Foreclosures, Short Sales and Taxes *

* this article written by Patricia Rathburn first appeared in the Croissant Park Community Association Newsletter, thus references to previous newsletter articles.



This is a departure from my usual submissions to the newsletter in which I am rarely serious even when talking about serious subjects. There is nothing funny about what is going on in the country at large, and on a local level with respect to the economy and housing/mortgage crisis. Many of us in the real estate/legal field had hoped that things would have turned around by now, or at least stabilized, but that does not appear to be happening. It has gotten to the point that I find it difficult to read the paper or listen to news reports as they uniformly predict more bad news in the housing market. I have seen it in my own business in a way that reminds me of the early 80’s when interest rates shot up dramatically. In those days, in my first job after law school, I worked for a law firm that did a lot of loan closings. I found myself in the position about 6 months into the job of being switched from the loan closing department to the loan foreclosure department – and foreclosing on the same loans that I had closed months earlier. It was a difficult time, but the economy managed to eventually rebound and that period, until recently, seemed like a mere bad memory.

Unfortunately, I am finding myself in the same position twenty some years later- I have at least one client a week calling for advice or help with working out a payment plan or in a foreclosure action on houses they have purchased or loans they have obtained within the past few years. These are friends, long term clients and people who have, in many cases, somewhat naively gotten in over their heads. Of course there are investors who are walking away from loans on the multiple high rise apartments they bought- but for the most part, I am seeing the individuals who only have one home, and are about to lose it. I recently ran into an old friend who told me he was looking for a rental in our neighborhood. I knew he and his wife had bought a home a few years ago – I did the closing for them-and asked why they were looking to rent. He told me that he had run into some family emergencies over the past year and simply could not afford to pay the taxes, insurance and mortgage on his house -so it was in foreclosure. When I asked him why he hadn’t called me to see if I could help, he gave the answer that I have been hearing over and over. He was too embarrassed to let anyone know what was going on. He was afraid if he told his friends or family how bad things were, that they would think he was asking them for money. He didn’t want to call me for help as he didn’t want me to think he expected me to work for free. These are the same reasons I have been given in so many instances that I thought it was about time that I add my voice to the issue in the hope that it might help someone in the neighborhood that finds themselves in my friend’s position.

First – do not be embarrassed. Everyone is having a hard time and no one is going to think less of you because you are caught in a financial crunch.

Second – take some sort of action. If you are not in the real estate field, you may not know how foreclosures work – so ask. You may have heard the term “short sale” which in many situations is being presented as something of a panacea-you see ads running frequently touting the short sale as an answer the prayers of a beleaguered property owner. In some cases they make sense and can work – in other cases they don’t. With housing prices falling, it has become more and more common to see houses that were purchased two or three years ago selling for much less than the price they last sold for. Many people don’t realize that in order to qualify for a “short sale” you have to go through a procedure much like qualifying initially for a loan.

For those not familiar with the term, a short sale is, simply, where a buyer offers a seller less money to purchase their house than the seller owes on his or her mortgage. For example – say you bought your house for $300,000 and owe the bank $250,000 in mortgages, and a buyer offers $225,000 for the house. The seller will have expenses involved in the sale – typically real estate commission, attorney’s fees, documentary stamps and the like – so after payment of the expenses there may only be $200,000 to pay off the $250,000 mortgage. In previous markets, that meant that the Seller would have to “find” $50,000 somewhere in order to pay off the mortgage and sell the house. In a short sale, the bank agrees to take less than it is owed in order to have the sale go through, and writes off the balance owed. This is often in the best interest of the bank, as it does not want to own more property – that is not the business they are in. If they end up acquiring title to the house in a foreclosure action, they have to market it, maintain it, pay a commission on the sale – all expenses that add up. The price that a buyer offers for a house in a short sale transaction is frequently the real “market value” of the property – which the banks realize. They know that even if they take back the property in foreclosure, that the price they ultimately sell it for will most likely be close to (or even less) than the short sale offer price. So it becomes an economic decision – do they take a loss now by accepting less than is owed to them – or later, when they sell the house themselves for less than the amount of the mortgage.

This sounds like it might be a good idea for some homeowners who find themselves “upside down” on their mortgage- where their house is worth less than what they owe- but it is not for everyone. What these ads for short sales don’t tell you is that the process involved in a lender approving a short sale is very much like applying for a loan, only in reverse. Instead of proving that you are credit worthy and can pay back the loan, before a bank will even consider approving a short sale you have to prove, through submission of bank records, pay stubs, tax returns and the like that you don’t have any saving or other means to pay off the mortgage. In most cases, you have to prove that you don’t have the ability to make your current mortgage payments which means that, again in most cases, that you have stopped paying them. This of course seriously affects your credit, but that is a topic for another day. You must submit a hardship letter explaining what happened to make it impossible for you to make the payments, and complete a financial profile. It is a lengthy process- often taking 60-90 days for a lender to approve the paperwork- so it is not a quick fix. But it is an option – and that is the important thing to remember- that there are some options. For example, it is possible, albeit difficult, to negotiate a different payment plan with a lender to bring current a past due balance or to lower your current payments. It takes perseverance, but it is possible.

There are even options in the event your house goes into foreclosure. First keep in mind that you do have some time. Foreclosures do not happen overnight and you won’t simply come home one day to discover a padlock on your door and Fluffy the cat out in the street. It is a legal process, and you will have advance notice of all proceedings.

One might think that there is a faint silver lining in terms of a tax reduction to those who manage to hold on. We have all seen the value of our property decrease from the all time high of a few years ago. If the value decreases because the only homes selling in the area are foreclosures or short sales, then one would think that the real estate tax bills would reflect that value. Therein lies the rub-the Property Appraiser’s office does not consider short sale or foreclosures to be the true market in establishing the taxable value of your home. They only look at arms length transactions between willing buyers and willing sellers, and exclude short sales and foreclosures. So despite the overall drop in value, you may be very surprised when you get your tax bill this year to discover that your taxes have not gone down. It is possible to protest the taxable value, but you need to be prepared to file a petition with the County and present your case at a hearing before the Value Adjustment Board for a reduced amount- and the Property Appraiser’s office, facing a county wide budget crisis, is not going to make that easy for anyone.

The best advice I can give if you find yourself in a financial position for any reason that will make it difficult or impossible to keep your mortgage current, is to talk to someone about it. A Realtor can not give you legal advice of course, but they can answer some practical questions. An attorney may be able to help you negotiate a different payment plan with your lender or give you advice as to whether it is worth it to you to try and stay in your home. There are professionals out there that can help you – and, as my last piece of advice, I strongly suggest that if you do need help you ask for it early, and that you are careful in your selection of whom you ask. As with any crisis, there seem to be a lot of new companies popping up to take advantage of a bad situation, preying on people who are already in a difficult spot, offering to help them, for a fee, do something that the homeowner could do on their own or with the assistance of experienced professional. Keep in mind that if an offer seems to good to be true- it probably is- and that there are certain professions (surgeons and skydiving instructors come to mind in addition to Realtors and attorneys) where experience and integrity are essential. Simply put- be careful out there.

As if- the newest mortgage scam

As if the mortgage/foreclosure crisis is not bad enough -it looks like it is going to get worse- and from a source that, had we been thinking, we would have realized was inevitable. I'll get to that in a minute.The average person hears in the paper and on the T.V. news that the current foreclosure rate is overwhelming, but it only takes a trip to the court house for the reality of those news reports to hit home. I was in the court house for over two hours yesterday on a foreclosure where I am representing the home owner attempting to get him some more time to work out a deal with his lender. The hearing I was in lasted 15 minutes. The rest of the time? In line at the foreclosure window of the clerks office. I was fourth in line but was behind three lawyers all with at least three file folder boxes filled with new cases. Only because a former student of mine who was third in line took pity on me and let me go ahead of her did I manage to get out of there after a mere 1 3/4 hours. My former student had her own file boxes of new cases to file and told me that by the time she got back to her office, there would likely be 100 new files opened.

As if the current waive of investor defaulted loans and subprime foreclosures weren't enough - we should start bracing ourselves for yet another new waive of foreclosures from what should have been an unexpected source- people with good credit who are current on their mortgages. Why would someone with good credit who is able to make their mortgage payments each month default on their loan? It is the latest mortgage scam - and when I say scam - I mean scam in the way of mortgage fraud. Who is doing this and how does it work? An example. Say you bought your small house in a nice neighborhood 4 years ago and paid $600,000 for it. You got an original loan of $540,000 and put in $60,000 in cash to close. Six months later, you got an appraisal saying your house was worth $700,000 - and you refinanced getting a new $630,000 mortgage, paying off your $540,000 loan, reimbursing yourself for the initial cash to close of $60,000 and getting $30,000 in cash back. This means that you have no cash of your own in the house. Fast forward a year or two, and your house is now worth $430,000. (I promise this is not going to turn into a math question having anything to do with what time the train arrives in Albany). You can stay in your house and continue to make payments on your $630,000 mortgage, acknowledging the fact that you now owe $200,000 more on your mortgage than the property is worth - or you decide to jump back into the market and buy a new house. After all, there are plenty of bargains out there, and you can move up from your small little house in the nice neighborhood to a big house in the neighborhood for less money than you paid for your first house - and with a lower interest rate on the new loan.

What's wrong with that you might ask? Well, in order to do that, people are representing to their lenders that they have a renter for either their existing house, or the new house, who will pay all the expenses. They indicate that the new, or old home will be held as an investment. The banks lend these people with the fabulous credit the money for the new house- they close on it and move in. The are now living in their dream house- and are going to stay put- so that sterling credit is not so important to them. So, and I'm sure you have already guessed this - they stop making mortgage payments on the tiny dream home and the lender for that house forecloses, further extending the foreclosure cycle and adding to the glut of homes for sale.

Sadly, given how quick government regulators were to catch on to what was going on in the subprime market, by the time this trend is noted nationwide, thousands of new foreclosure cases will have been filed.

Introduction

Pat is going to introduce herself, give some bio info, introduce the blog as a source of information and opportunity for people to contact Pat with questions, comments. Remember to send a link to you friends after you have posted the intro and some articles, asking them to post recomendations, comments etc.