California to Forgive Taxes on Short Sales – Retroactive to 2009

The California State Assembly has passed CA SB 401 which conforms California state tax law with federal law with regard to lenders’ debt forgiveness on real estate short sales, foreclosures or loan modifications.

This bill picks up where the last bill, which expired at the end of 2008, left off.

The Assembly passed a similar bill in March, however the Governor vetoed the bill due to riders that were attached to the bill that the Governor viewed as unfriendly to business in California.

The Governor said in a news conference yesterday that he will sign this bill into law prior to the April 15th 2010 tax deadline.

Bank of America Eases Qualifying Guidelines for Self Employed Borrowers

Bank of America announced today that it would allow the use of business funds for down payments, closing costs and reserves. This is a significant move by the nation’s largest bank toward easing lending guidelines by allowing self employed borrowers to use their business capital in order to qualify for a mortgage. While this falls short of bringing back stated income loans, it does make qualifying for a mortgage infinitely easier for self employed business owners. It is likely that we will see other lenders follow suit in the near future.

CA Legislature Approves Bill Aligning State Tax Law with Feds on Short Sales

The CA state legislature approved a bill that would exclude homeowners who do a real estate short sale from having to pay taxes on the debt forgiveness, aligning state law with the federal Mortgage Tax Debt Forgiveness Act.

CA had a similar law on the books up until the end of 2008, at which point the law expired. Since then, some tax experts have said that the debt forgiveness in a real estate short sale would be taxed at the CA state level as ordinary income, while others have argued that due to CA Revenue & Taxation Code 17131 – which states that when there is no applicable state law for a specific tax situation, state tax law tracks with federal tax law – that borrowers would not be taxed on short sales as long as their situation conformed with the dictates of the federal law.

This measure clears up any confusion regarding whether CA homeowners will have to pay taxes on the debt forgiveness resulting from real estate short sales.

The Senate approved the bill on March 11th 2010. It will now go to Gov. Arnold Schwarzenegger.

Obama Short Sale Program kicks off April 5th

The Obama Administration’s new short sale plan, which begins April 5, calls for banks to agree to not pursue borrowers for any deficiency judgments after a short sale, requires second lien holders to accept a maximum of $3000 to settle their debt, allots $1000 to mortgage servicers for a successful short sale, and allows for up to $1,500 in “relocation” assistance to borrowers.

The plan – Home Affordable Foreclosure Alternatives, or HAFA – is for borrowers who qualify for or have participated in the Home Affordable Modification Program, or HAMP, but have not been able to make their new reduced mortgage payments through the trial period. It is also for any borrower who has tried to modify their loan through HAMP and now requests a short sale in order to avoid foreclosure.

The program calls for banks to decide what they are willing to take $ wise in the short sale before the property goes on the market, so that the buyer, real estate broker and seller know what price the property needs to sell for in order for the bank to approve the short sale. It also requires lenders and servicers to use uniform documentation and short sale terms, prevents them from reducing the real estate agent’s commissions in a short sale and greatly expedites the lender’s short sale approval process to ten business days after receipt of an offer.

HAFA also allows lenders to offer a deed in lieu of foreclosure to borrowers with government insured loans without requiring borrowers to first put the property on the market for 90 days, which is the typical protocol for a deed in lieu of foreclosure.

With all of this said, the glaring, overwhelming problem with HAFA, like all government programs to date geared toward preventing foreclosures, (starting with the Bush Administration’s Housing Economic Recovery Act), is that bank participation will be voluntary and on the individual lender’s terms.

HAMP, which set out to help 3.4 million borrowers, to date has modified less than 120,000 borrowers’ loans, and even for the loans that have been modified, the lasting impact is questionable.

The good news with short sales is that, at least in my experience thus far in 2010, the nation’s lenders, simply by virtue of the fact that they have had the past 3 years to practice, are starting to move faster on short sales and issue approvals with less stringent qualifying criteria. This means that, without regard to government programs, the average homeowner has a better chance doing a successful short sale than ever before.

What’s the Deal with a Deed in Lieu of Foreclosure?

A deed in lieu of foreclosure is basically a voluntary foreclosure, where the homeowner agrees to surrender the property to the bank, and the bank, in exchange for not having to incur the legal expenses of going through the foreclosure process, in some cases agrees to not pursue any deficiency against the seller.

In past real estate downturns, banks were willing to take properties back in a deed in lieu of foreclosure. Today, however, most banks are not interested in doing deeds in lieu of foreclosure because they are already overwhelmed with foreclosed properties and do not want to take any more properties back.

For this reason, typically, when a seller calls their lender to request a deed in lieu, they are told that the bank does not want it, and to short sale the property.

The other major obstacle in most cases to a deed in lieu is that there can only be one loan on the property. If a homeowner has a first and a second lien on the property, they cannot do a deed in lieu of foreclosure.

Finally, a deed in lieu shows up as a foreclosure on a borrowers credit report.

Chase Bank Short Sale Update

Chase Bank will no longer accept offers on short sales from any investor/corporate/trust entities i.e. any offer from an LLC, Corporation, Trust etc. This is becoming increasingly common among the nation’s large lenders as more and more short sale investors attempt to purchase short sales at below market prices in order to immediately flip them for a profit.

Sound Familiar? Morgan Stanley walks away from $2 Billion in Commercial Real Estate

Giant Wall Street securities firm Morgan Stanley has announced the “orderly transfer” (read “strategic foreclosure”) of five commercial San Francisco buildings back to their lender, Barclays Capital. Morgan Stanley bought the buildings at the peak of the market and since then, the properties have lost as much as 50% of their value. Like any business, they made the “business decision” to rid themselves of the assets to better their bottom line. They just don’t like to call it what it is, lest the millions of homeowners in the same situation decide to do the same thing.

And of course herein lies the irony. Morgan Stanley spokesperson Alyson Barnes, who apparently has no sense of shame whatsoever, was quick to point out that this is completely different from a homeowner strategically walking away from a home they are upside down on: ““This isn’t a default or foreclosure situation, we are going to give them the properties to get out of the loan obligation.” No, it’s not a default or a foreclosure situation, of course not.

Banks and corporations, and the media they control, continue to take great pains to report instances like this in a completely different light than the way they portray homeowners doing precisely the same thing. For banks and corporations, it’s an “orderly transfer” based on sound business principles, while for homeowners it’s a “foreclosure” as the result of irresponsible behavior.

Bottom line, if you’re a homeowner who is upside down on your home, make the best business decision for you and your family and don’t allow yourself to be swayed by the propaganda put out by the banks and the media about your moral obligation to hang onto an asset that makes no economic sense for you to keep.

Beware – All lender short sale policies include a “waiver of funds” clause

Beware: All lender short sale policies include a “waiver of funds” clause that prohibits sellers from receiving any compensation from the short sale transaction, including a kickback from the real estate agent’s commission. Violations of this clause are a federal offense and constitute loan fraud.

Short Sale: Ethical Dilemma or Business Decision?

Not a day goes by that I do not get a call from a San Diego homeowner who is struggling with the moral dilemma of whether or not they should short sale their home.

I say “moral dilemma” because that’s how they perceive it, but the truth is that morals and ethics have nothing to do with it – it’s a business decision, plain and simple.

The banks would like the public to believe that they have a moral obligation to pay their mortgage (“you signed on the dotted line” they say), but the reality is that when you signed, you signed a contract that specified the real estate as collateral for the loan you were taking out. If you defaulted, willingly or not, the bank could take back the property. Period.

The irony here is of course that the banks are notorious for making “business decisions” which are to their benefit and profit, and everyone else’s detriment.

For example, the banks devised stated income, no qualifying, zero down, interest only loan programs that were so easy to qualify for that almost anyone could get them, carved up the mortgages into mortgage backed securities, sold them multiple times, made billions of dollars, and then blamed anybody and everybody else for the real estate crash and mortgage crisis – business decision.

The banks take billions of dollars of government bailout money and in exchange pledge to modify homeowners’ loans, increase lending and make a real effort to stem the tide of foreclosures – and then do none of the above – business decision.

The banks foreclose on homeowners after leading them along for months under the guise of doing loan modifications, take the properties back and then sit on them in order to cook their books and make themselves look more solvent than they actually are so they can pay back the government bailout faster and give themselves huge bonuses – business decision.

Finally, a corporation owns a luxury hotel, say the W Hotel in Downtown San Diego, or the St. Regis Monarch Beach in Dana Point, and after trying unsuccessfully to get its lender to modify its loan, decides to simply walk away and turn the property over to the bank – business decision. And a real life example by the way, as both of these hotels are now in receivership.

In other words, do you think for a moment that the board members of Sunstone Hotel Investors, the corporation that owned the W Hotel, debated giving up the property on moral or ethical grounds? Do you think that even came up? No – it was a business decision.

So, when a homeowner who is $100K, $200K, $300K or more, upside down on their property, makes the decision to give up the property and do a short sale, it is every bit as much of a business decision as it was for the owner of that luxury hotel. Ethics and morals have absolutely nothing to do with it, and it is disingenuous at best for lenders to imply anything different.

Bank of America (BofA) Short Sale Update

Bank of America, via their new Equator software platform, has implemented a requirement that the buyers financial information be input into the system – i.e. buyers Social Security #, address, etc. We speculate that they are requiring this information so they can do checks to make sure the buyer and seller are not related in any way and that it is an arms length transaction.

Wells Fargo / Freddie Mac Short Sale Update

Wells Fargo / Freddie Mac Short Sale Update 2/18/2010: We just closed a Wells Fargo short sale (Wells Fargo 1st & Wells Fargo 2nd) by convincing Freddie Mac, the investor behind the 1st lien, to agree to allow the buyer to bring in extra funds to settle the 2nd lien. This is significant as Freddie Mac has a policy whereby they will not allow any extra funds to go to the 2nd beyond what they are giving them. This took an extra month to negotiate but hopefully will set a precedent for future transactions.

Tax Implications of a Short Sale: 1099C, California Taxes & Federal Taxes

*Note* The question of the tax implications of a short sale came up this morning during my appearance on “These Days” with Maureen Cavanaugh on KPBS radio. As there seems to be quite a bit of confusion and misinformation with regard to this topic, I wanted to address it here on our blog. The following is excerpted from the Short Sale FAQ page of www.battiata.com, which can be accessed in its entirety by clicking here:

With regard to state and federal taxes, however, here is the excerpt from Battiata.com -

Q: Will I have to pay federal taxes on the money my lender loses in the short sale?

Answer: There are several different scenarios with regard to whether or not you will owe federal income taxes on the loss the lender takes in a short sale.

When you do a short sale, your lender is agreeing to settle the debt on the property for less than the amount they are owed. The IRS therefore allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale.

The IRS considers “debt relief” to be income for tax purposes. In other words, if your lender writes off $50,000 on your short sale, they will send you a 1099-C for that amount, and you would include that when you file your income taxes. The “C” stands for “Cancellation of Debt” and the law says cancelled debt is taxable as income.

There are however a few exceptions that most people who do a short sale qualify for that exclude them from having to pay taxes on their short sale.

Thanks to the Mortgage Tax Debt Relief Act that George W. Bush signed into law in January of 2008, homeowners who do a short sale on their primary residence, and have a purchase money loan (in other words, they have not pulled cash out of their home with a cash-out refinance) pay no taxes on the loss that their lender incurs in a short sale.

Homeowners who have pulled out cash from their home but have put that money back into their home to “substantially improve” their home, also are excluded from taxes on the short sale.

All other short sale scenarios – if you pulled cash out on your primary residence but spent it something other than upgrading your home or if you are doing a short sale on a second home or investment property – result in a taxable event unless you qualify for the “Insolvency” exclusion.

The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. Insolvency means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, you have more debt than you do money or assets, you are considered insolvent.

Many people who find themselves facing a short sale are in exactly this situation and are thus excluded from paying taxes on a short sale. We recommend you check with your CPA or accountant or go to the IRS website and look up IRS Form 982, which is the IRS form for debt relief and short sales. The IRS gives an explanation of “Insolvency” on this form.

Finally, the time period for The Mortgage Tax Debt Relief Act was originally only slated to go until the end of 2008, however it has now been extended to the end of 2012.

Q: Will I have to pay CA state taxes on the money my lender loses in the short sale?

Answer: California has passed its own version of the federal Mortgage Tax Debt Relief Act. It is Senate Bill 1055, which conforms to the federal law described in detail above, but applies to California state income taxes on a short sale.

There are differences between the state and federal law. For example, the term of the California law was only until the end of 2008. As of Jan 2009, this law is no longer in effect.

However, CA Revenue & Taxation Code Section 17131 provides that, unless there is some specific California statute to the contrary, California law tracks federal law on what income is excluded from taxation. Since there is currently no specific California law on this issue, short sales do not produce taxable income under California law as long as the Federal Mortgage Tax Debt Forgiveness Act is in effect (until the end of 2012).

With this said, we recommend you review your specific tax scenario with your CPA or accountant and have them answer any tax questions that you have. We are not tax advisors and do not dispense tax advice.

Short Sale Lender Update: Chase

We have gotten word from our clients that Chase has been trying to pursue deficiencies on Chase 2nd liens months after closing the short sale. Fortunately, we negotiate a full and final satisfaction on all of our Chase short sales, so these collection attempts cease immediately once we fax Chase their own short sale approval showing “full settlement”. Word to the wise – do not allow Chase to charge off your 2nd lien (which they will typically do after about 5-6 months of missed payments) – same goes for PNC/Nat City. Once these 2nd liens are charged off, a full and final satisfaction will require a payoff of 60% of the balance.

Short Sale Lender Update: Navy Federal

Navy Federal has started requiring an average of 30% of the balance owed to approve short sales and settle the debt. They typically ask the seller to sign a promissory note however the good news is that we have been very successful of late in negotiating around this so our sellers do not have to sign a promissory or contribute any money. If you have a Navy Federal loan, be sure to ask us about this.

Short Sale Lender Update: Wachovia

Wachovia is hands down the best lender to deal with for short sales. We routinely close Wachovia short sales in 60 days and are able to get 1% credit to the seller at close of escrow.

Short Sale Lender Update: Wells Fargo

Wells Fargo has implemented a policy whereby they will not allow any extra funds to go the second lien holder on Freddie Mac backed loans – even if the 2nd is a Wells Fargo loan and the first lender’s net is not decreased at all. With that said, Wells Fargo is one of the best lenders to deal with when doing a short sale.