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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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Free Legal Help for Homeowners Facing Foreclosure in Dane County

Dane County Foreclosure Prevention Taskforce
http://www.daneforeclosurehelp.org
For more information contact:
Dan O’Callaghan (608) 283-0117or Ellen Bernards (608) 576-8658

  

What:            FREE LEGAL HELP!  For homeowners facing foreclosure. Help available in English and in Spanish Ayuda disponible en español también.

Who:              For homeowners who have received a Foreclosure Summons and Complaint

When:           11:00 am – 1:00 pm, Thursday, March 1, 2012 & Every 1st and 3rd Thursday of the month.

Where:          City-County Building, 3rd floor, 210 Martin Luther King Jr. Blvd.

THIS IS A RECURRING EVENT, 1ST AND 3RD THURSDAY OF EACH MONTH.

FREE LEGAL HELP is available for Dane County homeowners in foreclosure.  Homeowners can receive basic legal information and free assistance in writing an Answer to the lawsuit at the Foreclosure Answer Clinic.  The Clinic has assisted almost 200 homeowners to understand the legal process of foreclosure and to respond their lawsuit. Homeowners who respond in writing to the lawsuit have more control over the process and a better chance for a favorable outcome.   

Homeowners have ONE CHANCE to file an Answer to their lawsuit. Filing an Answer is one of the critical things a homeowner MUST do even if the homeowner is in communication with the lender and working on options such as a loan modification or short sale.

Time is of the essence because homeowners generally have only 20 calendar days from the date they receive the initial lawsuit papers to file a formal response called an Answer.  Failing to file an Answer to the lawsuit on time significantly reduces homeowners’ control over the process and their ability to share their story with the judge. In addition, they may not be notified of important steps in the court process of foreclosure.

The Clinic is open the 1st and 3rd Thursdays of each month from 11:00 a.m. to 1:00 p.m. on the 3rd floor of the City-County Building, 210 Martin Luther King Jr. Blvd, Madison.  No appointments are necessary.  Homeowners should bring their Summons and Complaint as well as any other relevant papers about the foreclosure.  

The Foreclosure Answer Clinic is a collaborative effort of the Dane County Foreclosure Prevention Taskforce, the Dane County Bar Association and the UW Law School, with grant funding provided by the State Bar of Wisconsin and other support provided by Dane County.

Who We Are.  The Dane County Foreclosure Prevention Taskforce is a coalition of public agencies, non-profit service providers and other community partners working together to develop sustainable alternatives to foreclosure in Dane County. For more information, please visit daneforeclosurehelp.org.

Our Mission.  To develop and implement a coordinated response to the current foreclosure problem in Dane County. 

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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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2011 December Home Sales Report – Wisconsin REALTORS® Association.

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At least three major lenders have suspended foreclosures in nearly two dozen states, including Wisconsin. Allegations of misconduct and flawed practices in foreclosure lawsuits prompted GMAC, Bank of America, and JPMorgan Chase to put the brakes on foreclosures and halt post-foreclosure REO sales of properties in at least 23 states. Indeed, many title insurers have also suspended issuing title insurance policies for REO sales from these companies. Now, according to the New York Times, lawmakers in Washington and many states are calling for a freeze on all foreclosures. Foreclosure Furor Rises; Many Call for a Freeze, Oct 5, 2010.

At issue are flawed or false affidavits – sworn statements by the lenders’ employees who were to have reviewed the files for accuracy and correct documentation. Rather than actually review the files, these companies allegedly used “robo-signers” — employees who signed thousands of affidavits per month with no knowledge of the content and, in many cases, without even bothering to read the Affidavits.

Some Affidavits dealt with lost or missing assignment of mortgages. The bank that made the original loan often assigned or sold their loan to another bank. That bank, the new owner of the mortgage, must prove to the court that they have standing to file the foreclosure action; in other words, they are the proper party with an appropriate interest to foreclose.  They need to produce the original Assignment of Mortgage document as proof. During the hay-day of loose lending practices, many banks lost or even never had the original Assignment of Mortgage documents.

The solution: sign an affidavit that swears that the bank keeps original documents like this and the signer can’t find the original after a thorough search and investigation for the lost affidavit.

The problem: the person signing that affidavit allegedly never made a thorough investigation and has no knowledge of the file. How could he when he signed thousands every month.

In most foreclosures, the home owner never contests the foreclosure action because the homeowner had stopped paying many months earlier. These flawed affidavits usually present only procedural flaws, not real defenses on the merits. Thus, they likely only serve to slow the process and delay the inevitable.  In some cases, however, the injustice may rise beyond a lack of due process. 

No one knows the affect that this temporary moratorium will have on the real estate market or the foreclosure crisis. Yet, it certainly has created more risk and costs for lenders during the foreclosure process.  One affect may be to encourage lenders to seek foreclosure alternatives, such as short sales and deeds in lieu of foreclosure. Only time will tell.

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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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The percentage of Dane County home sales that involved distressed properties increased to over 25% in the first quarter of 2010. Wisconsin is not immune from the national foreclosure crisis. The good news, however, is that Wisconsin’s woes don’t compare to the hardest hit states and our housing market continues to outshine the national averages.

Nevertheless, a large percentage of Dane County sales in the first quarter of 2010 were foreclosure related.  Indeed, the Distressed Property Index, developed by Homested Title and Dan Miller, indicates that distressed properties account for over 25% of all Dane County sales.  

The Distressed Property Index measures the ratio of foreclosure filings to total home sales in Dane County. The index provides an estimate of the number of distressed properties sales in the overall market. A distressed property is one that has gone through some stage of the foreclosure process.

In March, the index topped 25%, suggesting that more than 25% of Dane County sales involved a distressed property.

The Index was created by Peter Zarov and Dan Miller as a way of providing critical information for Buyers, Sellers, and their agents.

The Index is published on a monthly basis at the Wisconsin State Journal and on Danecountymarket.com.

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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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Home Affordable Foreclosure Alternatives Program (known as HAFA) went into effect on April 5, 2010. HAFA allows owners to participate in a “short sale” with standardized procedures and expedited timelines. Short sales are traditionally the hardest and longest transactions to complete and involve dozens of hours of phone calls and paperwork and a very high level of expertise. HAFA, it is hoped, will streamline this process. It is important to note, however, that HAFA does not replace the traditional short sale. Rather, it is a stream-lined short sale process that applies to specific owners who have mortgages with specific, participating lenders.

HAFA Is Not For Everyone

HAFA is not a mandated program that all lenders must follow. Nor does it apply to all distressed home owners. HAFA only applies to lenders that voluntarily participate in the HAMP Mortgage Modification Program. The good news is that this includes most major, national lenders, such as: Citi, Bank of America, Wells Fargo, GMAC Mortgage, Chase, Litton, and many others. The bad news is that the program does not apply to Fannie Mae or Freddie Mac loans, which account for a huge percentage of home loans. Nor does it apply to most smaller, local lenders.

In addition, the program does not apply to the following:

  • Loans originated after January 2009,
  • Loans with a balance over $729,750,
  • Property that is not the seller’s principal residence,
  • Loans where the total monthly mortgage payment does not exceed 31% of the seller’s gross income.

In other words, HAFA may make a difference for some distressed home owners. But, it may not even apply for a large group of owners and their lenders. In that case, the traditional short sale process may still be a viable option.

How It Works

HAFA is a short sale program designed to work with the Federal home loan modification program called HAMP. The HAMP program is intended to allow distressed homeowners to stay in their homes by using mortgage modifications that lower their monthly payment. The Federal government recognized that many (if not most) homeowners either did not qualify for HAMP or could not even pay the lowered mortgage payment. HAFA is intended to offer these home owners an option to sell their home through a streamlined short sale process.
Traditional Short Sale

In a traditional short sale, the home owner needs to request a short sale from the lender. The process, in a nutshell, goes something like this:

  1. Sellers and/or Realtor contact lender and initiate discussions about short sale.
  2. Sellers collect reams of documents to prove to the lender that they cannot pay the mortgage.
  3. The Realtor lists the property and tries to find a buyer, having no idea how much the lender will demand or what purchase price will be enough for a short sale.
  4. Once a buyer has signed an offer to purchase, the seller submits a “short sale package” to the bank. The package contains all financial information and documentation showing the seller is unable to pay and the offer to purchase.
  5. The bank often (usually) requests additional documents and follow up documents and it can take many efforts, phone calls and faxes to finally confirm that the bank has what it needs.
  6. The Seller, Realtor, and perhaps attorney spend weeks or months negotiating with the bank over the terms of the short sale, including the purchase price, what closing costs and commissions will or will not be paid, how much money the seller might need to contribute at closing, and whether the bank will forgive the debt or demand a deficiency after closing.
  7. The Bank finally approves the short sale based on the purchase price, offer to purchase, and any amendments that needed to be negotiated to get bank approval;
  8. The sale finally closes.

This process can take months, and in some cases more than a year. Every lender has slightly different requirements and they each handle transactions differently. Most short sales require dozens upon dozens of long phone calls and an unbelievable level of persistence, patience, and hard work. And, Sellers and Realtors must repeat this process for every second mortgage. Up Until the moment of closing, the seller may not know if the lender will demand a deficiency. If the lender does demand a deficiency, the Seller will still owe the bank after closing.

HAFA Short Sale Process

HAFA is intended to streamline and standardize the procedures for short sales. The HAFA process goes something like this:

  1. Seller applies for mortgage modification through HAMP program and is either denied or misses payments;
  2. The lender must proactively notify the Seller about the option of a HAFA short sale (or the seller can ask);
  3. The lender sends a Short Sale Agreement (SSA) and a blank document called a Request for Approval of Short Sale (RASS);
  4. The Seller has 14 days to sign the SSA and return it to the lender along with the Realtor’s listing agreement and a title search showing any other mortgages or liens;
  5. The Lender will inform the Seller (even before any buyer submits an offer) what it will take to get short sale approval – either a purchase price or the amount of proceeds needed
  6. Once a buyer has signed an offer to purchase, the Seller and Realtor have 3 days to fill out and submit the Request for Approval of Short Sale (RASS) to the lender.
  7. The lender has 10 days to accept or deny the RASS;
  8. Upon acceptance of the RASS, the Seller proceeds to closing.

The fact that we were able to summarize both processes into 8 steps does not mean that HAFA will be just like an ordinary short sale. Step one will require the seller to submit much of the same documents as a traditional short sale. Indeed, a Mortgage Modification also requires financial disclosures and reams of documentation. But, once this step is done, the rest of the process is much smoother, much faster, and standardized.

Differences Between HAFA and Traditional Short Sales

HAFA improves the short sale process in a number of important ways. But it also comes with some trade-offs. The following chart highlights the differences between HAFA and traditional short sales:

Traditional Short Sale

HAFA

The home owner generally does not make mortgage payments up to the date of closing. They live “rent free” during the short sale process. Under HAFA, the owner must make mortgage payments up to 31% of their income. Failure to pay the mortgage will disqualify the owner from participating in HAFA.
Lenders can demand a deficiency for the amount of the short-fall. In other words, the debt is not forgiven after closing. First-Mortgage lenders must waive the deficiency and must negotiate with second-mortgage lenders to waive their deficiency as well.
The Seller could receive no funds at closing. Sellers can receive “cash incentives” at closing for up to $3,000.
Lenders generally budget up to $3,000 to pay second mortgage holders. Lenders are given a government incentive of up to $6,000 to pay to second mortgage holders.
The property could be sold by a Realtor or For Sale By Owner (FSBO) Property must be listed with a Realtor.
Lenders can take as long as they wanted to approve or deny the short sale HAFA imposes strict and short time-lines on participating lenders
Lenders will not begin to “negotiate” a short sale or even initiate the process until a buyer has signed an offer to purchase Lenders must start the process at the time or even before the property is listed with a Realtor.
Lender does not give short sale approval until days before the closing. Lender must approve the short sale, including the amount they will receive within 10 days of receiving the accepted offer.

 

These differences are important to understand. More importantly, it is critical to understand that HAFA
does not replace the traditional short sale. It is an additional tool that applies to certain lenders and certain home owners.

Homestead Title is always available to answer questions and help you with your short sale closings. Look for additional posts in the coming days and weeks.

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