This presentation is for information purposesonly and is not legal nor specific advice to anyone person or reader
What happens when you default?• The note involved in a foreclosure or repossession is a contract. It is an "I Owe You": a promise and an obligation for you to pay the debt owed to the lender that financed your property.• The mortgage on the property, is the security for that debt. It is a lien.
Default Consequences• Default - Failure to pay a debt when it is due.• Acceleration - Allows a lender to demand payment of the total outstanding balance upon default.• Foreclosure - Lawsuit calling the entire note due and requesting a court ordered sale of the property to satisfy the note.
Mortgage Foreclosure Four Step Process1. Complaint2. Final Judgment3. Foreclosure4. Deficiency Judgment
Step 1 Complaint - Lender sues on non-payment of Note. • Complaint Includes 3 Documents. 1. Summons - directs you to answer the Complaint. 2. Complaint - describes why the bank is entitled to payment on the Promissory Note. 3. Lis Pendens – (means "pending litigation”) filed in the public records of county where property is located to give notice to anyone dealing with the property that a claim has been made against the property.
Step 2Final Judgment – (not a money judgment)1. Orders clerk of court to sell to highest bidder within 30 days if borrower does not redeem, (pay the full amount the bank proved is due).2. If the highest bidder bids less than the amount due to the bank, the bank can come back to court and request a Deficiency Judgment (a money judgment).
Step 3Foreclosure Sale• May occur "on the courthouse steps", in a courtroom, in a meeting hall, in a large hallway and more recently, on the Web.• Bidding starts at $100 and goes up from there.• Lender has a credit up to amount owed on mortgage.• Bank bids for the property to "protect" the collateral up to the amount (and usually beyond) the bank has determined the property is worth.• Usually gets sold to the bank for a mere $100 if no other bidders at the foreclosure sale.• Buyer pays DOC stamps based upon sales amount.
Step 4• Deficiency Judgment –• demands that, if the lender does not receive all amounts due from foreclosure sale, the remaining balance be paid by the borrower. • “appraisal value” - “judgment amount” + (costs, penalties, late fees) = DJ• FMV on the date of the sale is LESS than the total indebtedness of the mortgage = deficiency.• FMV on the date of the sale is MORE than the total indebtedness of the mortgage = NO DEFICIENCY.
How Acquired (not automatic)• File motion in foreclosure action for DJ – must have evidentiary hearing to prove sales amount was less than judgment amount.• Must be done within one year from date of foreclosure sale.• May also be obtained in separate breach of contract action on promissory note (5 years to bring such action).
When Does Lender Seek a DJ?• Is this Primary Residence or Investment property?• What are the lender’s assets?• Strategic Default?• Is there Private Mortgage Insurance?
What is PMIA down payment of less than 20% of the purchase price meansyour lender may require you to buy private mortgage insurance(PMI), which partially protects the lender against the risk ofdefault.protects lender for an amount equal to that 20 % differencebetween loan amount and value.Example: Value = $100,000 Financed = $100,000PMI covers 20 % of amount financed = $20,000Acts like a $20,000 lien on the property.
RESULT OF PMIOnce the Lender approves the Short Sale, it gets sent to PMI for theirapproval.Adds 2-3 weeks to the process.From buyer’s or seller’s perspective, PMI does nothing to improve the ShortSale process.
HOW IS A DEFICIENCY JUDGMENT TREATED FOR TAX PURPOSES?If the lender gets a deficiency judgment, the lender is not forgiving the loan.The homeowner incurs income tax liability for debt forgiveness if: • the lender does not seek a deficiency judgment or • the lender pursues the judgment but is unsuccessful
What is Cancellation of Debt?If you borrow money from a commercial lenderthat later cancels or forgives the debt, you mayhave to treat the cancelled amount as income fortax purposes.
WHY?loan proceeds are not treated as income because of the obligation to repay.When obligation is forgiven, the amount discharged is normally reportableas income because you no longer have an obligation to repay.The lender is usually required to report the amount of the canceled debt toyou and the IRS on a Form 1099-C, Cancellation of Debt.
Very simplified example.You borrow $10,000 and default on the loan after paying back $2,000.If the lender is unable to collect the remaining debt from you, there is aCANCELLATION OF DEBT of $8,000, which generally is taxable income to you.
What is Recourse Debt?1. Recourse debt is debt for which the taxpayer is personally liable. In the event ofdefault, "the lender can look beyond the collateral pledged for the loan and holdthe borrower accountable for the unpaid balance."2. When a lender takes over a property as part of a foreclosure, deed in lieu or aspart of a short sale in satisfaction of a recourse note "the deemed sale price will bethe LESSER of the FMV of the property at the time of foreclosure OR the amount ofsecured debt."3. If the taxpayers debt exceeds the FMV, (i.e. Short Sale) the difference is treatedas debt discharge income if it is forgiven.
What Is Non-Recourse Debt?1. Nonrecourse debt is debt where the lender can only look to the loancollateral (i.e. the property) in the event the taxpayers defaults on the loan.2. In a foreclosure, deed in lieu, the sale proceeds from the deemed sale is equalto the balance of the non-recourse debt.There is no debt forgiveness (thus no taxconsequence) when the note is a nonrecourse note.The importance of understanding the distinction between a non recourse debt anda recourse debt is that a foreclosure on property involving recourse debt couldresult in both a gain or loss from the sale of property, and debt discharge income
Is there a second mortgage?Another name for a second mortgage -- GiftSecond mortgage lenders and private lenders are more likely than firstmortgage holders to go after the borrowers by suing for default on theunderlying promissory note.
Remember the Note• Contract between lender and borrower that gives lender the right to sue in the event of default.• Liability under the note does not always get released upon a short sale.• In separate action brought under note – 5 years to acquire DJ
What Does the Future Hold?• As of January 2012 an estimated 368,000 foreclosure cases are pending in Florida courts.• The backlog of cases is expected to grow by another 380,000 cases by 2016.
Short Sale -Property sold for less than what’s owed• Seller lists the property with a Realtor.• Buyer must be found and contract executed.• Sale and purchase agreement along with the sellers financial information is sent to the lender for review (this is called the short sale package.)• Lender orders a Brokers Price Opinion on the property.• Once conducted, received, and reviewed, the file is assigned to a Loss Mitigation Specialist. (LMS)• LMS accepts, rejects, or counters the Buyers offer on the property.• Negotiation continues until deal approved or its falls apart.• Upon agreement, closing date is set for about three weeks away.
BEST CASES FOR SHORT SALE• Start the process as soon as payments are stopped.• Nice homes in nice neighborhoods are more likely to stick – Buyers seem more willing to negotiate• Homes with only one mortgage easiest to get approved• 2 loans with only one lender still have a chance of getting approved.• 2 loans with different lenders very challenging to get approved.• Easier if pay-off is not too short, less than 70% payoff are hard to get approved.
Documentation to get out of a loan is similar to what’s need forgetting a loan.• Hardship letter• Financials -NEVER ENGAGE IN MISSTATING INCOME AND ASSETS – THIS IS BANK FRAUD – FBI WILL PROSECUTE
Home Affordable Foreclosure Alternatives (HAFA) ProgramHAFA offers benefits that make the transition as favorable as possible:• Get free advice from HUD-approved housing counselors and licensed real estate professionals.• Unlike conventional short sales, a HAFA short sale completely releases mortgage debt after selling the property. The deficiency is guaranteed to be waived by the servicer.• HAFA has a less negative effect on your credit score than foreclosure or conventional short sales.• HAFA provides $3,000 in relocation assistance
• MUST BE “ARM’S LENGTH” TRANSACTION - A transaction in which the buyers and sellers act independently and have no relationship to each other. A willing buyer and a willing seller, each acting in his own self-interest ensures that pricing on transactions are the basis of fair market valuations. The buyers and sellers nor their Agents have any agreements written or implied (spoken or hinted) that will allow the Seller to remain in the property or regain ownership of property.
Fannie and Freddie DO NOT ALLOW servicers to negotiate commissionson short sales below the amount negotiated by the listing agent, unless thecommission exceeds 6 percent.
AS IS PURCHASE AGREEMENT• 5 days to inspect Starts when bank approves sale to buyer at agreed upon price.• Seller is obligated to provide utilities during the inspection period. Listing agent needs to ensure owner turns on power. If power is turned off and buyer chooses not to inspect, get waiver of that contingency in writing. AS IS CONTRACT DOES NOT ELIMINATE JOHNSON V. DAVIS DISCLOSURE REQUIREMENTS.
Closing the Transaction• Track buyer’s loan to ensure timely closing – 30 days very challenging Buyers need to get pre-approved for loan amount.• Track all typical inspections, disclosures for timeliness.• If loan appraisal comes in low – must renegotiate – can cause problems if there are extension limits.• Final HUD 1 approval – REQUIRED 24-48 hours prior to close – NO MAJOR CHANGES ALLOWED.
In Short Sales…Need 2 Releases toAvoid DJs• What does the Approval Letter say? • Does it say both the Mortgage AND the Note are being released?• Does the approval letter say the mortgage is being SATISFIED or simply released.• If mortgage is being satisfied, it should contain language that the underlying obligation under the note is paid in full.• Look for language in Approval Letter that “mortgage and note are being satisfied.”
Deed-In-Lieu• “a transaction in which a borrower, after default, conveys to its lender by absolute deed, title to real property pledged as security for the indebtedness.
Banks Prefer Short Sales•Don’t want to manageanother property
DIL Prerequisites• Can’t sell the property• Clean title • No second mortgages or liens against property • No judgments against borrower REMEMBER THE NOTE – Seller wants to be RELEASED from the note as part of consideration for the DIL.
Title Insurance Issues• Lenders and title companies share the same concerns about deeds-in-lieu: They are subject to judicial attack by:1. re-characterization as an equitable mortgage: • Deed must be an absolute conveyance • Grantors cannot remain in possession2. violation of the “clogging the equity” doctrine (i.e., use of DIL to prevent borrower from exercising its rights to redeem the property from a foreclosure sale): • Deed must be given freely without duress or coercion3. setting aside of the DIL as a fraudulent conveyance or preferential transfer under federal bankruptcy or state fraudulent transfer laws.
MERGERWhen a mortgage on lands and the equity of redemption in thesame lands become united in the same person, ordinarily themortgage is merged,-in other words, ceases to be an incumbrance.Should it be determined subsequent to the acceptance of a deed inlieu of foreclosure that inferior lienholders are claiming an interest inthe subject property, a merger of the mortgage estate into the feeestate could arguably eliminate the lenders ability to foreclose suchclaims.The mortgage released by the DIL may lose its superiority.
This Warranty Deed is given as an absolute conveyance of title,in consideration of the full cancellation by Grantee of Grantor’sliability for all debts, obligations, costs, and charges secured bythat certain Mortgage encumbering the above described propertyrecorded on November 7, 2007, in Official Records Book 6156,pages 2181-2190, of the public records of Volusia County,Florida, securing $40,000.00, including, without limitation, theindebtedness secured by said Mortgage; provided however, it isthe intent of the Grantee by acceptance of this Warranty Deed,that the lien of said Mortgage shall not merge with fee simple titleto the above described property, but rather shall continue in fullforce and effect notwithstanding that the Grantee shall be boththe holder of said Mortgage and owner of fee simple title.
Tips for RealtorsThings you can do to help minimize this lengthy process time:• Advise clients to contact their servicer as early as possible.• Ensure all customer financials are in PDF format.• Help clients complete all documentation accurately and as soon as possible.• Make sure the purchase offer is a legitimate offer and fully executed.• Submit the best possible purchase offer at fair market value.• Provide listing information and comparables to support the price.Frequent causes of delay to be aware of:• A change of buyer or agent at any time may require process to revert to an earlier step; notify client’s servicer immediately if there is any change.• Investor/mortgage insurance approval is needed if the servicer is not fully delegated to approve the short sale.• Release on a second lien must be received prior to issuing an approval letter.• If customer has filed bankruptcy, the trustee must provide a court document that approves the sale of the property.