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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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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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Congress Extends the Deadline to CLOSE

Last year, Congress passed a tax credit for first time homebuyers and many “long-time” homebuyers. This credit provided for two deadlines:

  • Receive a binding offer to purchase on or before April 30, 2010
  • Close the sale on or before June 30, 2010.

Lenders, title companies, and real estate professionals worked feverishly to close transactions before that June 30th deadline. All the while congress was working (less feverishly, we are sure) to pass an extension of the bill.

Hours before it was set to expire, the Senate finally approved an extension to the June 30 closing deadline for the homebuyer tax credit, The move will give buyers who signed a purchase agreement by April 30 more time to close and still receive the tax credit of up to $8,000. Once signed by the President, the new deadline will be Sept. 30, 2010.

This extension will benefit those home-buyers who’s deals stalled or financing ran into trouble.  Many homebuyers could not close on short-sales or other distressed properties because of delays in lender approval.  The extension will be a welcome relief to those buyers.


Buyers, Realtors, and other professionals should be aware that this extension only affects home buyers who are in a binding contract that was signed before May 2010. It will not benefit those potential homebuyers who are still shopping for a home.
Interest Rates at Historic Lows

Nevertheless, today’s unprecedented interest rates may amount to a savings almost equal to the tax credit. Indeed, in January, a home-buyer might have locked in on a 30 Year Mortgage at 5.4%, a wonderfully low rate by historical standards. Today, that same 30 Year Mortgage might be at 4.6%. On a $200,000 mortgage, this amounts to a monthly savings of about $97.75 or $4,600 in just four years. While the tax credit might not be available for those still shopping for a home, the savings are still there.

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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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The new Federal Program designed to aid distressed home owners went into effect on April 5, 2010. The HAFA Program is designed to assist distressed home owners in selling their home, even if they owe more than the home is worth. The program 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.

Homestead has provided some basic information on HAFA in a previous post. Click Here. And, we are always available to answer your short sale or foreclosure questions (relating to Wisconsin properties).

On March 26, the Federal government announced a few changes to HAFA including:

  1. Sellers who are relocating can receive up to $3000 as an incentive to close (the original amount was $1,500).
  2. Changing some of the requirements when a homeowner declares bankruptcy and allows them to apply for HAFA (if you are considering a short sale and bankruptcy, you really need an attorney!)
  3. Allows for certain home owners to apply for the HAFA program even if they have not previously applied for a HAMP loan modification.
  4. Clarifies how third-party vendors (negotiators) may be paid.

Bloomberg news recently reported that this new program could be a “game changer.” Indeed, MoodysEconomy.com predicts that the HAFA program may stave off nearly 1.5 Million foreclosures over the next 2 years. While this may be a positive over the long term, it could mean more short sales over the short term. This has the potential to dampen sales prices in certain markets.

One key provision of HAFA is that it REQUIRES the use of a Realtor. All short sales are difficult and require expertise and the federal government recognizes that licensed Realtors will need to be a part of the transaction. Likewise, it is critical to use a title company with an incredibly high level of expertise and experience. Homestead Title has closed hundreds of distressed properties over the last 3 years and provides guidance and expertise whenever appropriate.

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 Question: What are the Tax implications when a lender forgives debt in a foreclosure or short sale?

Answer: The short answer – Ask an accountant! The long answer is that the forgiven debt may or may not be taxable. Normally, debt that is forgiven or cancelled by a lender must be included as income on a tax return. But the Mortgage Forgiveness Debt Relief Act allows owners to exclude certain cancelled debt on their principal residence from income. It only applies to “qualified principal residences,” and the law expires at the end of 2012. So, if the bank forecloses or agrees to a short sale and forgives debt, and the owner lives in the home as his principle residence, the IRS suggests that the debt will likely not be taxable. For more information, go to the IRS website or IRS Publication 4681.
 

Question: Why are some banks taking so long to approve Short Sales?

Answer: Lenders are completely overwhelmed and understaffed. The foreclosure crisis struck quickly and grew at a staggering pace – too fast for lenders to keep up. There were nearly 2 MILLION foreclosure filings in the first half of 2009 alone. A large lender may have a few hundred loss mitigators. Dane County saw over 1,400 foreclosures in 2009. That is one relatively small county out of thousands nationwide. Lenders simply can’t keep up. At the same time, they can’t keep up with defaults and late payments. It is taking lenders longer than ever to deal with customers in default, start the foreclosure process, and push the foreclosures to completion.

Question: If a Realtor hires a third-party negotiator, can the Agent be held liable for that negotiator’s actions?

Answer: Probably. Third-party negotiators often charge their fee from the agent’s commission. Some go further and contract only with the agent for their services. In this case, the negotiator is essentially a sub-agent of the Realtor and the Realtor may very well be liable for the negotiator’s actions. This is a question for the Realtor’s broker or legal counsel.

Question: Are agents allowed to hold offers, if the bank hasn’t looked at them yet, and play offers against each other until the bank examines the offers?

 Answer: An agent can delay submission of an accepted offer, but doing so is not likely in the client’s best interest. By delaying submission, the Agent would be delaying initiation of the short sale process. In addition, a seller cannot accept multiple primary offers.  Only one offer can be accepted and any other offers would be in secondary position. Thus, there should be little reason to delay submission. There is some disagreement as to whether agents should submit secondary offers.  Many experienced agents suggest submitting only one offer and suggest that submitting multiple offers only slows the process.  Other agents suggest that the secondary offer, if better, improves your chances on two levels: one, it is a better offer, and it also shows sincere marketing efforts.   

Question: Short Sale are high risk, take incredible effort and long hours, often result in reduced commission, and often involve angry sellers. Why would any sane Realtor touch one of these?


 Answer:
Short Sales, Foreclosures and REOs comprise anywhere from 20-30% of the sales market in Dane County and will continue to be a large part of the market for quite some time to come. Distressed properties are hard, but they are also a fantastic opportunity.  Realtors who commit to this are having their best years ever.  Those agents are careful about which short sales they will take and avoid those that will just be impossible to close.  And they develop systems and shortcuts that make the overwhelming work manageable.  Agents can do more than survive, while truly helping sellers and buyers. The key is to stay educated, develop efficient systems, and work with a team of experts. The most important member of your team is a nimble, experienced title company, like Homestead Title.

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Two Common Questions:
1. Can a short-sale seller accept multiple offers until the lender approves the sale?
2. Can a first time homebuyer claim the Tax Credit if the short sale lender has not accepted the offer before April 30, 2010.

A common misconception with Short Sales is that the seller’s lender must agree to the Offer to Purchase. Buyers, Sellers, and Agents treat the banks “approval” as if it is a precondition to a valid offer. Thus, sellers often accept multiple offers, believing there is no accepted offer until the bank agrees to the offer. Buyers may believe that they won’t receive their First Time Home Buyer Tax Credit if the bank doesn’t approve the offer prior to the April 30 deadline. (Click here For more information about the First Time Homebuyer Tax Credit).

The Bank Is Not A Party
A short sale lender is not a party to the sale transaction. Nevertheless, you will need their approval to close. The approval, however, is simply their approval to accept less money than they are owed. They do not get to sign the offer nor are they parties to the offer. Lender approval may or may not be a contingency in the offer.  If it is not a contingency, it is hard to make an argument that there is not a “Binding Contrac.”  Even if it is a contingency, there is a strong argument that there is a “binding contract” – it is just subject to a contingency.  (NOTE: Consult an Attorney or Accountant for your own circumstances).

Thus, a seller who accepts two offers to purchase (without a provision that one offer is a “Secondary Offer”) has likely breached one or both of his contracts. And, on a positive note, a buyer who receives an accepted offer to purchase from a seller prior to April 30, 2010, may qualify for the Tax Credit even without the short-sale lender’s approval.  An eligible taxpayer must buy, or enter into a “binding contract” to buy, a principal residence on or before April 30, 2010.  The IRS has not explicitly defined the term “binding contract.”   Nevertheless, when a buyer and seller sign the offer, they have created a contract, with or without short sale approval — short sale approval is just one of many contingencies, including inspection, testing, title, and financing contingencies.   Whether this contract is ‘binding’ as defined by the IRS is unknown.  There is a good argument that the buyer would not be disqualified from the tax credit solely because the bank approval contingency is met after April 30th.  Nevertheless, any buyer encountering this issue should consult with an attorney, accountant, and/or tax advisor. We cannot say whether the IRS will interpret a contract to be binding before bank approval.

Feel free to contact Homestead Title if you have any Short Sale questions.

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An Ohio man, facing foreclosure, took matters into his own hands.

Terry Hoskins said he’d received an offer to purchase the home for $170,000 — enough to pay off the house — which was in foreclosure and subject to multiple Federal Tax Liens. The bank refused, saying they could get more from selling it in foreclosure.

Hoskins refused to give in, telling the bank “I’ll tear it down before I let you take it.” And that’s exactly what Hoskins did.

The Moscow, Ohio man used a bulldozer to level the home he had built years earlier.

“As far as what the bank is going to get,” Hoskins declared, “I plan on giving them back what was on this hill exactly (as) it was.”

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