to use a mitigation company to negotiate new loans with the bank on the property. I currently owe $400,000.00 on a condo worth aprox. $250,000.00. If the mitigation is successful would I get a 1099 on whatever is forgiven even if the loan was fraudulent? Can I be held responsible for taxes on a fraudulent loan? I am not bankrupt (yet), but I was in a less than interest loan that when re-written may not be within my means to pay. Facing possible additional taxes while I go through the legal process would probably be crushing. Any advise would be appreciated. @Helen - I assume that the answer depends on how this is dealt with and whether or not the lender reports this as debt forgiveness. I would have a tax attorney advise on how this gets settled. My gut is that the lender will want to treat this as a loan mod so as not to admit to any wrong doing.

Helen Sept. 12, 2008

btw I am not the Helen from the post of 9/10.

Bob Sept. 12, 2008

Helen - have you asked your attorney about just getting the transactions voided?

Helen Sept. 12, 2008

It was at his suggestion we went with the mitigators. It appears that the fraud was not committed by the bank, but by the appraiser, developer, broker (and other involved parties). But I can always ask again.

Bob Sept. 12, 2008

I guess it would depend on what your end goal is here.

Helen Sept. 12, 2008

My goal is to be done with it. I can accept my losses, but cannot understand how I can now be held accountable for taxes in additional to the monumental loss of money. At some point in the future some people will probably be held accountable for their illegal dealings, but I will not be able to hold on until then financially.

SPF contractor Sept. 16, 2008

reply to : HELEN on September 10th, 2008 7:10 pm you refinanced 6 or 7 times? Sounds like you couldnt afford it in the first place (or second, or third...). I suggest you go to financial counseling. You cannot be wiped free of the debt you owe - you will still owe it til its paid off. Rent it for what you can get for it, live in what you can afford to rent until the market turns.

Bob Sept. 16, 2008

Question - What the heck is a <a href="http://www.sprayfoamnewjersey.com/">New Jersey spray foam insulation contractor</a> on the East Coast doing advising about tax issues in California? Answer - <a href="http://lorelle.wordpress.com/2005/09/19/what-is-comment-spam/">Comment spamming</a>. Leaving a link on my blog helps his website do better in the search engines. Solution: Since he had no intention of bringing any value to the conversation, and in order to get a link to his site felt it necessary to kick someone when they are down, I <a href="http://en.wikipedia.org/wiki/Nofollow">no-followed</a> his link and added one to a competitor. People who leave comments here asking for help are not fair game, so don't be a jack ass. You never know when life may throw you a curve.

moresa Sept. 18, 2008

Hello, I just recently closed on a short sale in Florida. However, I have a rental property in New York that is currently going through the short sale process. The property is Florida was sold for at least 80k less than the purchase price. What are the tax ramifications for both properties, once the short sale in completed? <em>@Moresa - I am not familiar with the law in Florida or New York, so I can't answer that. I would suggest that prior to moving forward on your NY short sale, that you consult with an attorney in NY so that you know the answer first. </em>

jf.sellsius Sept. 21, 2008

NY is primarily a judicial foreclosure state requiring lenders to file suit, obtain a judgment and publicly auction the property . The process can take 120-180 days. Procedural screw ups are common, extending the time and opportunity of borrowers to get back in the game.

Bob Sept. 21, 2008

Moresa - Joe Ferrara left the comment above this one. He is an attorney in New York. You may want to speak with him about the ramifications of the short sale of your NY property. He can be reached <a href="http://blog.sellsiusrealestate.com/about/">here</a>.

Lorri Sept. 28, 2008

Bob! Very interesting blog. I've learned a lot. Thanks. Any suggestions for a good attorney in Arizona (Phoenix)? Basically, same situation. Decent loan (fixed at 6.5%) no problems making payments with two incomes. Husband is packing since he doesn't want to be married anymore. Originally the house was just in my name...but we refianced (cash out) a few years ago and both are on the mortgage. I can't really handle the payments on my own (and at the moment I owe $40K more than what I could possibly sell it for....but that even that seems unlikely since there are 17 houses in the neighborhood already for sale). No way that my husband could make the payment. I can't really "stick him with the house" because I'm on the loan anyway. I would like to discuss options but don't really know what professional to turn to. Any suggestions?

Janet Sept. 30, 2008

Bob, I've learned quite a bit reading your column here. My questions are two fold. I am preparing the paperwork to file personal bankruptcy (hopefully Ch 7) in FL. My credit is ruined. I bought 8 rental houses for an investment in 2005. (Wish I could take that back.) I sold one for a profit but got stuck with the others when the market tanked. My wealth is gone, I lost all my savings, even my 401K and IRAs and used credit cards (about $250K in all) trying to keep making mortgage payments until I finally gave up last year. I have since suffered foreclosures on all 7 rental houses (4 in Texas, 3 in FL). The lenders would not take short sales which I tried to arrange with investor buyers. I got a few 1099A's but no 1099Cs. I did move, so maybe they got sent to my old address. - Do they have to send me a 1099C? What if it went to the wrong address. Do I need to contact them? - When I file my 2007 taxes in a few days from now, do I assume a 1099C (forgiveness) for every 1099A (abandonment/loss) I got? I now need to file BK to get out from under all the debt of the mortgages and credit card debt. I wonder if I should include my primary residence which I purchased in Nov 2005 for $208, and is now worth maybe $130K (there are listings of identical units in the MLS listed from $130K up to $220K but nothing is selling.) I am current and can afford my mortgage payment of about $1500 with Countrywide, but all my equity is gone and the mortgage balance is $187K. I have a good job and can just afford my monthly bills. But living in a house with a mortgage that I could not pay off if I had to sell concerns me and if I had to walk away and let it foreclose I would not be able to file BK for another 7 years. - Since I am taking the BK hit anyway, do you think it is wise to use this chance to walk away from the losses in my primary residence too? - How soon could I buy again? - Will I have trouble renting with a BK? Will I lose more by being a renter for the next 10 year? Janet

Bob Sept. 30, 2008

Lorri - I'll see who I can find in Arizona for you. Janet - The 1099A is issued for foreclosures and the 1099C for a short sale or loan mod where some debt is canceled, so you should only get one per loan. As you said, the credit damage is already done, so any difficulty renting already exists with the foreclosures. Not sure a BK will impact it any more. There are landlords who understand the issues many are having. I know a few who wrote a letter explaining the past credit issues and then demonstrate how they can handle rent now. It seems to work with many landlords. The foreclosures will keep you out of the housing market for 7 years. The personal residence can be looked at in a few ways. If you were to rent the property out, would it cover the mortgage & property taxes? If so, keeping it may be your best way of building wealth down the road, assuming that the mortgage isn't an adjustable. How much would you save by renting, taking into account that you would lose the tax deduction?

Geline Sept. 30, 2008

We live in California. We have 2 homes. First home , which we can no longer afford, has a 1st and a 2nd with 2 different loan companies. We are facing foreclosure. My question is 1) if the first forecloses will be still be liable for the 2nd? 2). Since Ca. is a nonrecourse state the lenders will not be able to come after us or place a lien on the 2nd home? Any help would be appreciated.

Bob Oct. 1, 2008

Gelinec - if the 2nd is a purchase money loan, then no. If the 2nd was a refi, then they can seek a deficiency.

Geline Oct. 1, 2008

Thank you Bob for your respose. So when the bank forecloses on our house since the 2nd loan on it was used to purchase the home there will be no deficiency? This site has been wonderful and very helpful at a time when we are at our wits end.

Bob Oct. 1, 2008

That is pretty much all a walk away plan is - telling you that if you have purchase money loans in California that you can walk with no deficiency.

Diane Oct. 3, 2008

WOW! Bob-this blog is amazing and provides very good feedback. It took me almost all day to read through the whole blog but was well worth it. However, since the Housing and Economic recovery act passed on Oct 1st, I wonder what changes/updates may now be in effect. I heard that you can no longer be taxed on the difference or the deficincy issued from a short sale? And what really is the benefit to a short sale as opposed to a foreclosure as of Oct 1st. I'm here in California by the way.

Bob Oct. 3, 2008

Thanks Diane for the feedback. The best overview that I have read on the housing recovery bill is here: http://thomas.loc.gov/cgi-bin/bdquery/z?d110:HR03221:@@@D&amp;summ2=m&amp; I haven't seen anything in the bill that addresses the taxation of a deficiency. <em>"And what really is the benefit to a short sale as opposed to a foreclosure as of Oct 1st."</em> That depends on the type and number of loans you have and the terms one is able to negotiate with the lender on the short sale.

Christina Oct. 6, 2008

Hi Bob, I was reading Diane's post (Excellent site by the way) isn't the credit ramifications for a foreclosure greater than a short sale? My understanding is a short sale stays on your credit for 3 years and dings ya about 150 points off your FICO? Isn't a foreclosure worse?? Any idea?? Also with a short sale is it true FHA will give you a loan after 12 months compared to 24 months after foreclosure?? Agents spread so many rumors, Id love the clarification. I am a real estate appraiser in the greater Los Angeles area should anyone need any advice on the market in my immediate area. <em> @Christina - yes, a foreclosure has greater credit implications, but no one outside of Fair Issac (FICO) can definitively say what the scoring impact is. How a short sale is reported is negotiable with the creditor. FHA says 24 months after a short sale vs longer for a foreclosure. Send me your contact info and I'll make it available online here.</em>

Dave Oct. 8, 2008

Hi Bob: Great blog! One of the best out there on these topics. I recently talked to my lender about a short sale of my primary residence. They said that due to my hardship situation, they would agree to a short sale and then issue a 1099(c). I want to get this in writing before I start the process since I have a 1st (non-recourse) and a HELOC (recourse) which would be forgiven. Do you know of a good CA attorney that can help me with this? Can you email me a few names? Since we are talking over $100,000 being forgiven, I want to make sure it is done correctly.

Dave Oct. 8, 2008

Could you also recommend a real estate agent that knows short sales in the CA Bay Area and a CPA that knows debt relief issues. Any CPA in CA since most of this advice can be done over the phone and I can pay with a credit card. THANK YOU &amp; keep up the great work!

Geline Oct. 8, 2008

Bob, Do you have to be in your primary residence for 2 years? Does that timeframe end when the foreclosure is completed or when you stop making the last payment. Thanks

April Oct. 8, 2008

Hi Bob, I am in Utah and am close to wrapping up a short sale on my primary residence which I have lived in for 17 months. Will the written off debt qualify for the debt relief act? Also, I have another property that I am trying to short sale. If I move into that home after my primary residence is sold, but before the short sale is finalized on that other property, will it then also qualify as my primary residence? I lived in that home for 14 months prior to moving to my current residence and the 2nd mortgage is a HELOC for 200K that paid off the original 2nd mortgage of 50K. The 1st mortgage will most likely be paid in full. Any idea where I can find out how the IRS defines "substantially improved" to see if landscaping and interior painting qualify? Thanks for your help!

Bob Oct. 11, 2008

April, I am not sure about your situation with regard to a primary residence on both properties. You need a CPA or tax attorney to advise you correctly. If you get it wrong, it could be expensive.

Mary Oct. 11, 2008

I purchased a second home two years ago in North Carolina and have had it on the market for one year with no sale or offer yet. I already have it on the market for 20K less than I owe on it. If I ask the lender for a short sale can they come for a deficiency judgement or attach lien to another property or am I taxed for the difference if it sells for 50K less. I have little to no Income now due to the market as well. I can not afford to hold on any longer. I have had perfect credit until now. What should I do?

Geralyn Oct. 13, 2008

We recently sold a home in January 2008. We sold it well below what we owed (due to economy). At that time we were unaware of the mortgage forgiveness debt act (our lender did not tell us either) and our lender worked a "deal" with us regarding repaying the debt. Can we now (months later) still file under the mortgage forgiveness debt law. How should we go about this in your opinion??? Thanks!

Ankur Oct. 14, 2008

Bob, Can you recommend a good Short Sale Lawyer in VA. Thanks, Ankur

Bob Oct. 14, 2008

Mary - whether or not the lender seeks a deficiency is determined in the the short sale negotiations. I don't know what legal rights the lender would have with regard to collections. Any forgiven debt can result in a 1099. You would need a tax expert to advise you on your options and exposure to tax liability on a property other than your primary residence. What part of North Carolina are you in?

Bob Oct. 14, 2008

Geralyn - if you still owe the debt, then there is no forgiveness that applies.

Bob Oct. 14, 2008

Ankur - I'll look into it.

ROBERT Oct. 15, 2008

Bob, if the lender agreed to a short sale when our home sold in October 2007....and did not require any monies to be owed at closing.... and did not require a promissary note to be signed...Can the lender pursue a defeciency judgment even though; * The lender issued a 1099-C form to our family waiving the debt outstanding. The same 1099-C form was filed to the IRS by the lender. * Our family had to also file the 1099-C form with the IRS to report the dept waived. In any other year prior the debt foregiveness act, the IRS would taxed our family on the monies waived. In the above scenario, how could a family be reasonably taxed on monies waived (i.e. taxed on $60,000)...and...still be pursed by a lender for 100% of the money waived (i.e. $60,000) ?? This appears to be penalizing the home owner x 2 (intentionally - double charging the home owner). The collection agency of the lender is not aware that the lender had actually issued a 1099 - C form. My question is...can the lender issue a 1099-C form waiving the debt legally...not require a promissary note at closing...not instructing our family to bring money in at closing...and....still try to recover the funds waived ? <em>@Robert - a 1099C means the debt was cancelled per the IRS. Call an attorney and have them address the collection issue with the lender and collection agency.</em>

Dave Oct. 16, 2008

Thanks for the attorney referral. We live in the San Jose, so a CPA and experienced short sale real estate broker in that area would be perfect. Thanks!

Carl Oct. 16, 2008

Ok you said, "If it were me, I would attempt the short sales while keeping the loans current." We just agreed to rent a condo after relocating cross country. The owners are stalling on providing a lease. They dropped off keys to relatives so we could move in easily upon arrival. Then several days later, they showed up to collect the rent, stalling again on the lease. We asked about the lockbox on the front door and were told they decided over the previous weekend to do a short sale after all. However when we located the listing, they had placed the condo up for sale several days before the weekend. From all I have read, in order for a bank to approve a short sale, the owners would have to be in arrears on the mortgage. We are concerned about continuing to pay someone who may be skimming the rent and not paying the mortgage company. Without a lease, we would be subject to swift eviction from all we've read. We are not sure what to do next, because we don't want to come home one day only to find we've been locked out of a place we are supposedly renting month-to-month. Any advice? Thanks! <em>@Carl - if you are in California, it takes a certain amount of time to evict a tenant. My bet is that you won't see a lease since they need to sell the property. Get up to speed on the tenant/landlord law specific to your state. You should also find out via tax records if your landlord is in foreclosure. My advice is find another rental.</em>

Dino Oct. 18, 2008

I purchased a 2nd home in Florida in Aug 2007. pre-construction price was $279,000 .it is now worth around $150,000. I owe on the 1st $220,000 and 2nd $30,000 same bank. I cant rent it to cover my expenses, I can barely pay for my primary residence now. I'm currently working with a short sell realtor to see if we can get an investor to buy it, I'm 30 days behind on my mortgage. if I can get the bank to agree on a short sell will I still be taxed on the deficiency?. what would happen if I foreclosed on it, I live in NY. @Dino - You should be advised by an attorney before you follow through on the short sale.

Crystal Oct. 22, 2008

Bob, I own my home and my income has dramatically decreased in the last year and I make only a quarter of what I once did. I purchased my home for $353,000, have a loan amount of $320,000 and it is worth about $225,000. I am not behind on my payments as of today but my loan is set to readjust at the start of 2009 and with less income and a higher mortgage, I'm not going to be able to make my payments in the near future. I am considering a short sale or foreclosure and am wondering if a) the debt forgiveness applies to both b) what the credit ramifications are for both and timeframe for re-purchasing. I also have some money saved in the bank and am wondering if I do a short sale if the bank will come after it or force me to come to the table with money. If the banks forces me to bring money to the table and leaves me penniless, I am wondering if it I would be better off foreclosing and keeping the money I have. Is the debt forgiveness guaranteed in short sales/foreclosures or is this something you have to negotiate? I was told that the debt would only be forgiven in a foreclosure if you filed for bankrupcy as well, is this true?

Harry Oct. 25, 2008

Hi Bob, Thanks for the wonderful service of providing such valuable suggestions.. My situation is as follows: I bought a townhouse in Maryland in 2005. It was a 80/20 loan with the same lender (20 is HELCO). I suffered a job loss almost a month ago, and I don't have any source of income. I just got a really good job offer outside the country which I don't want to lose, and leaving the country soon. I have been in talks with my lender to let me know the options I have, and they are suggesting to do either a short sale or deed-in-lieu. I have to leave the country soon.. 1.Can I hire a realtor to do the Short sale and have them negotiate with the bank on the sales/proccedings? 2. Do I need to be involved in any of the proceedings of short sale and/or foreclosure? 3. Am I eligible for the tax relief benefit? 4. Is MD a non-course state? Can the lender come after me seeking deficiency judgement? Thanks in advance..

Joey Reeder Oct. 27, 2008

I own a home in Frisco, Texas. It was purchased in June of 2006. It was my primary residence until Jan, 2008. I lost my job at the last of December of 2007 and did not made a payment in Jan. or in any month since. I moved out in Jan. thinking that I might lease it for "some" amt. and that I could put some with it to make the mortgage payment. I was unable to lease it. What is the best thing for me to do tax wise? Let them foreclose or try to do a short sale? My income has dropped from over $100,000 a year to a part time job that pays $800.00 a month. I can't pay other bills I have, either. Please advise me on what to do to do with the property.

Lauren Oct. 28, 2008

Bob- My husband and I need to sell. Its been up for sale for 8 months with no offers we have reduced the price multiple times. A couple questions..How do we find someone who knows how to do short sales? AND will you try to explain how forgiven dept works out as SIMPLE as you possibly can? Our loan amount is 205,000. Desperately, L

Lauren Oct. 28, 2008

OH and we havent been in the house for two years quite yet if it makes a difference...

Jeff Nov. 1, 2008

Bob, I purchased my home in CA in April of 2006 for 470k. It is now worth about 250k. I owe 509k. I have an original purchase money first mortgage and I refinanced the second and took out 40k, (the amount I had originally put down on the property). This now makes the second mortgage a recourse loan. I am currently pursuing a short sale. Both lenders have shown the willingness to work with me I owe 120k on the second. Assuming all goes well with the sale, will I only receive a 1099 on the 40k since the rest of the debt was aquisition money, or can they 1099 me on the whole 120k since it is a different lender? Also since it is now a recourse loan, can the lender come after me for the whole 120k in a deficiency or just the 40k that I took out? Thanks.

Eric Nov. 2, 2008

Hi Bob, I have been trying to get a short sale done on my property. I have 3 mortgagees all with bank of america 1st 250K 2nd 46K 3rd 40K I have an offer for 265K good until oct 5th. I am at a stand off with the BOA they want me to sign a document saying I will pay back the entire deficiency balance and the terms of the pay back are not defined. I refused and I was told I was being transferred to the Deed in lieu of Foreclosure department. I only have 2 days to make my decision. The buyers will be moving on as of the 5th. So its BK and foreclosure or sign the deficiency balance agreement. What would you advise. Below is the email i sent to BOA after i was informed i was being transferred to the DIL department. Is there any way we can still make a short sale happen without signing a document making me responsable for the entire deficiency balance, or respobsible but saying it will be written off as 1099 income? A DIL would require the remarketing of the property, probably won't get the 265K available now, and would continue have a property with no payments coming in. If the bank does not agree to a short sale I would estimate they are walking away form at least 50K saved. Just doesn't make sense to me. However, if what you say is true, that in a DIL the bank will cancel my debt and waive there right to a collect on the deficiency balance then it would be a better financial option for me. But I doubt this will happen for all 3 mortgages and I would most likely declare BK. Most likely the short sale is the only way to prevent foreclosure and BK.

Eric Nov. 2, 2008

the property is my primary residence in MA

Shellie Nov. 4, 2008

Bob- I am in the middle of a short sale and after reading all of your information on this blog, i have a question in regards to what my short sale approval states. If u could, can you put the following sentence in lamens terms for me please: "The bank reserves all deficiency rights as provided by the note, deed of trust/and or security agreement and local and federal laws." Thank You.

Dana Nov. 12, 2008

Hi Bob, our problem is this: we bought this house we live in, May of 2007.we placed it on the market to sell it on Oct. 2007.a lot of visits but no one was interested in buying it.we applyed for a short sail but themortgage company would not go through with it as we had no offer on the house.next we send in the required paperwork for a deed in lue of forclosure.we are behind with our payments 4 months.we owe like $8000by now.my husband is in the military and i sahm takingcareof our 16 months old child.so,just 1 paycheck of $3300 with a mortgage of $1300/month + the rest of the bills.how do i found out if we qualify for this Mortgage Forgiveness Debt Relief ? Also, after this hit on our credit score how will we be able to build it back up?Thank you very much.Dana

MLW Nov. 24, 2008

Hello. My situation. We have a home with two mortgages. We are filing bankruptcy but recieved an offer on our home that will cover the first and 11k of the second (leaving 30k). The second has stated that they were looking for 10k to settle and are happy with the offer. My question is are we going to be responsible for the taxes on the outstanding 30K or will we be covered under the shortsale law? Thanks! MLW

Jennifer Nov. 25, 2008

O.k. I have read through the above problems and am not sure where to head. I had a home through Irwin Mortgage Corp., I was in the middle of a separation with my husband and I was beginning bankruptcy precedings. My home was foreclosed on before the bankruptcy could be finalized. The mortgage company filed a 1099c, which forgave the loan amount of $49,500. I then received a letter from the IRS stating since I had an income increase in the year 2002, I now owed them almost $17,000. O.k...does this new law help me? If not, do you know where I can go for help? The IRS suggested I call the mortgage company and ask them to file an amended 1099c. That would be great...but, the company no longer even exists. The mortgage company resold my house and easily regained the amount of my existing mortgage. Do you have any suggestions? I, truly am at a loss...and can't afford the IRS payments. Thanks, in advance...Jennifer from Florida

Kelli Nicholson Dec. 3, 2008

I am a single parent and public school teacher. I owe $300k on my house and with the side in the economy, my home is now only worth $200k. With no raise in pay this year, an increase in health insurance costs, and a decrease in child support, I am barely making ends meet. My credit is good and I have made all of my mortgage payments on time, but I'm not sure how much longer I can hold on. I pay 74% of my take home pay on my mortgage alone. A friend of mine told me there was a program to help refinance homes to their actual value with the remainder of the loan being forgiven. Does a program for me exist? Thank you! K

chris mullen Dec. 6, 2008

Bob: I bought my house in 2006 with a 80/20 and two different lenders. I was married when I purchased the house but spouse not listed on anything. My spouse never moved in as we separated. With this happening I struggled to pay the mortgage and besides took care of my ill mother. Things got hard and I fell behind. I did a short sale after the house didn't sell after being on the market for over a year. I wasn't in the house long, a little over a year. I live in MA, will this qualify under the forgiveness in regards to taxes?

Susan ONeal Dec. 24, 2008

I was looking at your reply to Rachel on Jan. 29, 2008 and I have a question for my own situation. I purchased my home in Florida in 2003 and refinanced it in 2006 for improvements and personal debt consolidation. Now I can not afford tokeep the home and it looked as if the Mortgage Relief Act would help me get past the tax situation in a short sale. But why would a refinance jeopardize that? We are also not indefault of our mortgage at this time. I have missed the December, 2008 payment but know that I will not be able to make any future payments due to a layoff. Would the fact that I am not in default be a problem with the tax relief?

micah Jan. 4, 2009

Had major medical problems and lost my job. We went into the forclosure process. We talked to a guy who was willing to buy the house from us but at half of the amount owed to the bank. If he couldn’t at that price, then he said he would just wait until the forclosure auction. We talked to the bank and they agreed to a short sale of 28000. We owed 56000. Everything went through and the paper work and funds were transferred. Luckily the guy lets us rent the house so we still live in the same house but someone else ownes it. This happened in 2008. Does this qualify under the Mortgage Forgiveness Debt Relief Act? Our state is in MN.

Harvi Jan. 4, 2009

Hi, I am confused about this law. I have a loan on a primary house that I purchased for $379,000 in March of 2006 for a 3 year interest only ARM. I currently owe about $343,000 on 1st and about $35,000 on Home Equity with the same lender. I have had no job for the past year but have been current with my payments. But I don't think I can pay any more what are my options and I don't want ot take a credit hit. Thanks

Dianne Jan. 7, 2009

Bob, Can you recommend a good real estate attorney who is familiar with Countrywide? We live in Ft. Myers Florida and are approved for a short sale, but after reading your blog feel we need to sit down and talk with someone. Thanks.

Nia Jan. 10, 2009

Bob, I had 2 homes in CA that were recently foreclosed on. They were not primary residences; both were investment homes. Neither of them sold at the foreclosure auctions, and the mortgage companies said they are going to 1099 me for the entire balance (about $300,000 per home!). Usually, if the homes had been sold at the auction, I would be 1099d for the difference between what I owe and what it was sold for. Will I be responsible for claiming income for the entire balance or is there something I can do? Also, I had a HELOC on one of the homes with BofA (I had used the HELOC of the first home to purchase the second home). BofA just called me and said that I owe the entire amount (~$150,000). They said they are going to refer me to collections if I cannot pay this. Are there any laws that can help me not to owe this large amount, as my example includes investment homes? Would it be more advisable to claim bankruptcy? Please note that I am not rich, I have no other assets, I just got ahead of myself in purchasing these homes. If you can recommend someone to talk to, I would appreciate it. The homes are in CA, but, I am a resident of NJ. Thanks for your help.

Marilyn Jan. 11, 2009

I hear a lot about attorneys and CPAs. Enrolled Agents are the tax professionals that are licensed through the Dept of Treasury to represent taxpayers and prepare taxes. We started practicing administrative law after the Civil War when there were so many claims against the government that there were not enough attorneys to handle them. Our job is tax and representation. Please don't forget about us when you are responding. Many of us have a lot of experience with these issues. Great Blog!

Marilyn Jan. 11, 2009

If you know some good attorneys in So California, could you email me the info so I can refer my clients.

Jennifer Jan. 15, 2009

Hoping someone can help me... My husband just recently lost his job, so we are not behind on any payments yet, but will be if he can't find another in the next month. I'm trying to plan ahead in case he doesn't find anything. We owe $222k on our first mortgage (refinanced to this amount) and $18k on a fixed equity loan (second mortgage), both mortgages are with Bank of America. Our house is valued at $170k. What do I need to do to get the Bank to reduce our loan to $170k and forgive the outstanding debt? Will I have to pay taxes on the forgiven debt (if so, how much?)? Do I need to be behind on payments for the Bank to agree to this? Would I be better off trying to short-sell my home? We live in AZ. Thanks for any help in advance!!!

Jennifer Jan. 29, 2009

Dear Bob- We have a home that was our primary residence, then my husband lost his job and took a new one in southern Ca (1st house is in the bay area). We tried to sell it, and the deal fell through (Jan. '08). We rented it out at a loss in March '08 with a one year lease. I have tried talking to our bank about a loan modification, etc., but they haven't been very helpful because until this month (Jan. '09) we were still making our payments on time. Our first and a HELOC are with the same lender, and still at owner occupied rates. We are considering a short sale, but are concerned about the tax repercussions. If it was a primary residence and then wasn't due to job relocation, is that any different in a short-sale/tax payment scenario? Thanks-

Kimberly Simmons Jan. 30, 2009

Bob, My husband lost his job and so we are pursuing a short sale. How do we apply for tax debt relief on the 150,000 that we will most likely receive a 1099 for in 2010?

John Falzone Jr Oct. 11, 2011

Does the exclusion apply after 2010?

Dot Cieslak Oct. 17, 2011

My husband has a condo that we are trying to sell. He had this befor we got married it is in his name only. Since then we have built and home. He has never been late on any payments or bills. But, with all confusion about the short sale information he won't do it. This decision is hurting us with credit cards, cause of the lack of funds. I am layed off still looking for a job. How do I get the information we need? I talked to a short sale lawyer and his reply was everyone is different, and the realistate agent knows nothing. Is there taxes to pay at the end of the year we most likely will have to sell fourty thousand less then what we owe. Will our credit card rates go up? Can we still purchase a car or anything alse for example without being charged an high rate? How long does this hurt his credit? Or does it affect mine even though it isn't in my name and we are married? Can it come back on us later and affect us if we did do short sale? How do I get ahold of a lawyer that can answer our questions? Dot Cieslak

George Prunes Jan. 4, 2012

Dear Bob, We are short-selling our home. It looks like it will finalize soon (sometime in February). What are the tax ramifications this year?

ALICE MARIE MASON Jan. 24, 2012

i am trying to figure out if i will have to pay fed tax when the house is under mortgage indebtness?is it better to have a foreclosure and claim bankrupcty?the mortgage co declared me deceased and it has been down hill from there.don,t know which way to go.i know my credit is effected.what advise do you have? thank you

Ted Jan. 31, 2012

I closed a short sale on a home in May of 2011. The loan was a refinance/home equity loan done in 2000 while we still lived in the home. I was transferred to another city a year or so later and the home had been rented since then. Does it still qualify as "qualified principal residence indebtedness" since the loan was done while we still lived in the house?

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