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01/02/2013: Mortgage Forgiveness Debt Relief Act of 2007 (Extension)
****(Expires 12/31/2013)****
Struggling homeowners who are considering a short sale or modification will be eligible for tax relief in 2013.
The “fiscal cliff bill” passed by Congress on January 1 included a provision to exclude borrowers from paying taxes on debt forgiven through a short sale, foreclosure, or loan modification.
Known as the Mortgage Debt Relief Act of 2007, the act was scheduled to expire December 31, 2012, but received an extension for another year. Source: DSNews.com
All eyes in the nation now turn to California as Governor Jerry Brown signed into law today the Homeowner Bill of Rights to help struggling Californians keep their homes. This law aims to avoid foreclosure where possible to help stabilize California's housing market and prevent the other negative effects of foreclosures on families, communities, and the economy. The new law will generally prohibit lenders from engaging in dual tracking, require a single point of contact for borrowers seeking foreclosure prevention alternatives, provide borrowers with certain safeguards during the foreclosure process, and provide borrowers with the right to sue lenders for material violations of this law.
The following is a summary of the key provisions of the Homeowner Bill of Rights that may affect California's REALTORS® and their clients. The full text of this law, also known as Assembly Bill 278 and Senate Bill 900, is available at www.leginfo.ca.gov.
Applicability of the Law: This law will generally come into effect on January 1, 2013. It only pertains to first trust deeds secured by owner-occupied properties with one-to-four residential units, unless otherwise indicated below. "Owner-occupied" means the property is the principal residence of the borrower and secured by a loan made for personal, family, or household purposes (CC 2924.15). A "borrower" under this law must generally be a natural person and potentially eligible for a foreclosure prevention alternative program offered by the mortgage servicer, but not someone who has filed bankruptcy, surrendered the secured property, or contracted with an organization primarily engaged in the business of advising people how to extend the foreclosure process and avoid their contractual obligations (CC 2920.5(c)). A "foreclosure prevention alternative" is defined as a first lien loan modification or another available loss mitigation option, including short sales (CC 2920.5(b)). Some of the requirements of this law do not apply to "smaller banks" that, during the preceding annual reporting period, foreclosed on 175 or fewer properties with one-to-four residential units (CC 2924.18(b)).
No Dual Tracking During Short Sale: A mortgage servicer or lender cannot record a notice of default or notice of sale, or conduct a trustee's sale, if a foreclosure prevention alternative has been approved in writing by all parties (e.g., first lien investor, junior lienholder, and mortgage insurer as applicable), and proof of funds or financing has been provided to the servicer. This requirement expires on January 1, 2018. Effective January 1, 2018, a lender or mortgage servicer cannot record a notice of sale or conduct a trustee's sale if the borrower's complete application for a foreclosure prevention alternative is pending, and until the borrower has been given a written determination by the mortgage servicer. Smaller banks are only covered by the requirements taking effect in 2018. CC 2924.11.
Cancelling a Pending Trustee's Sale: A mortgage servicer must rescind or cancel any pending trustee's sale if a short sale has been approved by all parties (e.g., first lien investor, junior lienholder, and mortgage insurer as applicable), and proof of funds or financing has been provided to the lender or authorized agent. For other types of foreclosure prevention alternatives, a lender must record a rescission of a notice of default or cancel a pending trustee's sale if a borrower executes a permanent foreclosure prevention alternative. These requirements do not apply to smaller banks, and will sunset on January 1, 2018. CC 2924.11.
Providing a Single Point of Contact: For a borrower requesting a foreclosure prevention alternative, the mortgage servicer must, upon the borrower's request, promptly establish and provide a direct means of communication with a single point of contact. The single point of contact must remain assigned to the borrower's account until all loss mitigation options offered by the mortgage servicer are exhausted or the borrower's account becomes current. The single point of contact must be an individual or team responsible for, among other things, coordinating the application for the foreclosure prevention alternative, giving timely and accurate status reports, having access to those with the ability and authority to stop foreclosure proceedings, and referring the borrower to a supervisor if any upon the borrower's request. Each team member must be knowledgeable about a borrower's situation and current status in the foreclosure alternatives process. These requirements do not apply to smaller banks as defined. CC 2923.7.
Brought to you by the CALIFORNIA ASSOCIATION OF REALTORS®. |
Gov. Jerry Brown signed SB 458 (Corbett) into law. SB 458 extends the protections of SB 931 (2010), to ensure that any lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans.
Under previous law (SB 931 of 2010), a first mortgage holder could accept an agreed-upon short sale payment as full payment for the outstanding balance of the loan, but unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.
The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender will pursue them after the short sale closes, and demand an additional payment to subsidize the difference. SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.
If you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income.
Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness (Taken From IRS.gov).
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
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SHORT SALE |
FORECLOSURE |
Purchasing A New Home |
As soon as 2 years with an FHA loan (only 3.5% down payment). |
Normally 5 - 7 years. |
Credit Score |
As low as a 50 point hit if you keep your payments current. |
The credit hit can range from a 150 to a 300 point reduction. |
Credit History |
A Short Sale will normally be reported on your credit as, “Paid in full, Settled” or “Paid, Settled for Less Than Owed”. |
The Foreclosure will remain as a public record on your credit history for 7-10 years. |
Deficiency Judgment |
UPDATE, 7/16/2011- CA Senate Bill 458 Passes Banning Deficiency Judgements from ALL 2nd Lein Holders when they approve a short sale.
UPDATE, 1/1/2011 - CA Senate Bill 931 Passes Banning Deficiency Judgments from ALL 1st Lien Holders regardless of loan or occupancy type. |
The bank has the right to pursue a Deficiency Judgment (except in those states where there are no Deficiency Judgments). |
Deficiency Amount |
NONE:
SB 931 PROTECTION for 1st liens
SB 458 PROTECTION
for 2nd liens
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With the typical Foreclosure, the home will incur legal fees, repair and maintenance costs, insurance costs, etc… and in the end will normally sell for a lower price as an REO (bank owned home). This will create a larger deficiency amount. |
City |
Sold Price |
Amount Owed |
Lender |
Huntington Beach
|
$455,000
|
$610,000
|
Bank of America
|
Laguna Niguel |
$735,000 |
$1,020,000 |
Chase |
|
$1,221,000 |
$1,450,000 |
Bank of |
Ladera Ranch |
$950,000 |
$1,300,000 |
HSBC Mortgage |
|
$599,000 |
$815,500 |
GMAC Mortgage |
Coto De Caza |
$1,100,000 |
$1,500,000 |
Private Hard Money |
|
$825,000 |
$1,050,000 |
Citibank |
|
$699,000 |
$860,000 |
OCTFCU |
|
$1,310,000 |
$1,670,000 |
Bank of |
Rancho Santa Marg. |
$301,000 |
$402,500 |
Mortgage IT Inc. |
Laguna Niguel |
$241,500 |
$462,600 |
Nations Choice Mtg |
|
$680,000 |
$739,000 |
Citibank |
|
$300,000 |
$402,000 |
Bank of |
Rancho Santa Marg. |
$115,000 |
$269,950 |
Clarion Mortgage |
|
$245,000 |
$421,200 |
Chase |
Menifee |
$262,000 |
$555,000 |
American Mtg |
|
$199,000 |
$440,000 |
Bear Stearns |
|
$300,000 |
$639,000 |
Bank of |
|
$560,000 |
$710,000 |
Bank of |
|
$225,000 |
$344,000 |
First Franklin Corp |
Costa Mesa
|
$176,000 $300,000
|
$371,990 $489,000
|
Wells Bank of America
|
Aliso Viejo |
$432,280 |
$567,000 |
Mylor Financial |
|
$166,000 |
$247,200 |
Loan Link Fin. |
|
$525,000 |
$705,000 |
Clarion Mortgage |
|
$560,000 |
$812,000 |
|
|
$385,000 |
$529,500 |
Bank of |
|
$530,000 |
$651,500 |
Lehman Brothers |
|
$380,000 |
$589,000 |
Sbmc Mortgage |
|
$580,000 |
$760,000 |
Bnc Mortgage |
|
$240,000 |
$465,500 |
Southstar Funding |
|
$613,600 |
$630,000 |
Wmc Mortgage |
|
|
|
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