Foreclosures & Foreclosure Alternatives.pptx

The Real Estate School of Nevada
CE.7008000-RE (Classroom)
3 hours – General
©Copyright 2021 Real Estate School of Nevada. All Rights Reserved. 1

The Law (30 min.)
 All the foreclosure-related activities in this class,
when completed by real estate agents, are governed
by the law.
 Know the Law and Know what You are Doing.
 It is very easy to go from licensed agent completing
legal activities to foreclosure consultant performing
illegal activities.

NRS 645F Addresses:
 Foreclosure Consultants;
 Foreclosure Purchasers;
 Loan Modification Consultants; and
 Persons Performing Covered Services For
Compensation

Foreclosure consultant defined (NRS 645F.300)
 “Foreclosure consultant” means a person who, directly or
indirectly, makes any solicitation, representation or offer to a
homeowner to perform for compensation, or who, for
compensation, performs any covered service that the
person represents will do any of the following:
1. Prevent or postpone a foreclosure sale;
2. Obtain any forbearance from any mortgagee or beneficiary of a
deed of trust;
3. Assist the homeowner to exercise the right of reinstatement
provided in the legal documents;
4. Obtain any extension of the period within which the homeowner
may reinstate the homeowner’s obligation;

Foreclosure consultant defined
5. Obtain any waiver of an acceleration clause contained in any
promissory note or contract secured by a mortgage on a residence
in foreclosure or included in the mortgage or deed of trust;
6.Assist the homeowner in foreclosure or loan default to obtain a
loan or advance of money;
7.Avoid or ameliorate the impairment of the homeowner’s credit
resulting from the recording of a notice of default or the
conduct of a foreclosure sale;
8.Save the homeowner’s residence from foreclosure; or
9.Assist the homeowner to obtain a foreclosure reconveyance.

“Foreclosure purchaser” defined. NRS 645F.330
 “Foreclosure purchaser” means a person who, in the course of his or
her business, vocation or occupation, acquires or attempts to acquire
title to a residence in foreclosure from a homeowner.

“Loan modification consultant” defined. NRS 645F.365
 “Loan modification consultant” means a person who, directly or
indirectly, makes any solicitation, representation or offer to a
homeowner to perform for compensation, or who, for compensation,
performs any act that the person represents will adjust the terms of a
mortgage loan in a manner not provided for in the original or
previously modified mortgage loan. Such an adjustment includes,
without limitation:
1. A change in the payment amount;
2. A change in the loan amount;
3. A loan forbearance;
4. A change in the loan maturity; and
5. A change in the interest rate.

“Covered service” defined. NRS 645F.310
 “Covered service” includes, without limitation:
1. Financial counseling to a homeowner, including, without limitation,
debt counseling and budget counseling.
2. Receiving money for the purpose of distributing it to creditors in
payment or partial payment of any obligation secured by a
mortgage or other lien on a residence in foreclosure.
3. Contacting a creditor on behalf of a homeowner.
4. Arranging or attempting to arrange for an extension of the period
within which a homeowner may cure a default and reinstate an
obligation pursuant to a note, mortgage or deed of trust.
5. Arranging or attempting to arrange for any delay or postponement
of the time of a foreclosure sale of a residence in foreclosure.
6. Advising a homeowner regarding the filing of any document or
assisting in any manner in the preparation of any document for filing
with a bankruptcy court.

“Covered service” defined. NRS 645F.310
7. Giving any advice, explanation or instruction to a homeowner which in
any manner relates to the cure of a default in or the reinstatement of
an obligation secured by a mortgage or other lien on a residence, the
full satisfaction of the obligation, or the postponement or avoidance of
a foreclosure sale.
8. Arranging or conducting, or attempting to arrange or conduct, for a
homeowner any forensic loan audit or review or other audit or review
of loan documents.
9. Arranging or attempting to arrange for a homeowner the purchase by
a third party of the homeowner’s mortgage loan.
10. Arranging or attempting to arrange for a homeowner a reduction of the
principal of the homeowner’s mortgage loan when such a mortgage
loan is held by or serviced by a third party.
11. Providing the services of a loan modification consultant.
12. Providing the services of a foreclosure consultant.

Highlights of the Law NRS 645F
 NRS 645F.390 requires a license for:
 A person who performs any “covered service: for
compensation;
 A foreclosure consultant; and
 A loan modification consultant.
 NRS 645F.392 written contract required:
 A person who performs any covered service for compensation
shall execute a written contract with a homeowner before
providing any covered service.
 regulations exist describing the information that must be
contained in the written contract
 Contract must be executed before receiving compensation
(NRS 645F.405)

 NRS 645F.396
 Addresses record keeping requirements
 Requires procedures for dealing with complaints

 NRS 645F.397 disclosures required:
 “[Name of company] is not associated with the government, and our
service is not approved by the government or your lender.”
 “Even if you accept this offer and use our service, your lender may not
agree to change your loan.”
 “You may stop doing business with us at any time. You may accept or
reject the offer we obtain from your lender [or servicer]. If you reject the
offer, you do not have to pay us. If you accept the offer, you will have to
pay us [insert total amount or method of calculating the total amount] for
our services.”
 “If you stop paying your mortgage, you could lose your home and
damage your credit rating.”
 preceded by the heading “IMPORTANT NOTICE,” printed in at least 14-
point bold type
 Required on each general communication; at least 12-point font
 Additional disclosures listed in 645F.398

 NRS 645F.400 Prohibited acts.
1. A person who performs any covered service shall not:
(a) Claim, demand, charge, collect or receive any compensation
except in accordance with the terms of a contract for covered
services.
(b) Claim, demand, charge, collect or receive any fee, interest or
other compensation for any reason which is not fully disclosed to
the homeowner.
(c) Take or acquire, directly or indirectly, any wage assignment, lien
on real or personal property, assignment of a homeowner’s equity,
any interest in a residence or other security for the payment of
compensation. Any such assignment or security is void and
unenforceable.
(d) Receive any consideration from any third party in connection with
a covered service provided to a homeowner unless the
consideration is first fully disclosed to the homeowner.

(e) Accept a power of attorney from a homeowner for any
purpose, other than to inspect documents as provided by law.
(f) Make any representation, express or implied, that a
homeowner cannot or should not contact or communicate with his
or her lender or servicer.
(g) Misrepresent any aspect of any covered service.
(h) Make any representation, express or implied, that a covered
service is affiliated with, associated with or endorsed or approved
by:
(1) The Federal Government, the State of Nevada or any
department, agency or political subdivision thereof;
(2) Any governmental plan for homeowner assistance;
(3) Any nonprofit housing counselor agency or program;
(4) The maker, holder or servicer of a homeowner’s mortgage
loan; or
(5) Any other person, entity or program.

 NRS 645F.410 Fines:
 Commission may impose a fine up to $25,000
 In addition to other administrative penalties
 NRS 645F.420 Homeowner Action:
 Homeowner may sue in court for legal remedies
 NRS 645F.430 Deceptive purchaser:
 A foreclosure purchaser who engages in any conduct that operates as a
fraud or deceit upon a homeowner in connection with a transaction that is
subject to the provisions of NRS 645F.300 to 645F.450, inclusive,
including, without limitation, a foreclosure reconveyance, is guilty of a
gross misdemeanor and shall be punished by imprisonment in the county
jail for not more than 364 days, or by a fine of not more than $50,000, or
by both fine and imprisonment.
=P~

 NRS 645F.440 Rescission
 If a foreclosure purchaser engages in any conduct that operates as a
fraud or deceit upon a homeowner in connection with a transaction that is
subject to the provisions of NRS 645F.300 to 645F.450, inclusive,
including, without limitation, a foreclosure reconveyance, the transaction
in which the foreclosure purchaser acquired title to the residence in
foreclosure may be rescinded by the homeowner within 2 years after the
date of the recording of the conveyance.
 The process is outlined in the regulation.
=P~

Foreclosure & Foreclosure Alternatives (10 min.)
 Facing foreclosure?
 What are homeowners’ options?
 Let the Bank Foreclose
 Short Sale
 Loan Modification
 Deed in Lieu of Foreclosure
 Homeowners should look at the situation more from a financial
standpoint rather than an emotional one.
 One very important thing to remember: Time is of the essence!
 It's time to think through the situation and decide.
 Then, act right away so they have enough time to complete the
solution THEY choose.
 Be cautious to not overstep your bounds. Do not offer legal
advice.

Foreclosure & Foreclosure Alternatives
 10 options when facing foreclosure:
1. Do Nothing
2. Payoff or Refinance
3. Reinstatement
4. Loan Modification
5. Mediation
6. Partial Claim
7. Deed in Lieu of Foreclosure
8. Bankruptcy
9. Sale
10. Short Sale

1. Do Nothing
 If a homeowner does nothing, he or she will most
likely will lose the home at foreclosure auction.
 Credit reports disclose this damaging information.
 Loan applications generally ask if the applicant has
ever been foreclosed upon.

2. Payoff/Refinance
 Completely pay off the entire loan amount plus any default
amount and fees
 Usually this is accomplished through a refinance of the debt.
 New debt is normally at a higher interest rate and there may be a
prepayment penalty.
 With this option, there should be equity in the home.
3. Reinstatement
 Pay the entire default amount plus interest, attorney
fees, late fees, taxes, missed payments and fees.

4. Loan Modification
 Utilize the existing mortgage company to refinance the debt
or extend or modify the terms of the loan.
 To qualify, you must prove to the lender you have fixed the
problem that caused the late payment history.
5. Forbearance/Mediation
 The lender may be able to arrange a repayment plan based
on the homeowner's financial situation.
 The lender may even be able to provide a temporary
payment reduction or suspension of payments.
 Information will be required from the lender to show ability
to meet the new payment plan requirements.

6. Partial Claim
 A loan from the lender for a 2nd loan to include back
payments, costs and fees.
7. Deed in Lieu of Foreclosure
 Give the property back to the bank instead of the bank
foreclosing.
 Banks generally require the home be well maintained,
and all mortgage payments and taxes must be current.
 Banks must approve this option.
 Most loan applications ask if this has ever happened.

8. Bankruptcy
 This option can liquidate debt and/or allow more time.
 Speak with a qualified bankruptcy attorney.
 Chapter 7: (Liquidation) to completely settle personal
debt
 Chapter 13: (Wage Earner Plan) payments are made
toward a plan to pay off debts in 3 years.
 Chapter 11: (Business Re-Organization) A business
debt solution. Generally, value in excess of $1.2 million

9. Sale
 If the property has equity (after all loans and monetary
encumbrances are paid), the homeowner may sell the
home without lender approval through a conventional
home sale.
10. Short Sale
 Also known as a pre-foreclosure sale, a short sale can be
negotiated with the lender by a real estate professional if
what is owed is more than the property's value (“upside
down”).
 The lender can agree to accept less than what is owed on
the property as pay-off of the loan obligation.

The Foreclosure Process (35 min.)
 Judicial vs. Non-judicial Foreclosure
 Judicial Foreclosure
 Lender must file a lawsuit asking the court to order a
foreclosure sale
 Used when no “power of sale” clause exists
 Then home is auctioned to the highest bidder
 Homeowner may have up to 12 months after the sale
to redeem the property (statutory right of redemption) if
judicial foreclosure is used
 Judicial foreclosure is available in Nevada.

The Foreclosure Process
 Judicial vs. Non-judicial Foreclosure
 Non-judicial Foreclosure
 Primarily used in Nevada
 Used with a deed of trust and a power of sale clause
exists
 Borrower has already agreed to allow a foreclosure
sale in the event of default, so the process is faster
 Sale executed by the lender or a trustee
 No right of redemption if non-judicial foreclosure is
used
 Non-judicial foreclosure is available in Nevada.

 Mortgages vs. Deeds of Trust
 Mortgage
 Contract which creates a monetary lien against real
property
 Most frequently used in the states east of the Rocky
Mountains
 Two parties to the mortgage
 The mortgagor who is the borrower, and
 The mortgagee who is the lender

 Deed of Trust
 A contract which creates a monetary lien against real property
 Are most frequently used in the states west of the Rocky Mountains
 Three parties:
 The trustor (the borrower)
 The trustee (an independent third party chosen by the lender)
 The beneficiary (the lender)
 Trustee holds naked title to the property and has been given the
power of sale by the trustor (borrower)
 If the borrower defaults, the lender may order the trustee to
exercise the power of sale and commence foreclosure
proceedings against the property.

 The borrower’s obligations in a mortgage or deed of trust:
 Make the required payments of principal and interest when due
 Pay the property taxes when due
 Keep the property insured against loss through fire, windstorm, and other
casualties
 Keep the property in good repair
 Make no alterations to the property which would decrease its value

 A Summary for Non-judicial Foreclosure:
 NRS 107 is the governing law for deeds of trust (NRS 106 for
mortgages)
 NRS 107.080 addresses foreclosure trustee sales

 A Summary for Non-judicial Foreclosure:
 Lender (beneficiary) instructs the trustee to exercise the power of sale
because of the default
 Trustee collects all necessary documents, orders a title search, identifies
all lien holders and other parties entitled to receive a notice of the
foreclosure
 Notice of Default is prepared, recorded, published, posted, and mailed
to all concerned parties
 Borrower has 35 days from the day after recording of the notice to
reinstate the loan including all expenses (reinstatement period)
 Once the 35 days has expired, the trustor enters the second phase of the
foreclosure and has 3 months from the date of the recording of the
Notice of Default to redeem the property by paying the full amount of the
loan plus all allowable expenses to date.
 This can be expedited to 60 days for an abandoned property

 The trustee must provide to each interested party the Notice of
Sale (notice of trustee sale) to last known address
 The notice of sale must also be posted in a public place 20 successive
days in the county where the property is located
 The notice must also be published (advertised in a local newspaper)
once a week for 3 consecutive weeks.
 If a residential foreclosure, notice of default must be posted on the
property itself for 100 days before the date of sale; and
 notice of sale must be posted on the property for 15 days before the
date of sale
 Notice must be delivered to any tenant no later than 15 days before
the date of sale
 Notice must indicate borrower’s right to participate in a mediation
program and the right to waive the mediation
 Right to mediation could run concurrently with the foreclosure
process

 Effective July 1, 2009, along with the NOD, the owner will also receive
information about the Nevada Foreclosure Mediation Program (FMP).
 Law AB 149
 Under the law, owner-occupied owners can request mediation prior to
foreclosure sale.
 The request must be made within 30 days from the date the NOD was
mailed to the Owner by the Trustee.
 To request the mediation, the owner must return the “Election/Waiver of
Mediation Form” along with a cashier’s check for $200.
 The lender will also be required to pay the same fee.
 The mediation must be held within 90 days of filing of the NOD and the
lender is required to have a representative with “decision making authority”
present at the mediation.
 The owner will need to come prepared to show their financial status by
preparing a “Financial Statement” and a “Housing Affordability
Worksheet”.

 What Happens at Mediation?
 The mediator will seek to determine:
 Can the owner afford to stay in the property if some concessions are
made on the Lender’s part
 Can the Lender make the concessions necessary.
 The process is to come up with a Win-Win solution to a difficult
situation, if such a solution can be reached while being fair to all
parties.

 The borrower can stop the foreclosure sale by filing an intent to
cure at least 15 days prior to the sale and bring the loan current
by noon before the auction sale.
 Sale is held; auctioned to the highest bidder
 Trustee Sale is held on the exact day stated in the Notice of
Trustee Sale
 The sale deprives the homeowner of all interest in the property
and there is no right of redemption.
 From date of sale, trustee has 20 days to deliver deed and bidder
has 10 days to record it
 Lenders have 3 months to pursue a deficiency judgment

 Deficiency Judgment
 Should the proceeds received by the lender at the auction sale be
less than the sum due (or deficient), the lender has the right to
sue for a deficiency judgment.
 A foreclosure sale, may not forgive all.
 lender can sue and obtain a deficiency decree against any other
real and personal property assets of the borrower to satisfy the
remainder of the debt

 Requirements of Purchaser at Trustee Sale
 If a vacant property: (NRS 107.110)
 Purchaser has an obligation to maintain the exterior which
includes:
 Foliage
 Trespassers
 Mosquito larvae
 Anything that creates a public nuisance
 Must start correction within 14 days of notice and complete
within 30 days
 Subject to fines of $1,000 per day
 Entitled to a hearing

 “Homeowner's Bill of Rights” (SB321, Chapter 403)
 Creates requirements for foreclosure mediation while setting up civil penalties for
lenders who fail to follow required servicing requirements
 Effective as of October 1, 2013, and will apply to the foreclosure process wherein
the Notice of Default is recorded on or after that date
 Provides for the borrower to be allowed to participate in the Foreclosure Mediation
Program (FMP) if the servicer/lender is pursuing a judicial foreclosure
 Previously, the FMP was available only to homeowners subject to non-judicial
foreclosure
 Lenders must provide the homeowner with additional information including all the
following 30 days prior to filing the Notice of Default:
 A mandatory statement for service members and service members’ dependents outlining
specific rights that may apply;
 A summary of the loan account; the summary must include all relevant information related
to the loan and contact information for inquiries regarding the loan;
 A statement that sets forth the facts that establishing the lender’s right to foreclose;
38
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 A statement that lists foreclosure prevention alternatives that are provided by the specific
lender; and
 A statement that notifies the borrower of the right to request copies of the promissory note,
the deed of trust, any assignments of the loan, and the payment history for a required time
period.
 Prior to recording the Notice of Default, the lender must communicate directly with the
borrower or show proof of attempted communication. This section prohibits foreclosure
proceedings unless a servicer complies with all of the requirements for contacting
distressed borrowers. Servicers will have to make repeated attempts to contact the
borrower by phone and by email and must be able to document those attempts, how
many were made, who they spoke to, when there were no replies, etc. A borrower can
file a lawsuit forcing the lender to prove that they took all the necessary steps and have
all the supporting documentation to demonstrate compliance. Failure to do so may
result in the process beginning all over again.
 No more “dual-tracking.” This provision prohibits a lender from pursuing foreclosure
while the borrower is pursuing a foreclosure prevention alternative, such as “loan
modification” or “short sale.” Also, it will prevent the pursuing of foreclosure by the
lender while the borrower is current under his obligations of a prevention alternative
such as loan modification (i.e. the “90-day trial period”).
39

 The lender MUST provide the borrower with a “Single Point of Contact”
(SPC) and a direct line of contact to the SPC, if the borrower requests a
foreclosure prevention alternative. The SPC must have specified
“authority and ability.”
 The bill provides a time frame in which a borrower can request a review if
the borrower is denied for a foreclosure prevention alternative.
 Also, SB 321 changes the foreclosure timeline as follows:
 SB 321 forces the dismissal of a judicial foreclosure, or the rescission of a
Notice of Default, in ALL the following situations:
 If the borrower accepts a permanent foreclosure prevention alternative;
 If the notice of sale is not recorded within 9 months after the recordation date
of the Notice of Default;
 If the foreclosure sale is not conducted within 90 days following the recordation
of the Notice of Sale.
 If any of the new rules set forth by SB 321 are violated, the bill
provides remedies to the Homeowner.
40

Short Sale (20 min.)
 What is a Short Sale?
 The process by which a homeowner can sell the home
while the sales proceeds do not fully pay off the existing
loans(s)
 The lender accepts a discounted payoff to satisfy the loan
 Sells “short” of what is due
 Requires providing proper documentation to the lender to
 If the sale is approved, the home can be sold for a price
lower than the total debt without the seller be required to
cover the shortfall.
 The mortgage is either fully or partially satisfied and any
foreclosure process stops.

Short Sale
 Qualifying the Seller:
 There are other “qualifications” that will come into play other than the
lender allowing the “shorter” payoff.
 The seller also has to agree to specific terms. In some cases:
 May be asked the bring money to the table (often seen in a 2nd loan
situations)
 May be asked to execute a promissory note agreeing to make payments
 Will have to agree to the credit terms or how the short sale is listed on
the approval letter
 There may be other liens on the property or attached to the seller
preventing the home from passing clear title.

Short Sale
 Elements of a Probable and Proper Short Sale
 The property is worth less than is owed
 The seller has some hardship that makes it impossible or extremely
impractical to keep the property
 The seller is cooperative and willing to work with a real estate broker to
package the short sale
 The lender is contacted who expresses willingness to entertain a short
sale
 The property is listed, with appropriate caveats and protections for the
seller, properly priced, and effectively marketed
 The lender is presented with an offer, accepted by the seller, along with a
completed short sale package and narrative explaining why the short
sale is necessary and desirable
 The lender approves the offer and escrow closes as usual
 No proceeds go to the seller

Short Sale
 Why would the lender agree to accept a short sale?
 Legal concerns: Lenders have come under legal pressure to work
with borrowers to equitably resolve situations where borrowers are
unable to meet their mortgage obligation, particularly when the
borrower makes an effort to arrive at a compromise solution.
 Wall Street is watching: Lenders rely heavily on their ability to
package and sell bundles of loans on the secondary mortgage
market. They need to sell these bundles of loans in order to put the
funds back to work by loaning the money again and collect loan fees
along the way. If mortgages perform poorly after they are sold it
could impact the lender's ability to sell their loans on the secondary
market. A successful short sale gets the loan payoff resolved
quickly.

Short Sale
 Why would the lender agree to accept a short sale?
 Asset management expenses: If a lender acquires a property through
foreclosure, the property will be managed until it is repaired and resold.
It is expensive to manage real property assets. Keeping properties
maintained, keeping utilities on, making repairs, and the administrative
costs attached to these activities, are all costs the lender would prefer to
avoid. A successful short sale eliminates most of these costs.
 Reserve requirements: Delinquent and non-performing loans place
another burden on mortgage lenders. For all delinquent and non-
performing loans, lenders must set aside funds in reserve to deal with
potential losses. These funds cannot be put to work generating new loan
fees until the bad loans are resolved. A successful short sale lets the
lender put more money to work.

Short Sale
 Evasive Action
 Can I simply deed my property to someone else and
avoid the hassle?
 The lender still considers you primarily responsible for payment
on the loan. If loan payments do not get paid, or if the lender
ultimately forecloses, this will still show on your credit. Do not
deed your property to someone else without consulting with an
attorney.

Short Sale
 What sort of hardship would the lender consider legitimate?
 The seller must demonstrate a legitimate hardship.
 Generally, so long as the hardship is real and the mortgage company
believes the loan is likely to become delinquent as a result, the short
sale request will be processed by the Loss Mitigation Department.
 The key to getting the Loss Mitigation Department to accept a
hardship is to submit a strong hardship letter.
 Below is a list of "hardships" that are common and frequently
accepted by mortgage lenders.
 Family illness or injury
 Job loss or significant income loss
 Divorce or separation of domestic partners
 Death of spouse
 Adjustment in mortgage payment or unforeseen increase in living expenses

Short Sale
 How will a short sale affect credit?
 The key is to avoid foreclosure.
 A short sale will affect the homeowner’s credit rating, especially if
mortgage payments are missed during the process.
 A foreclosure is the most damaging event to credit status
 Can a borrower be considered for a short sale if loan payments
are current?
 Yes, however the required financial documentation must be
submitted along with a detailed hardship letter explaining the
inability to continue with loan payments and the reason behind
the short sale request.

Short Sale
 Why work with a real estate licensee?
 Getting a short sale approved by the lender is a complicated, multi-
step process.
 This requires a high level of patience, persistence and most
importantly, experience.
 The lender realizes that it is best for all parties to have the short sale
file packaged correctly from the very beginning, by a real estate
professional who does not have a conflict of interest.
 The homeowner gets professional representation at little or no cost
as the lender pays the real estate commission.

Short Sale
 How does the Mortgage Forgiveness Debt Relief Act of 2007
work?
 Prior to passage of this law, for any debt that was forgiven in a short
sale or foreclosure, the homeowner would receive a 1099 and would
have to report this forgiven (or cancelled) debt as income.
 This still holds true for those individuals who do not qualify for the
exceptions of the act.
 From January 1, 2007, to January 1, 2012, the act eliminated the
“phantom tax” on debt cancellation in mortgage discharge.
 Debt must have been debt incurred to acquire a principal residence
 Cancelled debt up to $2 million is eligible
 Sets forth rules for determining the allowable amount of exclusion for taxpayers
with non-qualifying indebtedness and taxpayers who are insolvent
 Debt from a second (non-acquisition) mortgage or HELOC is not eligible
 Cancelled debt from investment properties and second homes is not
eligible

Cancellation of Debt (20 min.)
 The following are the most commonly asked questions
and answers about The Mortgage Forgiveness Debt
Relief Act and debt cancellation:
 What is Cancellation of Debt?
 If the lender later cancels or forgives debt, the borrower may have to
include the amount as income for tax purposes, depending on the
circumstances.
 The lender is usually required to report the amount of the
canceled/forgiven debt to the borrower and the IRS on a
Form 1099-C, Cancellation of Debt.
 Example: The borrower borrows $100,000 and defaults on the loan
after having paid $20,000. If the lender is unable to collect the
remaining debt, there is a cancellation of debt of $80,000, which
generally is taxable.

Cancellation of Debt
 Is Cancellation of Debt income always taxable?
 Not always. There are some exceptions. The most common situations when
cancellation of debt income is not taxable involve:
 Qualified principal residence indebtedness; applies to most homeowners
 Bankruptcy: debts discharged through bankruptcy are not considered taxable
income
 Insolvency: If the borrower is insolvent when the debt is cancelled, some or all of the
cancelled debt may not be taxable. A person is insolvent when total debts are more
than the fair market value of all total assets.
 Certain farm debts: If the debt was incurred directly in operation of a farm, and more
than half the income from the prior three years was from farming, and the loan was
owed to a person or agency regularly engaged in lending, the cancelled debt is
generally not considered taxable income.
 Non-recourse loans: A non-recourse loan is a loan for which the lender's only
remedy in case of default is to repossess the property being financed or used as
collateral. Forgiveness of a non-recourse loan, resulting from a foreclosure, does not
result in cancellation of debt income. However, it may result in other tax
consequences. These exceptions are discussed in detail in Publication 4681.

 Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or
cancelled debts?
 No. The Act applies only to forgiven or cancelled debt used to buy, build or
substantially improve a principal residence, or to refinance debt incurred for
those purposes.
 In addition, the debt must be secured by the home. This is known as qualified
principal residence indebtedness.
 The maximum amount treated as qualified principal residence indebtedness
is $2 million or $1 million if married filing separately.
 Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred
to refinance a home?
 Debt used to refinance a home qualifies for this exclusion, but only to the
extent that the principal balance of the old mortgage, immediately before the
refinancing, would have qualified.
 For more information, including an example, see Publication 4681.

 How long is this special relief in effect?
 It applies to qualified principal residence indebtedness forgiven in
calendar years 2007 through 2012.
 The Mortgage Forgiveness Debt Relief Act was extended to 2014

 If the forgiven debt is excluded from income, do I have to report it on
my tax return?
 Yes. The amount of debt forgiven must be reported on Form 982 and this
form must be attached to the tax return.
 Must the entire Form 982 be completed?
 No. Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness (and Section 1082 Adjustment), is used for other purposes in
addition to reporting the exclusion of forgiveness of qualified principal
residence indebtedness.
 If using the form only to report the exclusion of forgiveness of qualified
principal residence indebtedness as the result of foreclosure on a principal
residence, one only needs to complete lines le and 2.
 If the homeowner kept ownership of the home and modification of the terms
of the mortgage resulted in the forgiveness of qualified principal residence
indebtedness, complete lines le, 2, and l0b.

Short Sale (20 min.)
 What about Tax Consequences?
 If the homeowner does not qualify for the above exclusions, the IRS
defines the amount "short" as having been “cancelled.”
 It is also required that the lender issue a 1099 for the shortage
amount and the borrower is required to claim this amount as income.
 If a property is foreclosed, this is also debt cancellation, and the
default amount can also be treated the same way.
 In most cases the amount of default with a foreclosure will be much
greater than with a short sale.
 This is one of many reasons why avoiding foreclosure is most likely
the better option.

Short Sale
 Will the lender pursue a deficiency judgment?
 In some cases, the lender will also pursue a deficiency judgment against
the borrower and attempt to collect the amount that was short.
 This requires a separate action to be filed in court causing the mortgage
company in incur further expense.
 The mortgage company is acutely aware of the borrower’s inability to pay
and often sees further collection as pointless.
 The lender also has the right to pursue a deficiency judgment in a
foreclosure.

 Common Elements of a Short Sale:
 A hardship letter
 Written by the sellers describing their circumstances
 The sellers should be as persuasive as possible in describing why the
sellers are in no position to continue with their financial obligations to the
lender.
 This letter can make or break the short sale.
 The reasons given by the sellers should be compelling and the sellers
should be both honest and frank in their disclosures to the lender.
 Include corroborating material.
 If the seller was fired, include the termination letter.
 If the seller has medical bills, summarize them.
 If the seller is ill or disabled, the seller should explain how it is impossible to
keep the property.
 If there are tax problems, the seller should describe and document them.
 If the property was damaged and not covered by insurance, as in several
recent natural disasters, the seller should document the damage and the
denial of the claim.
Short Sale

 A copy of the purchase contract and all supporting documents signed by
both the buyers and sellers
 Written proof of the buyers’ ability to purchase the property, i.e., a
completed loan application, pre‐approval by a lender or evidence of cash on
hand (a current bank statement)
 A copy of the certified escrow instructions
 An estimated net/closing statement (HUD1) certified by an escrow officer
who is acceptable to the lender. It is very important that this estimate be as
complete and accurate as possible. Many lenders will reference the closing
statement in their acceptance or rejection. An approval may state “Lender
will accept net proceeds of no less than $273,565 no later than November
30, 2013”. If the estimate of net proceeds is wrong for any reason, there
may need to be an attempt to renegotiate with the lender.
 A completed and signed IRS Form 4506, "Request for Copy of Tax Form”
Short Sale

 A completed and signed personal financial worksheet; this will
include assets such as other real estate, stocks, bonds, 401Ks, etc.
 Tax returns for the previous two years
 Employment paycheck stubs for the past two months
 Profit and Loss statement (if the seller is self‐employed)
 Bank statements for the past two to three months
 A completed Short Sale Application if the lender provides one; many
don’t
 A CMA/BPO with supporting sales data to show that the offer
presented is the best market price offer the lender is likely to receive
Short Sale

 A short narrative
 Written by the listing agent about the market and market trends in the
immediate area
 Highlight such data as average time on the market, number of short
sale and REO listings in the MLS and price trends
 Support conclusions with material such as recent economic data and
newspaper articles; The decision maker may well be in another state
and will not necessarily understand why the property is suddenly
worth less than the loan.
 Marketing history, showings, and feedback. Here again, it is
needed to show the lender that a real effort has been made to get
fair market value. They must understand that they could not have
gotten a higher price themselves or with another agent.
Short Sale

Foreclosure Alternatives (15 min.)
 Keep the Property:
 If the sellers are unhappy that the property value is less than the loan
balance, but are otherwise under no pressure to sell, keeping the
property can be the best solution.
 Even if there is some short-term financial distress, it need not result
in loss of the property.
 Ask if there is family or other resources that can carry the seller
through if there is some financial stress.
 Because of the lack of equity, a refinance may not be possible, but be
aware of any special “hardship refinance” programs a particular
lender may offer. These change frequently.
 If the sellers must move, could they rent the property (even at a
negative cash flow) and sell it later in a better market?

Foreclosure Alternatives
 Sell the Property and Bring Cash to Closing
 This might not sound appealing, but it can be a good choice for
sellers who are in a financial position to pay a deficiency from other
liquid assets.
 This approach avoids the credit damage that even a successful short
sale will cause.
 An alternative in some circumstances is for the seller to agree to
convert any deficiency into a personal note, or a note on another
property owned by the seller.
 Licensees should always advise sellers to consult appropriate legal
and tax professionals before considering such a note.

 Attempt a Loan Modification
 Lenders are increasingly interested in helping financially
distressed homeowners stay in their homes.
 In some cases, they have been willing to reduce or roll back
interest rates, or reduce the allowable payment, to help sellers
avoid short sales and foreclosures.
 Also known as a “workout”
 It is not generally advisable for the agent to take the lead in
representing a property owner in a workout.
 Workouts are not real estate transactions.
 They are complex contract modifications, and to date, relatively
few homeowners in distress have been able to come to a
permanent agreement with their lender.
 The homeowner should be advised to consult an attorney if this is
the option they choose.

 Deed in Lieu of Foreclosure
 Offering to trade the property to the lender in exchange for the
cancellation of the note might make sense if the seller:
 Owes more than the property is worth
 Is unable to make payments
 Is likely to lose the property in foreclosure in the near future . . .
 This approach is more likely to be successful in states with very long
foreclosure timelines.
 The lender can obtain the property much sooner and may feel that the
mitigation of loss is worth the cancellation of the note.
 Like a loan modification, this is a contract negotiation, and should be
undertaken only after consulting with an attorney.
 Referred to as a “friendly foreclosure.”

End of Course Quiz
 You are now ready to take the end-of-course quiz.

1. If the bank forecloses on your home,
you can be liable for the difference in what
you owe vs. what they sold it for at the
foreclosure sale.
a. True
b. False
Copyright 2021 Real Estate School of Nevada, Inc. All Rights Reserved. 67

2. If you complete a short sale, you could
be liable for taxes on the difference
between what you sold the house for and
how much you still owed on your
mortgage.
a. True
b. False

3. A homeowner cannot redeem their
mortgage AFTER the Notice of Sale has
been filed.
a. True
b. False

4. You should have your financing in
place at the time you bid on a property at
the courthouse foreclosure sale.
a. True
b. False

5. Under SB321 there is no notice of the
homeowner's right before the NOD is
filed.
a. True
b. False

6. If a person's house is not sold at the
foreclosure sale, then the entire foreclosure
process must be started again by the bank.
a. True
b. False

7. A lender must provide a borrower
information about foreclosure prevention
alternatives offered by the servicer.
a. True
b. False

8. In Nevada Judicial foreclosure may be
performed.
a. True
b. False

9. In a non-judicial foreclosure, there is
no redemption period after the
foreclosure sale.
a. True
b. False

10. Partial claims and Deed In lieu of
Foreclosures are "friendly foreclosures”.
a. True
b. False

11. A person who, directly or indirectly, makes any solicitation,
representation or offer to a homeowner to perform for
compensation, the prevention or postponement a foreclosure
sale is legally referred to as a:
a. Foreclosure Purchaser
b. Foreclosure Consultant
c. Loan Modification Consultant
d. REO Professional

12. In addition to administrative sanctions, a person who
commits a prohibited act under NRS 645F (covered
services) may be fined as much as:
a. $5,000
b. $10,000
c. $20,000
d. $25,000
78

13. A borrower who agrees to transfer title to the
lender to avoid foreclosure proceedings is
pursuing a:
a. Forbearance
b. Loan Modification
c. Deed in Lieu
d. Short Sale

14. The bankruptcy that involves the
reorganization of a business is a:
a. Chapter 7
b. Chapter 11
c. Chapter 13
d. Chapter 17

15. Some refer to a short sale as a:
a. Foreclosure Sale
b. Pre-foreclosure Sale
c. Bankruptcy
d. Deed in Lieu

16. Which of these terms is associated with a
non-judicial foreclosure?
a. Deed of Trust
b. Power of Sale
c. Trustee
d. All the Above

17. With a deed of trust, the borrower is
referred to as the:
a. Trustor
b. Trustee
c. Beneficiary
d. None of the above

18. In Nevada, the reinstatement period of a non-
judicial foreclosure is what number of days?
a. 10
b. 30
c. 35
d. 60

19. If a residential foreclosure, the notice of default
must be posted on the property itself for what number
of days before the date of the sale?
a. 30
b. 60
c. 90
d. 100

20. All the following represent "hardships" that are
commonly accepted by mortgage lenders in a
potential short sale EXCEPT:
a. Family illness or injury
b. Significant loss of income
c. Property value is less than mortgage balance
d. Separation of domestic partners

The Real Estate School of Nevada
CE.5846002-RE (Internet)
3 hours – General

Foreclosures & Foreclosure Alternatives.pptx

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