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Archive for the ‘HAFA’ Category

If you owe a debt to someone else and they cancel or forgive that debt, the cancelled amount may be taxable.

Cancelled or forgiven debts happen every day in the Real Estate world. Short sales and foreclosures result in substantial, cancelled or forgiven debts. The Bank’s loss may be considered the home owner’s gain – a taxable, forgiven debt. A short sale happens when the proceeds of a home sale are not enough to pay off the mortgage. The bank agrees to take a “short” payoff and may cancel or forgive the shortage.

For the last 5 years, most homeowners were exempt from paying taxes on that forgiven or cancelled debt. Unless Congress acts soon, homeowners will have to start paying income taxes on that debt.

Taxable Income

If you owe $200,000 on your home but your sale only results in $150,000 in proceeds, you will be “short” by $50,000. You would likely need to count that $50,000 as taxable income to the IRS! In this case, you might owe and additional $12,500 in tax liability. In fact, you may owe this tax even if your house is foreclosed if it results in a shortfall to the bank.

Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act of 2007 exempts many home owners from paying taxes on the forgiven debt. This law, however, is set to expire at the end of 2012. If it does, it may have a chilling effect on short sales and loan modifications. Many experts and commentators believe Congress will extend the law. It was originally effective until 2009 and Congress extended it to 2012 as part of the Emergency Economic Stabilization Act of 2008. In August, the Senate Finance committee approved a one-year extension, with bipartisan support (this was not a full vote of Congress). Others are more skeptical. A lame-duck Congress has its plate full with the looming “Fiscal Cliff.”

If the law is not extended, many believe the Real Estate market will suffer. Indeed, over 20% of Dane County sales are distressed property sales. These distressed sellers would be faced with another, “phantom” tax just to walk away from their homes.

 

 

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A new settlement among big banks may provide relief to many struggling home owners.  Nearly 20% of all home mortgages are underwater – the home is worth less than the amount owed to the bank. This has been the major cause of the foreclosure crisis nationally and a problem many have sought to remedy. A new settlement with big banks raises hope for many underwater home owners that they may be able to reduce their loan or refinance with better terms.

New Federal Settlement

Ordinarily, a bank will not lend to a homeowner if the home is worth less than the current mortgage because it requires the homeowner to borrow more money than the home is worth. Under the new settlement, tens of billions of dollars will be earmarked for homeowner relief. It is unclear how this money will be dolled out, but it is presumed that it will include:

  • Reducing the principle balance owed on a loan
  • Refinancing to a lower rate
  • Providing incentives to lenders to approve refinances, modifications, or short sales
  • Providing cash settlements to some homeowners who have already lost their home to foreclosure

As with previous federal programs (HAFA and HAMP), this program is not expected to provide broad reaching relief. It will only apply to about 10% of underwater homeowners. Nevertheless, this might be enough to stabilize the housing market and provide a much needed boost to the hardest hit segment of the market.

For a detailed summary of the settlement, see the New York Times Article.

Madison Realtors, lenders, and attorneys are invited to our seminar on Short Sales & Foreclosures:

Short Sale Seminar

February 23, 2012: 1pm – 4pm

City Center West
525 Junction Rd.
Madison, WI 53717-2152

REGISTER HERE

Licensed REALTORS, Attorneys and lenders are invited to attend this powerful seminar on short sales, foreclosures, and navigating distressed properties. This seminar has previously been approved for 3 Hours of Continuing Legal Education credits in Wisconsin.

Attorney Peter Zarov will be breaking down the foreclosure time line, the short sale process, and REALTOR’s risks and responsibilities. This class will cover:

  • Short sale time line
  • Foreclosure process and understanding timing and leverage.
  • How to avoid liability during a short sale (Your referral team, common scams, etc.)
  • The short sale packet and best practices to submit
  • The HAFA Short Sale Program and other new incentives
  • Transactional pitfalls and how to avoid them
  • Bankruptcy and how it affects sales

Agents will a acquire critical knowledge of the foreclosure process in Wisconsin, short sale procedures, and important trends in distressed property transactions.  Surviving and thriving in this market requires a familiarity and understanding of these topics. 

The Event is $15 and includes a 65 page packet of outlines, materials, and forms.  

 
 


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Many home owners are in financial distress and owe more than their home is worth. In this case, selling their home will not net enough proceeds to pay off their current mortgage. Often, the only option is a “short sale,” in which their lender agrees to accept less than a full payoff to release the mortgage.

HAFA is a Federally sponsored program providing incentives to lenders that agree to short sales. A short sale is a long, difficult process requiring weeks if not months of negotiation with the bank to convince them to accept less than the full amount due. The goal of HAFA is to streamline and standardize the short sale process. HAFA, however, only applies to certain home owners and to lenders that participate in the program.

More importantly, HAFA did not apply to loans owned, underwritten, or guaranteed by Fannie Mae and Freddie Mac. This excluded a large number of loans… until now!

Fannie Mae and Freddie Mac Introduce Their Own HAFA Program

Fannie Mae and Freddie Mac recently announced their own entry into the HAFA Program. Both programs will likely be very similar to the original HAFA program. This development will open the door to a vast majority of distressed homeowners to utilize the HAFA Short Sale Program. And, this means that sellers, REALTORS, and attorneys must understand how the various programs work.

Like the original HAFA program, the Fannie Mae and Freddie Mac programs “piggy back” off of the HAMP Mortgage Modification program. Distressed homeowners must first apply for a mortgage modification under the federal HAMP program. And, like the original program, the new programs provide similar incentives to homeowners and lenders to close a short sale. Homeowners can receive up to $3,000 in “relocation assistance” for completing a short sale.

These programs have just been announced and are not yet in effect. Homestead will continue to provide updates prior to the August 1st implementation date.

For updates and more information on this and other topics, please subscribe to this blog.

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The following chart provides definitions and differences for various terms and concepts you may encounter in short sales and foreclosures. For a brief explanation of the HAFA Process, see HAFA Explained – The New Federal Short Sale Program. The National Association of Realtors also provides excellent information and resources.   These definitions and terms are a broad-brush attempt to offer clarity and understanding.  Many terms only apply to Wisconsin. 

Term or Concept

Traditional Short Sale

HAFA Short Sale

Foreclosure

HAMP N/A Mortgage Modification program through the Making Homes Affordable initiative. HAMP may be required for a HAFA Short Sale. HAMP Loan modification may be an alternative to foreclosure. The program has been unsuccessful for most home owners.
HAFA N/A The short sale program offered through the Making Homes Affordable initiative. HAFA is designed to be a short sale alternative when a loan modification fails. N/A
SSA

Short Sale Agreement

SSA Only Applies to HAFA:

Lenders do not agree to a traditional short sale until the end of the process, only after approving all application materials AND the offer to purchase.

SSA is the Lender’s Agreement that outlines the short sale for the home owner. This is agreed to at the time of listing.

N/A

RASS

Request for Approval of Short Sale

RASS Applies to HAFA:

Request for short sale approval is a long drawn out process of submitting information and often resubmitting it many times.

The Seller or REALTOR submits the RASS within 3 days of having an accepted offer. The lender than has 10 days to approve or deny the request. If approved, lender must close when buyers are ready.

N/A

Term or Concept

Traditional Short Sale

HAFA Short Sale

Foreclosure

Principle Residence Can do short sale if not principal residence. May have federal income tax consequences for amounts the lender does not collect. The home must be the seller’s principal residence to qualify for HAFA. N/A
Timing Wildly varies, but “Short” does not usually describe the length of time. 3-18Months to complete. Much faster than traditional short sale.

Less than 60 days From application to approval. Lender has 10 days to approve any accepted offer. Can close within normal timelines once the offer is approved.

Foreclosures in Wisconsin can take 8-12 months where a seller does not contest the foreclosure (default judgment). It can take longer if the seller answers the complaint. I can take less time for abandoned or commercial property.
Default The missed mortgage payment that leads to the filing of a foreclosure
Deficiency Lender may or may not demand a deficiency. The Deficiency is the amount of money the lender is still owed. Lenders cannot demand deficiency. First Mortgage holders generally waive their right to a deficiency in order to speed up the process. 2nd or 3rd lenders usually still retain a right to deficiency.
Term or Concept

Traditional Short Sale

HAFA Short Sale

Foreclosure

Loan Types and Underwriters Virtually all lenders and underwriters will do short sales. Every lender or underwriter has different standards. Only applies to non-GSE loans, meaning NOT Fannie Mae or Freddie Mac.

Only applies to lenders participating in the HAMP Program.

All lenders can file foreclosure actions.

Mortgage Payments Sellers generally do not pay mortgage payments during the foreclosure and short sale process. Essentially, they are there “rent free.” Sellers must continue making mortgage payments, but not more than 31% of their gross income.

N/A

Commission Lender may negotiate to reduce it. Many investors and programs now require 6% if that is written in listing agreement. Requires servicers to honor listing agreement if commission does not exceed 6% N/A
REALTOR Anyone can participate in a traditional short sale, including FSBO’s, Investors, or non-licensed individuals HAFA short sales MUST be listed with a REALTOR. N/A
Term or Concept

Traditional Short Sale

HAFA Short Sale

Foreclosure

Initiating Short Sale Process Seller, Realtor, or Attorney calls lender, but process generally starts once a Buyer accepts the offer. Process initiated by sending short sale “package.” Seller calls lender and requests HAFA Short Sale. Lender must proactively offer short sale to individuals who try and fail at HAMP. May require application for HAMP first (although new guidelines allow for direct application for Short sale). N/A
Cash at Closing Sellers are rarely allowed any cash at closing. Many lenders require the seller to bring money to closing Lenders can offer up to $3,000 as a cash incentive for sellers to do a HAFA short sale. N/A
Credit Consequences Consult a financial advisor or credit counselor. Short sales can have a significant impact on credit. Consult a financial advisor or credit counselor. Short sales can have a significant impact on credit. Consult a financial advisor or credit counselor. Foreclosure will be a significant impact on credit.

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Foreclosure This Exit: Highway Sign

Short Sale Seminar

May 26, 2010: 9am – 12pm

City Center West
525 Junction Rd.
Madison, WI 53717-2152

Licensed REALTORS and lenders are invited to attend this powerful seminar on short sales, foreclosures, and the new HAFA Program.

Attorney Peter Zarov will be breaking down the Agent’s responsibilities, the foreclosure time line, and the short sale process. This class will cover:

  • Short sale time line
  • Foreclosure process
  • How to avoid liability during a short sale (Your referral team, common scams, etc.)
  • The short sale packet and best practices to submit
  • The NEW Federal HAFA Short Sale Program
  • Transactional pitfalls that will kill the deal that can be avoided

Agents will a acquire critical knowledge of the foreclosure process in Wisconsin, short sale procedures, and the changes brought about by the new HAFA Program that went into effect on April 4, 2010. Surviving and thriving in this market requires a familiarity and understanding of these topics.

The Event is $15 and includes materials, bagels, pastries, coffee, and juice. We accept payment by credit card or check.

Attend This Event

For more information, go to www.homesteadtitle.net/seminars or subscribe to our blog at www.homesteadtitle.net/blog

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Distressed Property Resources

 

Education and expertise are critical to serving distressed homeowners and buyers of distressed properties. Beware of internet sites that often contain incorrect information or involve scams. We have found the following resources to be helpful for Wisconsin Realtors, attorneys, and distressed home owners.

Trusted Web Sites:

 




 

 

Trusted Sources of Education:

 

 

The best resources are local. Feel free to contact Homestead Title to see if we can answer your questions or point you in the right direction. We’re here to help!

Ph: (608)203-4800

Email: home@homesteadtitle.net

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