The Foreclosure Crisis

Bank of America halts foreclosures in all 50 States

2010-10-09T13:11:00.002-04:00

It's nearly the end of 2010 and Bank of America, JP Morgan Chase and a few others are halting foreclosures pending an investigation into whether these foreclosures are totally legit. Seems there's been a lot of paper-pushing, but the procedures have not passed muster in terms, I guess, of due process in some instances, and proper documentation, etc. So the bank has voluntarily halted all foreclosures to make sure it's people have the procedures right, and that families who shouldn't be foreclosed on, aren't foreclosed on. Stay tuned.

The Workout: Are there errors on account such as the amount in escrow?

2008-12-27T21:20:00.000-05:00

If you have been served with a foreclosure petition, you may find that some of the information is not accurate in your account. The law allows you to request a clarification from your lender in writing. RESPA (Real Estate Settlement Procedures Act) is the law that was enacted in 1990. It requires the lender to respond within 20 days of receipt to acknwledge receipt of the QUALIFIED WRITTEN REQUEST. And it further gives the lender 60 days to conduct an investigation if the borrower claims an error.

FORECLOSURE RESCUE SCAMS

2008-12-22T00:57:00.000-05:00

There are many types of so called foreclosure rescue scams. Here are three examples:

1) Phantom Help scams:
Under this plan, the home owner is led to believed they are being helped by the "rescuer" who poses as someone who will work on the homeowner's behalf to call the lender, negotiate terms, do paperwork, all of which the homeowner could do him or herself. Then the homeowner runs out of time becuase important deadlines may be missed and the "rescuer" leaves the homeowner and basically runs off with the money. The homeowner could lose the home and sometimes it would have been preventable if the homeowner had gotten the right help.

2) Bait and Switch scam:
The homeowner is led to believe they are signing a refinance document or some other document but in fact they are signing over the deed to someone who may not even be at the closing and who the homeowner has never heard about. Deeds are actually forged in this scenario. And the homeowner is tricked into transfering ownership of the home for a pittance.

3) False bailouts scam:
The homeowner is led to believe that he is giving up title for a short period of time till he gets back on his feet. So he will stay in the home and be a renter. Known as the lease buy back scheme, the homeowners are "told that surrendering title is necessary so that someone with a better credit rating can secure new financing to prevent the loss of hte home." But the end result is that the homeowner never gets to buy back the home because they can never meet the new terms and the "rescuer" takes the home and all the equity.

Commercial Properties in New York are in distress

2008-12-17T16:07:00.000-05:00

According to Crains, New York's commercial properties are experiencing significant distress. Many investors are waiting on the sidelines for the bottom to fall out so that they can acquire the properties at wholesale prices. Commerical foreclosures

What is MERS?

2008-12-16T00:38:00.000-05:00

It is an acronym for Mortgage Electronic Recording Systems. These days, the holders of mortgages which are various trustees, banks and mortgage companies, can record a deed electronically instead of physically going down to the court house.

The practice of recording deeds electronically can make it very difficult for defendant's attorneys to determine who has "standing" to sue a homeowner for foreclosure.

How does Bankruptcy impact foreclosure?

2008-12-12T06:17:00.000-05:00

If all other options fail, filing bankruptcy (a chapter 13) may be a way to buy yourself time to come up with the money to pay the arrears on your mortgage. Bankruptcy STAYS the foreclosure

Foreclosures hit wealthy neighborhoods

2008-12-08T08:16:00.000-05:00

Many homeowners in the top income brackets, with homes worth in the millions, are starting to lose their homes. Even here in New York the rate of foreclosures for wealthy owners has spiked in recent weeks.

TARP to be expanded?

2008-11-14T19:13:00.000-05:00

The TARP is under scrutiny from the FDIC. You may know that TARP is an acronym for Troubled Asset Relief Program. It is basically designed to help the financial system as a whole, not aid individual home owners. So that is why all the money is going to banks. The problem is that the banks are hoarding the money. They are buying other healthy banks with the money. But they are very slow to help homeowners by offering workouts on these mortgages.

The Bush Administration is bearish on assisting homeowners with their mortgage crisis and has said it is against using the TARP as a foreclosure prevention program. Instead, they want to assist banks and the hope is that the banks will unfreeze funds and start lending again, thus reviving the economy.

The FDIC, under the tutelage of up and coming whipper snapper Sheila Bair has vowed to press ahead with a proposal to force banks to enter into more workout deals with borrowers. Ms. Bair wants to see more assistance going to Main Street, and a bit less to Wall Street.

The problem is that Bair does not have the authority, on her own, to go over the head of the President and his appointees such as the Treasury Secretary and the Federal Reserve (by the way, I wonder whatever's become of Bernanke?)

In any event, according to Reuters, Bair does have a lot of support on this from the Democrats. Check out the article on Reuters here.

Banks claim to want to workout many of these foreclosure deals, but feds reneg on bailout plans

2008-11-12T22:12:00.000-05:00

Today I attended a seminar sponsored by the Federal Reserve Bank in NYC. It seems more banks are willing to offer workout with borrowers, from Citibank to JP Morgan and Wells Fargo. A lot of banks are now being proactive and are approaching borrowers who are not yet in foreclosure, or even late with a payment, but who they suspect of possibly being on the borderline as far as continuing to make timely payments. It was encouraging to hear that there is so much activity and sensitivity coming from the banks, especially today, given the announcement by Treasury Secretary Paulsen, that the Feds are re-negging the $700 Billion dollar workout.

His argument was that it was not a bailout that the banks need. He feels that there are systemic problems that the bailout is not addressing. It is unclear what this will mean for homeowners. I think it might be good news. It will force banks to be more cooperative with homeowners and try to work out these loans. But I could be wrong. It may make them less inclined to give credit, and less inclined to have an incentive to work things out. Let's see how this plays out.

3 ways to get out of paying taxes on discharge of indebtedness income ("DOI")

2008-11-09T20:39:00.000-05:00

There are three ways to legally avoid DOI taxes. There are as follows:

1) Argue that the discharge or forgiveness is really a settlement for a Contested liability. In other words, lets say you had a mortgage for $100,000. But you have refused to pay it because you dispute whether this was a fair amount for the house or whether the lender is charging you too much since you can prove you already paid what they are saying you did not pay. Whatever your reasons, you refuse to pay $100,000. You agree to pay instead $85,000. The lender accepts the $85,000. Normally you would have to pay $15,000 DOI taxes. You would have to pay taxes on the $15K. But in this case, because you disputed the liability, you would inform the IRS that there are no taxes due since this is a contested liability.

2) Nontaxable purchase price reduction argument. If the original sale involved coercion or fraud to pay a higher price when the house was not worth that, you can argue that DOI is not taxable because the debt was forgiven due to a "nontaxable purchase price reduction."

3) Insolvency. You can avoid DOI taxes by demonstrating to the IRS that you are insolvent. If your mortgage plus your other debts exceed your assets, you are basically insolvent and so you cannot pay DOI taxes under the insolvency exception.

Opportunities from the foreclosure crisis

2008-11-05T02:01:00.001-05:00

The foreclosure crisis is not all about bad news. There is some good news for some people. Just tonight I was at the Roosevelt Hotel in New York City, at a seminar given by Donald Trump about foreclosures. It seems that if you have the finances, this is a good time to pick up some great deals in real estate for "pennies on the dollar."

I know for a lot of people, this is actually depressing news - those people who are being foreclosed. But there are other opportunities as well. It's not all gloom and doom for everyone. If you are one of those people who is fortunate enough to have the means, by all means, think about investing in real estate right now.

What is the Mortgage Forgiveness Debt Act?

2008-11-02T23:24:00.000-05:00

This was a law passed in 2007 to shelter homeowners in a foreclosure from "nasty tax surprises."

The act excludes from taxable income "most discharged primary residence purchase money debt" and provides some benefit to homeowners whose debt is a mix of refinance purchase money loans, home improvements, and refinanced consumer debt."

What does that mean? Well, normally if you have "discharge of indebtedness income" ("DOI"), that is, "income" that comes from the lender reducing the principal balance that you owe, this is called DOI income and this is taxable, believe it or not.

In other words, if you are in foreclosure and a part of the workout is that the lender reduces your principal, the difference between the amount your loan is reduced to and the amount you borrowed is DOI and that is taxable even if you are in foreclosure. The lender has to send you a 1099C and you have to file that with the IRS or face possible penalties and interest.

But, the good news is that the law has changed somewhat.

Ths new law applies to debt discharged between January 1, 2007 to December 3, 2009.

The new law makes an exception to DOI taxable income of up to $2 million for "qualified" principal residence indebtness. But only if the reason for the discharge of indebtedness is due to a decline in the residence's value, or the taxpayers financial condition.

Only funds used to acquire the home, or construct or substantially improve the home counts. (Acquisition debt.)

By the way, you do not owe DOI if you file bankruptcy, if the home was never worth the price you paid for it in the first place, or if the debt was "unconscionable" to begin with because of "usurious fees and rates."

By filing bankruptcy you can avoid taxes after a foreclosure

2008-10-31T12:27:00.000-04:00

Normally if you are bankrupt as well as foreclosed, you will not have to pay taxes on any DOI income (discharge of indebtedness income.) Remember that discharge of indebtedness income is the income that is forgiven or cancelled by the lender, or when you have a short sale, or when you get a principal reduction as part of a loan modification.

So let's say you owe $300,000 to a lender. The lender sells the house for $200,000. So there is $100,000 hanging out there that you did not pay and the lender did not seek to make you pay. The lender has discharged or cancelled your indebtedness. So you have $100,000 of discharge of indebtedness income! That is taxable.

Let's say under another scenario, you owe $300,000. The lender in a loan modification reduces your principal owed to $250,000. You have discharge of indebtedness income of $50,000. This is taxable.

You normally have to pay taxes on DOI unless you file bankruptcy. That is an exception to this tax liability. SPEAK WITH A TAX EXPERT ON THIS.

Yes, you can get taxed when your home goes into foreclosure!

2008-10-31T12:20:00.000-04:00

After you experience a foreclosure, you may think that is the end of the nightmare, but in fact you can be assessed a huge tax bill afterwards. This is because the lender files a 1099-C to inform the IRS of the foreclosure.

When a debt is forgiven or foreclosed, it is treated as income to the buyer because the buyer no longer has to repay, even though they received income when they took out the loan. If the amount that is forgiven or discharged is less than the loan about, you will have DOI income (discharge of indebtedness income.) You will also have DOI in a short sale scenario and when a loan modification with a lender included a reduction of principal. DOI is taxable.

If the borrower/home owner is not aware of this, he or she may undereport taxes for that tax year and the IRs will assess interest and penalties to such an individual.

Speak with a tax specialist after a foreclosure, or before. If a foreclosure occurs, you have to file a long form 1040 and attach a form 982. But you must discuss this with a TAX EXPERT!

What if instead of a capital gain I have a capital loss when my home is foreclosed? Can I deduct this from my taxes?

2008-10-31T12:04:00.001-04:00

Let's say you bought the house for $100,000 and you have a basis of $200,000 on your house on account of qualifying repairs you made on the house. (Remember that basis = purchase price plus qualifying repairs). So your basis is $200,000 and the selling price is $100,000 (fair market value). The question is, what is your capital gain?

Well, remember that capital gain = Sales price minus basis.

Remember also that your sales price is the lesser of two things: the fair market value, or the amount of the debt forgiven plus any cash (as in cash for keys).

In this case, the fair market value is $100,000. So your selling price $100,000 minus your basis $200,000 equal negative 100,000.

You have a loss!

Well, you pay taxes on a gain. You would think you can deduct a loss on your taxes?

You would be wrong. You cannot deduct capital losses on your home after a foreclosure even if you are taxed on the capital gains.

What are the tax consequences of foreclosure?

2008-10-30T06:05:00.001-04:00

You could incur significant tax liability when you experience a foreclosure. Even if you have an attorney handle your foreclosure you should always consult with a tax attorney as well, as you may be subject to a capital gains tax.

The capital gains is calculated as the difference between the sales price and the basis in the house.

Basis = purchase price + any qualifying repairs.

Sales price = the lower of the debt forgiven plus any cash and the fair market value of the home.

Capital gains = sales price minus the basis.

In other words, let's say you bought the house for $100,000 and at foreclosure it is worth $325,000 (fair market value). But you owe $400,000 mortgage. If the lender forgives this loan, or takes a deed in lieu, your basis would be (assuming no qualifying repaires) $325,000-$100,000. In this scenario, you would use the fair market value as the sales price because it is lower than the debt forgiven. Remember that the sales price is the lower of the debt forgiven plus any cash and the fair market value. So your capital gains here is $225,000 (sales price minus basis.)

Let's assume the house was worth $400,000 (fair market value) but you owe $325,000 in mortgage. The basis would still be $225,000.00 because you are always going to choose the lower of the debt forgiven and the fair market value as your selling price. In this scenario your capital gains is selling price minus basis: $325,000-$225,000 which is $100,000. Your capital gains is $100,000.00

Let's assume all of the above but now you had made qualifying repairs of $100,000. Your basis would be purchase price plus qualifying repairs. That would be $100,000 plus $100,000. Your basis is $200,000. If your basis is $200,000, what is your capital gains? Remember that the capital gains is the selling price minus the basis....

Now let's say you are trying to figure out your capital gains in these two scenarios. The fair market value is $325,000. The basis is $100,000. So the capital gains is $225,000.

In the second scenario, the basis is $200,000 and the fair market value is $325,000. So the capital gains is $125,000. If the house is worth $325,000 but you owe $400,000 you would use $325,000 as the selling price (you are always going to use the lower of the two numbers.) So your capital gains would be $325,000 selling price minus $200,000 basis which is $125,000 in capital gains.

What would you actually pay to the IRS? In this example, you would pay nothing. Why? Because luckily each homeowner can exclude $250,000 once every five years if they are in residence at the time of the foreclosure. If married, the exclusion is $500,000 which is essentially $250,000 for each tax payer.

Had the example yielded a capital gain of over $250,000, then the homeowner, if single, would owe capital gains on the difference, after excluding the first $250,000.

What options do I have when I am in foreclosure?

2008-10-30T05:53:00.000-04:00

You have several options when you are in foreclosure. You can:

1) Get a temporary forebearance on the loan. How does that work? Well, the lender can simply agree to suspend your payments for period of time, example 3 months. All you would probably have to pay in that time is small downpayment. However, after 3 months you would owe the arrears, late fees and interest.

2) Get the lender to reduce your interest on the loan. That could potentially reduce your monthly payment by hundreds of dollars.

3)capitalize the arrears. Meaning add the arrears to the outstanding principal balance.

4) While you are at it, if the interest rate is adjustable, negotiate to get those rates fixed going forward.

5) Reduce the outstanding principal on the home to the actual value of the home. Many homeowners bought homes at prices well above the actual value of the home. So you could have lender reduce the principal to the actual value of the home.

5) Try to have late fees waived.

6) Try a combination of all the above.

Can you save your house?

2008-10-28T08:31:00.000-04:00

Foreclosure is tough. Nobody wins. Not the banks, not the lenders. Believe it or not, it is in the bank's interest to find a way to make this work, so that you can keep your house and they can get paid. No bank wants to take a loss on real estate if they don't have to.

Home retention programs abound. But the important question to ask yourself, the brutally honest question is, "can I afford to keep this house." If you got into trouble because you lost your job but now you are working again, you may be able to work something out with your lender if your income supports home ownership. There has to be income, verifiable income that you can show from your taxes, 1099 and a financial worksheet.

As I may have said before, if you got an "exotic mortgage" like a income only mortgage, or negative amortization loan, or a subprime (high interest) loan, you would be, by law, entitled to a 90 day notification, and you get a mandatory conference after 60 days. That gives you a lot of time to try to make this work out in your favor - if you have income and home ownership is possible.

But the lender is only going to agree to something that is sustainable. If all else fails, as a last resort, you can consider a chapter 13 bankruptcy which also allows you to keep the home, but this should only be used as a last resort. With a chapter 13 you will get a mandatory payment plan, and you will have to make provisions to pay the arrears that have built up.

Of course, if you are having trouble paying your mortgage in the first place, and now you have to pay the mortgage and the arrears, it doesn't sound like much of a solution, and for many people, a chapter 13 is not really a solution. It only works if you are working now, and you will be able to make payments, or you have a buyer for the property, and you need to stop the auction which is scheduled before the closing. Otherwise, if you just don't have income, it doesn't make sense to file a chapter 13.

Both a chapter 13 and a foreclosure will negatively impact your credit report for a very long time.

Causes of the mortgage crisis

2008-10-26T08:06:00.000-04:00

The are many contribution factors to the complete breakdown of the financial industry and the housing market. The reasons include:

1) Deregulation - the government removed the legal checks and balances that would have policed the financial industry and many with superior bargaining power abused their powers and failed to act ethically.

2) Home equity - in the late nineties and early zeros the appraised value of many homes across the country went through the roof. This created a spread between the purchase price of the house and what the market value of the house was. The difference between the two is called EQUITY. What happened was that this equity is a form of wealth and it opened to door for predatory lenders to come in and give loans (home/equity loans) to people at exorbitant rates. Many of these people were elderly and on fixed incomes. They couldn't repay these loans - and many of these were adjustable rate mortgage loans.

3) Lending discrimination - many banks and financial institutions went into predominantly Black and Latino neighborhoods and offered residents outrageously unaffordable ARM mortgages which the lenders knew were unaffordable from the start. In many instances, the gave subprime mortages to people who should have received prime mortgages based on their credit scores.

4) Securitization - this is a fancy term for what happened when Wall Street got in on the subprime lending game and turned the mortgages into asset backed securities, and then sold these securities to investors in the marketplace. These investors would get high returns of interest for having provided the initial capital for the creation of these outrageous and inappropriate loans - predatory lending.

5) Consolidation of unsecured debt and secured debt - many people were told that by consolidating all their debts, like credit cards, mortgages, car loans, etc, they could take out one mortgage, make one payment, and get tax savings. Often the tax savings was negligible and what the consumer ended up doing is putting their homes in jeopardy by increasing the principal balance, and often taking a loan with higher interest rates, which were sometimes adjustable rates. Then they couldn't pay the monthly mortgage for one reason or another and they were soon facing foreclosure.

6) Rise in the "Secondary Market" - the mortgage business became more complicated and many more players entered the fray. When a borrower signed off at closing to a loan, the lender went right out and sold that loan to another entity. That entity may have given the loan to what's called a "servicer" to collect monthly mortgage payments....this new system helped predatory lenders get away with predatory lending schemes because they had less accountability.

What are the steps to Foreclosure?

2008-10-24T13:44:00.000-04:00

The first official notice of foreclosure is usually the NOTICE OF DEFAULT which your lender will send you in the mail. It usually is sent if you are 90 days delinquent but it could be sooner. If you do not cure this default in the time allotted, you will receive an ACCELERATION LETTER. This letter will tell you that your entire balance on the loan is due, even if that balance is $300,000.00.

If you are not able to cure this default after receiving the acceleration letter, the lender will then file a summons and complaint move to serve you with a summons and complaint AND they will also file a lis pendens (this provides notice of the foreclosure to your debtors and every one else in the public0.) There will be a hearing in court after you answer. If you do not answer, there is a hearing anyway. It is called a HEARING ON THE SUFFICIENCY OF THE COMPLAINT.

You always have the right to redeem. That means until the property is sold, you have the right to cure the default by paying the balance that is due on the arrears. But the court will set a date for REDEMPTION after the hearing.

Then a date is set for SALE of the property. And finally there is a CONFIRMATION OF SALE.

Why are so many foreclosures being filed?

2008-10-23T08:37:00.000-04:00

Here in New York, foreclosure filings are at an all time high. Most of the filings are in the "subprime" market but there are filings in the prime market as well and these numbers are increasing.

The subprime market consists of those who are considered to have less than perfect credit history. The problem with that is that it has been found that many people in the New York area who had good credit and should have received "prime" loans, in fact received subprime loans. And these individuals tend to be African Americans and Latinos disproportionately.

When an individual receives a subprime loan, that individual receives a much higher rate of interest than someone who receives a prime loan. So for example, if a home costs $275,000, a person who receives a prime loan may be charge 5.84% interest for 30 years and their monthly mortgage payment would be $1620. (If your math doesn't yield this number you have to consider that these lenders use an amortization schedule that takes into account the reduction of principal with every mortgage payment. And that is assuming you do not have an interest only loan.)

But a person who receives a subprime loans may be charged, say, 9.5% interest and their monthly mortgage would be $2312. Plus they may owe fees for PMI (Private Mortgage Insurance) and other charges bringing their monthly out of pocket on their home to nearly $3000 per month (almost double what the prime borrower would pay!)

The numbers get even more astronomical as the rate of interest increases. If the rate of interest increased just one percent (1%), for example, that could result in nearly $200 extra per month.
These increases happen quite often because what many lenders do is they offer adjustable rate mortgages to targeted borrowers. The initial rate is usually just a "teaser" rate. So in a matter of months, the subprime borrower finds themselves completely unable to pay the mortgage. They start falling behind in payments and in three months time they are facing foreclosure.