Joyce’s Voice…5 Foreclosure Myths for 2012

Beginning in 2007, foreclosures rocked the real estate world. Like an out-of-control freight train, they began decimating the market, peaking in 2009. Myths and rumors began propagating like mushrooms as consumers struggled to understand the new reality. Although many misconceptions have come and gone, we still encounter five myths on a regular basis.

1. There is going to be a flood of new foreclosures to the market.

This rumor has appeared every year since 2008 and has been routinely debunked. However, recent announcements that the Feds reached a settlement over the robo-signing scandal have reignited speculation. The idea is simple: Since the cork is now out of the foreclosure bottle, we’ll soon see another flood of REOs inundating the marketplace.

My personal opinion: don’t hold your breath.

Banks have learned that if they control inventory, they can affect local prices. By releasing homes in measured amounts, they realize higher prices than if they released a glut of homes. In addition, they’ve learned that if they can mitigate their losses by agreeing to a short sale, everyone wins.

2. You can go directly to a bank to buy a foreclosure.

Every few weeks I’m asked how to buy foreclosures direct from a bank. Someone knows a friend being foreclosed on and they want to step in and grab the house before it hits the market. Don’t we all? In reality, banks have a simple system – they first offer properties on the courthouse steps. The rest they assign to asset mangers who then hire local real estate agents to put them on the market along with all the other homes. Want an REO? Pay cash at the courthouse steps or get in line witheveryone else when they hit the local MLS (Multiple Listing Service).

3. You can get a killer deal by submitting lowball offers on foreclosures.

You would think this myth would be dead by now. Unfortunately, like Elvis sightings, it just won’t go away. Here’s the truth: Banks want REOs sold in 30 days or less, so they typically appear on the market priced slightly under comparable properties. If the property doesn’t sell quickly, the bank will lower the price after about 30 days. Lowball offers are ignored and are, quite frankly, a waste of everyone’s time and effort. You might get a deal by offering a lower price on a foreclosure that’s been sitting on the market for more than 90 days, but remember that there are good reasons it’s gone unsold for so long. And even if you have cash, your lowball offer won’t be accepted —seriously.

4. You can’t use foreclosures when doing an appraisal.

Or short sales, for that matter. That is no longer true. In fact, in many neighborhoods, that’s all that’s there. Therefore, foreclosed or distressed sales represent the actual value of homes in the area and HAVE to be used to appraise other properties. Don’t like it? Get over it. Times have changed and the ways neighborhoods are valued have changed as well.

5. Foreclosures are only affecting the bottom end of the market.

This used to be true. However, while foreclosure rates on the lower end of the market have actually decreased, they’re actually increasing on the upper end. According to Daren Blomquist, vice president of RealtyTrac, the market share of foreclosed homes under $1 million is shrinking, but those among properties valued over $1 million are rising – up 115% since 2007. And foreclosures on properties valued upwards of $2 million have increased by 273%. While some well-known jet-setters have melted down and lost everything, others are choosing to strategically default. They see it like liquidating a poorly performing portfolio – they have enough resources to cut their losses and move on. Historically, banks have been reticent to foreclose high-end homes and absorb a large loss, but defaulters are now forcing their hands and mansion foreclosure rates are moving on up.

Myths control behavior, and this has never been truer than in the housing market. Savvy agents will work hard to educate their clients, debunk myths, explain market trends, educate with solid facts – and actually close transactions.

Author: Carl Medford, a practicing Realtor with Prudential California Realty in the San Francisco Bay Area

Joyce’s Voice…Deal will mean $648 million for those with troubled mortgages in the state

The agreement settles claims that big banks signed foreclosure papers without knowing all the facts.

 

OLYMPIA — A $25 billion agreement reached Thursday between states and the nation’s biggest mortgage lenders should help several thousand Washington homeowners refinance, and thousands more who’ve lost their houses through foreclosure could receive checks for $2,000 each.
The deal, signed by five major banks and all states but Oklahoma, settles claims that lenders routinely signed foreclosure documents without really knowing whether the facts they contained were correct.
In Washington, the deal will be worth in the neighborhood of $648 million, with the bulk of it being money banks will expend in modifying the loans of homeowners. “Our settlement holds America’s largest banks accountable for harms homeowners suffered from shoddy loan servicing, illegal robo-signing and faulty foreclosure processing,” said state Attorney General Rob McKenna, one of eight attorneys general who led negotiations. The settlement requires Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial/GMAC to modify loans, pay penalties to state and federal governments and fund programs to assist borrowers and send cash settlements to the foreclosed homeowners.
Of the five major lenders, Bank of America will pay the most to borrowers nationwide: nearly $8.6 billion. Wells Fargo will pay about $4.3 billion, JPMorgan Chase roughly $4.2 billion, Citigroup about $1.8 billion and Ally Financial $200 million. The banks will also pay state and federal governments about $5.5 billion. “This settlement is great news for many homeowners in Washington state who have been struggling to keep the American Dream of homeownership alive,” said Jerry Martin, president of the Snohomish County Camano Association of Realtors. “Literally, thousands of troubled homeowners now have a better chance of receiving loan modifications or reduction of principal balances owed on their mortgages.” McKenna said the agreement is the biggest consumer financial-protection settlement in U.S. history. It is the largest multistate agreement since the $206 billion tobacco lawsuit settlement in 1998.
But unlike money the state collected in the tobacco suit, funds received through the mortgage settlement must go to homeowner assistance and cannot be used to fill a gap in the state budget, McKenna said. He said he made that point to Gov. Chris Gregoire’s staff and legislative leaders of both political parties when he briefed them on the deal earlier this week. The cornerstone of the complicated deal is a requirement that the banks find ways to shrink monthly mortgage payments. It might be through buying down the principal on a loan. Or it might be by helping those who owe more on a home than it’s worth — but who nonetheless are up to date with mortgage payments — to refinance. Today, those “underwater” owners can’t qualify for a refinancing of their loan.
The deal requires banks to make foreclosure a last resort. And they can’t foreclose on a homeowner who is being considered for a loan modification.
Roughly $24 million will be paid to people in Washington whose home loans were improperly foreclosed between Jan. 1, 2008, and Dec. 31, 2011. Each would receive a check for about $2,000.
The state will receive $5 million in civil penalties and $45 million for programs that provide counseling and financial assistance to distressed homeowners.
State and federal officials, including President Barack Obama, said the agreement should help stabilize the residential housing market by making it possible for millions of people to keep their homes.
“That’s certainly the hope,” said Glenn Crellin, associate director of research for the Runstad Center for Real Estate Studies at the University of Washington. “It is not a panacea. It is not going to solve all the problems out there. It certainly should cause some folks to think, ‘I can work my way out of this yet.'”
In Washington, about 245,000 mortgages were perceived to be underwater at the end of September 2011, Crellin said. Only those with loans held by the institutions named in the settlement are potentially eligible for assistance.
Owners of another 76,000 homes were at least 90 days past due on mortgages or in foreclosure at that time, Crellin said. For those in the business of selling homes, Thursday’s settlement was welcomed, though it’s not expected to jump-start activity. Affordability through lower prices will bring people back into the market more rapidly than the lawsuit, said Ken Anderson, a director for the Northwest Multiple Listing Services and owner of Coldwell Banker Evergreen Olympic Realty in Olympia. “The market just needs to heal itself,” he said. “I think what the settlement will do is it will compensate some people who were wronged. And it will help banks put this behind them and get back to doing what we’re used to them doing in normal years.” The states have agreed not to pursue civil charges over the abuses covered by the settlement. Homeowners can still sue lenders on their own, and federal and state authorities can still pursue criminal charges. The settlement also ends a separate investigation into Bank of America and Countrywide for inflating appraisals of loans from 2003 through most of 2009. Bank of America acquired Countrywide in 2008.
The deal, reached after 16 months of contentious negotiations, is subject to approval by a federal judge. Critics note that the settlement will apply only to privately held mortgages and not to those owned by mortgage giants Fannie Mae and Freddie Mac. Banks own about half of all U.S. mortgages, or roughly 30 million loans. Fannie and Freddie own the other half.
Jerry Cornfield: 360-352-8623; jcornfield@heraldnet.com.
The Associated Press contributed to this report.

Where to learn more
Consumers are advised to check online or call a settlement hotline to see if they will benefit from the mortgage settlement. “Don’t give up. Look into whether or not you’re eligible. We may have more news about other banks in the future as well,” Washington Attorney General Rob McKenna said.
•Washington State Office of the Attorney General: www.atg.wa.gov
National Mortgage Settlement: www.nationalmortgagesettlement.com
Ally/GMAC: 800-766-4622
Bank of America: 877-488-7814
Citi: 866-272-4749
Chase: 866-372-6901
Wells Fargo: 800-288-3212

Published: Thursday, February 9, 2012

By Jerry Cornfield, Herald Writer

Joyce’s Voice…Understanding Mortgage Debt Cancellation

A lender will, on occasion, forgive some portion of a borrower’s debt. The general tax rule that applies to any debt forgiveness is that the amount forgiven is treated as taxable income to the borrower. Some exceptions to this rule are available, but, until recently, when a lender forgave some portion of a mortgage debt (such as in so-called “short sales,” foreclosures and “workouts”), the borrower was required to pay tax on the debt forgiven.

A law enacted in December 2007 provides relief to troubled borrowers when some portion of mortgage debt is forgiven. That relief expires on Dec. 31, 2012. Use this information to better understand mortgage debt cancellation:

General Rule for Debt Forgiveness:

If a lender forgives some or all of an individual’s debts, the general rule is that the forgiven amount is treated as ordinary income and the borrower must pay tax on the forgiven amount. Exceptions apply for bankruptcy, insolvency and certain other situations, including mortgage debt. (See below)

Current Law for Mortgage Debt (January 1, 2007 through Dec 31, 2012):

A borrower can be excused from paying tax on forgiven mortgage debt. The debt must be secured by a principal residence and the total amount of the outstanding obligation may not exceed the original mortgage amount plus the cost of any improvements. The objective of the legislation was to assure fairness: Homeowners should not be required to pay income tax where there is no cash realized in a transaction.

Example: The provision is best understood with an example.

Assume a family purchased their home for $175,000, with a mortgage of $150,000. In 2012, they need to sell the home. They find that the value of homes in their area has declined, so they can sell for only $120,000. At the time of the sale, the outstanding balance on their mortgage is $132,000. Thus, there will not be enough cash at settlement to repay the lender the full balance of the mortgage. If the lender forgives the entire difference between the amount owed ($132,000) and the sales price ($120,000), the debt forgiven will be $12,000. The relief provision assures that the homeowner will not pay tax on the $12,000 forgiven.

Does the relief apply only to a sale?

No. The provision has broader application. Lenders might forgive some portion of mortgage debt in a sale known as a “short sale” (as above, when value at sale is less than the amount owed) or in a foreclosure when the debt is wiped out. In addition, if a borrower still living in the home is able to make an arrangement with a lender that reduces the principal balance of a mortgage, the amount forgiven in that workout will not be taxed.

Can the homeowners in a short sale or foreclosure claim a loss?

No. The loss is considered a personal loss and is therefore ineligible for either capital loss or ordinary loss treatment.

What happens to the seller when mortgage debt is forgiven?

Until January 1, 2013, the homeowner will pay no tax on any forgiven amount. Under pre-2007 law, the amount of forgiven mortgage debt (the $12,000 in the example above), would have been treated as income, and taxed at ordinary income rates.

Does this provision apply to a refinanced mortgage?

Only in limited circumstances. The relief provision can apply to either an original or a refinanced mortgage. If the mortgage has been refinanced at any time, the relief is available only up to the amount of the original debt (plus the cost of any improvements). Thus, if the original mortgage was $125,000 and later refinanced in a cash-out arrangement for a debt totaling $140,000, the $15,000 cash-out is not eligible for relief if a lender later forgives some amount related to the cash-out. Tax relief is generally not available for second mortgages or home-equity lines of credit where the funds are not used for home improvement. Any amount that is not eligible for the relief provision will be taxed as ordinary income.

How does the homeowner get the correct information to the IRS?

The lender is required to provide the homeowner and the IRS with a Form 1099 reflecting the amount of the forgiven debt. The borrower/homeowner must file a Form 982 to reflect the amount forgiven and to show the reason why the forgiven amount is not taxable. Any taxable portion of forgiven debt will then be reported on the homeowner’s Form 1040 for the tax year in which the debt was forgiven. For example, a lender that forgave mortgage debt in March 2012 would provide the 1099 information to the IRS and the homeowner as required. The forgiven amount would then be reflected as appropriate on the 2012 Forms 982 and 1040 that will be due April 15, 2013.

Is there a limit on the amount of eligible debt?

Yes. Up to $2 million of mortgage debt on a principal residence may be forgiven tax-free. Any amount of forgiven debt above $2 million is taxable as ordinary income.

Does this provision apply to commercial real estate?

Permanent rules enacted in 1993 provide relief to debt-burdened commercial real estate and rental properties. The 2007 provision puts commercial/investment property and residential owner-occupied property on similar footing.

What if a property declines in value, but the owner stays in the house?

The provision would not apply. The provision applies only at the time of sale or other disposition or when there is a workout (reduction of existing debt) with the lender. No mechanism exists to reflect a loss of value while the property is still being used as a residence. (See the question on capital losses, above.)

Do all lenders forgive mortgage debt when property values decline or in foreclosure?

No. Some states have laws that allow a lender to require a repayment arrangement, particularly if the borrower has other assets. Forgiveness of debt is always at the lender’s discretion.

When did this legislation pass?

A version of the mortgage relief provision passed the House in 1999 and 2000, but was not enacted. The rules of current law were enacted in 2007 as part of H.R. 3648, a bill focused solely on housing issues. The original rules were effective from January 1, 2007 through December 31, 2009. The provision was extended through December 31, 2012 in 2008 as part of the stimulus legislation enacted in 2008. (HR 1424, PL 110-343).

What is the revenue effect?

No current score exists for an extension of this provision beyond 2012. When originally enacted in 2007, the score was a loss of $1.4 Billion over 10 years. The 2008 extension added $362 Million to this score.

Information from NAR