Short Sale Blog

Here is the latest short sale news at Seattle Short Sales. We assist hundreds of Seattle area homeowners with short selling their home and avoiding foreclosure.

Debt Settlement Part 1: The Difference Between Debt Settlement and Debt Consolidation

Seattle Short Sales - Thursday, May 16, 2013

This article is Part 1 of a two-part series on debt settlement. In this article, we look at the differences between debt consolidation and debt settlement. In the second article, we will look at two recent real examples - of clients of ours, whose debts we have settled by convincing their lenders to accept thousands of dollars less than the balances owing.

Many people are confused about the differences between the two strategies known as “debt consolidation” and “debt settlement.”

Debts can add up. Unfortunately, today’s difficult economic climate has many people facing reduced income due to hours cuts or layoffs, and home prices remain low. In these tough times, many Americans find themselves forced to pay basic bills with their credit cards. Their debts are adding up to levels that they may not be able to continue paying.

One way of managing a high debt load is “debt consolidation.” Most people have several different debts, each with a different interest rate. Debt consolidation means managing those debts in order to minimize the interest paid.

For example, if you have $5,000 of credit card debt that you are paying 22% interest on, you are paying over $1000 per year in interest on that debt. If you can move that debt (and any other high-interest debts) into a lower-interest loan, e.g. by paying the credit card off through a line of credit secured against your home, you can bring that interest rate down to perhaps 6%. Those savings, of 16% interest on a $5,000 would save you $800 per year - money that can go directly towards paying off the debt itself, not just servicing the interest.

However, debt consolidation does not relieve you of your obligation to actually pay off that credit card debt. You still owe that $5,000 - and you are still accruing interest on it, even though now it is at a lower rate.

And this is where “debt settlement” comes in. Debt settlement is a completely different strategy. It means making an offer to your creditor, to permanently get rid of your debt. For example, in the case above, you could offer your credit card holder $2,500 to call the debt quits! You would be relieved of having to pay the remaining $2,500, and you would be relieved of that $1,000+ you were paying each year in interest!

Why would your credit card company, or any other creditor, agree to this?

Because it's better than getting nothing.

Debt settlement works with unsecured debts - in other words, debts that do not have collateral associated with them, such as a mortgage on a house or a car loan (where the lender has the right to foreclose on the home, or repossess the car, if you stop repaying them).

Debt settlement also works with undersecured debts, for example a second or third lien against a home. If sale of the home generates only enough funds to pay out the first lien (which, in most cases, is the mortgage loan), then the second or third liens are considered to be undersecured. Since so many homes have dropped in value over the past five years, many second and third liens are now undersecured.

In either case, whether the money owed is unsecured (e.g. credit card debt) or undersecured (e.g. a judgment lien), your creditor has nothing to repossess from you if you do not pay it back. They may be worried that you will declare bankrutpcy - in which case they will receive little or nothing on the money you owe. And that is exactly why they may accept significantly less than the actual amount you owe, in order to “settle your debt.” Because if they don’t, they may get nothing at all.

We have helped numerous clients settle their debts, permanently, often for only 10 to 20% of the total funds owed. In Part 2 of this series, we will look at two real examples - where our clients have been relieved of having to repay thousands of dollars of debt.

Seattle Short Sales has a team of experienced and successful real estate specialists dedicated to working with distressed homeowners. We close, on average, 12% of all short sales per month in King County. In the last 24 months, we have negotiated over 756 short sale approvals, and discounted over $81 million of mortgage debt for distressed homeowners.

In addition to our short sales negotiators, our team includes dedicated professionals advising and advocating for homeowners in the fields of: loan modifications, bankruptcy, debt settlement and collection defense. As part of our service, we offer unlimited attorney and CPA consultations.

If you are a homeowner who is struggling to make ends meet, and would like to learn more about the options available to you, please go to: http://seattleshortsales.com/homeowners/

You can also contact Lambros Politis on Google+ or to find more up to date information on this subject, go to theArk Law Group Blog. 

January Stats: Over 90% of our Short Sale Approval Letters Came with Full Deficiency Waiver for Sellers

Seattle Short Sales - Saturday, February 23, 2013

91% of our short sale approval letters for January 2013 came with a full deficiency waiver for our sellers! Of the 35 short sale approvals that we negotiated for struggling homeowners last month, 32 of them had the lenders waiving the deficiency. This means that the homeowners are able to walk away from their underwater mortgages clean: with to no requirement ever to pay their lenders the shortfall on the mortgage payment following the short sale, and able to make their move to financial freedom without bearing the burden of past bad debts

The deficiency balance is the difference between the balance owing to the lender on the mortgage, and the net proceeds available to pay off the lender following sale of an underwater home. For example, if Hal owes $250,000 on his mortgage, but his home is worth only $200,000 at today’s prices, he is underwater by $50,000. Commissions and closing costs, after selling the home, might total around $25,000.

So, if Hal is able to obtain his lender’s approval for a short sale, after selling his home and paying closing costs, there might only be $175,000 to pay his lender: $75,000 short of the full $250,000 owed. That $75,000 shortfall is the deficiency.

That $75,000 is just a fictitious example to illustrate how a deficiency is calculated. But here are some real numbers for January: In January, 2013, the deficiencies on the 35 approvals we negotiated ranged from $3,000 to $234,000. The average deficiency was $87,000

Back in 2010, when we started collecting stats on our short sale approvals, less than half of the lenders would waive the deficiency balance. Continuing with our example: if Hal’s lender does not waive that deficiency, it means that he is trying to pick up the pieces in his life, all the while knowing that debt collectors might come after him for $75,000. That situation does not give Hal a lot of motivation to start working at rebuilding his finances.

Fortunately, lenders have come around to realize that short sales are a far better way to cut their losses on a bad mortgage, than spending a year or more foreclosing on a homeowner who simply does not have the money to pay. Now they are actually encouraging homeowners to do short sales - both by waiving the deficiency balance in most cases, and even sometimes paying homeowners extra cash on top for completing the short sale.

These days, in the majority of cases, the lender will waive the deficiency balance. What that means in our example Hal's case is that the lender writes that $75,000 off. They promise Hal that they will never come around to collect it (and that promise is in writing, in the short sale approval letter). Hal can put his bad mortgage debt completely behind him, and look ahead to rebuilding his life.

Seattle Short Sales has a team of experienced and successful real estate specialists dedicated to working with distressed homeowners. We close, on average, 12% of all short sales per month in King County. In the last 24 months, we have negotiated over 756 short sale approvals, and discounted over $81 million of mortgage debt for distressed homeowners.

In addition to our short sales negotiators, our team includes dedicated professionals advising and advocating for homeowners in the fields of: loan modifications, bankruptcy, debt settlement and collection defense. As part of our service, we offer unlimited attorney and CPA consultations.

If you are a homeowner who is struggling to make ends meet, and would like to learn more about the options available to you, please go to: http://seattleshortsales.com/homeowners/

New Cenlar Short Sale Approval Letter: Homeowners in Seattle, WA, Receive $146,000 Loan Discount, Deficiency Waived!

Seattle Short Sales - Wednesday, October 31, 2012
These Seattle, WA, homeowners avoided foreclosure through a short sale. They owed nearly $290,000 on their Cenlar mortgage, including arrears. They relocated to California in April, 2011 - at which time their home was valued at more than the balance owing. But rapidly dropping property values meant that, by the time their home was on the market, its value had dropped to less than their mortgage debt.

They could not afford to pay both their rent in California and their mortgage in Seattle. Their only hope to avoid foreclosure was to negotiate a short sale with Cenlar.

Cenlar has just issued their approval letter for the short sale, accepting $142,528 net proceeds on the $288,400 mortgage balance owing - a discount of $145,872. The short sale approval letter waived the Seattle homeowners of ever having to repay that deficiency.

You can read the Cenlar short sale approval letter here: 9.12.12_Cenlar_1st_Lien_146k_Deficiency_Debt_Settled_Short_Sale_Approval.pdf

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

The Mortgage Forgiveness Debt Relief Act of 2007

Seattle Short Sales - Tuesday, October 23, 2012

The Mortgage Forgiveness Debt Relief Act of 2007 became law on December 20, 2007. The aim of the Mortgage Forgiveness Debt Relief Act is to protect homeowners who have lost their home through foreclosure, or who have taken action to avoid foreclosure through a short sale or mortgage modification, from the double hit of having to then pay income tax on their forgiven mortgage debt.

Normally, forgiven debt is considered by IRS to be the same as taxable income. For example, if your lender forgives $100,000 of your mortgage debt, whether through foreclosure or via a short sale, that $100,000 would be considered taxable income for the year that that debt was forgiven. However, in recognition of the global financial crisis that has resulted in millions of American homeowners struggling to pay their mortgages, the Act was passed as a special provision, to relieve these homeowners of having to pay income tax on the forgiven debt.

The Mortgage Forgiveness Debt Relief Act originally applied only to homeowners who were foreclosed upon, or whose debt was forgiven, between January 1, 2007, and December 31, 2009. Its expiry date has since been extended to December 31, 2012. It is possible that that expiry date will be extended further, but so far no decision has been made about an extension.

The Mortgage Forgiveness Debt Relief Act applies only to mortgage debt that was owing on your principal residence. For your home to qualify as “principal residence”, you must have both owned the home and used the home as your principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the home. Other things to know:

  • The maximum amount you can treat as qualified principal residence indebtedness is $2 million, or $1 million if married and filing separately.
  • The Act applies to debt that is forgiven through foreclosure, through a short sale, or through modification of the terms of the mortgage. Forgiven debt is normally considered by IRS to be income. In IRS terms, what the Act does is allow you to “exclude” this income when filing your tax return.
  • The forgiven debt must have been used to buy, build, or substantially improve the residence. In other words, forgiven debt on both first and second mortgages can be included under the Act provided that the debt was used for one of those purposes - but not if it was used for other purposes, e.g. to pay off credit cards or to buy a new car.
  • The forgiven debt must be secured by that same residence.
  • Refinanced debt proceeds may also qualify for exclusion under the Act, provided that they were used to “substantially improve” the residence and not for other purposes.
  • Debt that has been forgiven on second homes or investment homes does not qualify for exclusion under the Act - but it may be exempt from income tax due to other exclusions such as Insolvency.

If your lender forgives more than $600 of your debt, they are required by law to issue you a 1099-C, Cancellation of Debt form. Make sure that you examine the form as soon as you receive it. Check that the amount of debt forgiven (listed in Box 2), and the fair market value listed for your home (Box 7) are both correct. If there are any problems with the form, have your lender correct them immediately.

To exclude forgiven debt from taxable income, fill out IRS Form 982 and attach it to your income tax return.

For more detailed information about excluding forgiven debt from your taxable income, through the Mortgage Forgiveness Debt Relief Act and through other exclusions such as Insolvency and Bankruptcy, download IRS Publication 4681.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Using the IRS Insolvency Clause For Mortgage Debt Relief Forgiveness

Seattle Short Sales - Wednesday, September 19, 2012

Home sellers and real estate agents who are concerned about the upcoming expiry of the federal Mortgage Debt Relief Forgiveness Act still have options for avoiding a tax bill from the IRS, according to Seattle Short Sales, Inc.

With the principal amnesty program set to expire on Dec. 31, 2012, the Bellevue, Wash., team of legal, tax and real estate professionals is assuaging fears that sellers will miss a valuable tax break if their short sales do not close by year end.

“This looming deadline is instigating a surge of short sales,” explains Ross Kilburn, who notes that short sales increased 25 percent nationwide in the first quarter of 2012 over the previous year. “What most homeowners and many brokers do not realize is that the IRS offers several non-expiring exemptions that allow sellers to circumvent the income tax assessed on forgiven debt.”

An estimated 11 million Americans are underwater on their mortgages, carrying nearly $700 billion in negative equity as they try to ride out the recession. With one in every five homes worth less than is owed, the U.S. government passed the Mortgage Debt Relief Forgiveness Act in 2007, and then renewed it in 2009, to help homeowners recover from the economic crisis.

Prior to the Mortgage Debt Relief Forgiveness Act, the IRS taxed most forgiven debt as income. Under the current laws, the Act temporarily suspends this penalty when a lender absolves a customer’s mortgage debt. In order to qualify for the federal relief program, underwater mortgage holders must demonstrate extreme financial hardship, whether from a layoff, retirement or unexpected medical costs. Up to $2 million of debt can be forgiven by lenders.

Although the Mortgage Debt Relief Forgiveness Act expires at the end of this year, many underwater homeowners who short sale their homes will still be able to use the insolvency clause to avoid paying income taxes. In order to avoid paying taxes on discharged debt under the insolvency clause, the total amount owed to all creditors must be greater than the fair market value of all the homeowner’s assets. Liabilities, such as mortgage debt, credit card debt, student loans and vehicle loans, are balanced against assets like the home, vehicles, jewelry, artwork, bank account balances and retirement savings.

If a borrower is insolvent, the discharged debt is not taxable, up to the amount of the insolvency. For example, if a seller has a combined debt of $400,000 and assets totaling $145,000, then up to $255,000 of debt can be forgiven without being taxed. Since any absolved principal above this amount brings the seller back to financial solvency, the balance beyond $255,000 is taxable.

“This overlooked insolvency exemption has the potential to help hundreds of thousands of homeowners across the U.S. who currently don't have access to this important information,” praises Dean Guske, a CPA based in Bellevue. “Kudos to Seattle Short Sales, Inc. for spreading their knowledge widely."

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Insolvency, and Other Ways to Avoid Paying Income Tax on Forgiven Debt

Seattle Short Sales - Sunday, August 12, 2012

This article is Part 2 of a series on the tax implications of forgiven debt. Part 1 dealt with the Mortgage Debt Relief Forgiveness Act of 2007, which relieves homeowners of having to pay tax on forgiven mortgage debt. That Act expires at the end of 2012 - so Part 2 looks at other options for avoiding paying tax, and specifically at insolvency: what insolvency is, and how you can apply this clause.

It is the middle of 2012, and the Mortgage Debt Relief Forgiveness Act expires at the end of the year. Some homeowners and real estate agents might wonder if it is worth even listing a home for a short sale at this point, because they are concerned that the short sale might not close before the Act expires. They are worried that, after expiry of the Act, that any debt forgiven by the lender may be considered taxable by the IRS.

However, there are many exceptions that homeowners can use avoid paying income tax on forgiven debt that are outside of the Mortgage Debt Relief Forgiveness Act. And the exceptions don’t expire! This article lists some of those exceptions, and then focuses on the exception for “insolvency,” since that is an exception that will apply to many struggling homeowners:

Seller-financed debt:
If the person that you bought the property from actually financed your purchase, i..e. your mortgage is with the seller of your property, you are exempt from having to pay income tax on any of that forgiven debt.

Title 11 Bankruptcy:
If you are in Title 11 bankruptcy proceedings at the time that your lender forgives the debt, you are exempt from having to pay income tax on the forgiven debt. Title 11 Bankruptcy includes bankruptcy filings under Chapter 7, 11 or 13.

Insolvency:
Many people do not realize that, if they are insolvent at the time that the lender forgives the debt, they do not have to pay income tax on the forgiven debt.

Insolvency means that the your debts are greater than the fair market value of all the things that you own - including any cash in your bank accounts, as well as retirement savings (e.g. IRA accounts and 401(k) and your interest in any pension plans).

If the amount you owe (not just on your mortgage - on car loans, credit cards, everything) is more than the value of what you own, then you are insolvent. You must do this calculation for the time immediately before the debt was forgiven. If you are insolvent, the forgiven debt is not taxable - at least to the point that the forgiven debt does not make you solvent.

Here are some examples:

Example 1. Jessica is insolvent. She does not have to pay income tax on any of the forgiven debt:
Jessica owed $300,000 on her mortgage. She could not afford to keep making her mortgage payments, but her home was only valued at $210,000. Following the short sale, she paid her mortgage off for $180,000 (after closing costs). Her lender waived the $120,000 deficiency - this means that her forgiven debt was $120,000.

 Jessica was worried that she would have to pay income tax on the $120,000 - but she looked up the insolvency clause.

Immediately before the debt was forgiven, Jessica owed:
mortgage debt: $300,000
car loan: $12,500
credit cards: $8,000
student loan: $32,000
TOTAL OWED: $352,500
Immediately before the debt was forgiven, the assets Jessica owned were:
bank account: $600
home value: $210,000
car (fair market value): $15,000
household goods, clothing, etc.: $5,000
TOTAL  ASSETS OWNED: $230,600
At the time that the lender waived her deficiency, Jessica owed $352,500. Everything she owned was worth $230,600. This means that she was insolvent by $122,500.
Even the amount of the forgiven debt does not bring her back to solvency. This means that she does not have to pay income tax on any of the forgiven debt.

Example 2. Bryan is insolvent, but the amount of the forgiven debt brings him back up to solvency. He must pay income tax on part of the forgiven debt.
Bryan was self-employed, and owed $450,000 on his mortgage. The economic downturn caused his business to slow down, and his son required medical treatment. He could not longer afford to make his mortgage payments. But his home was now worth only $350,000.

His lender approved a short sale, accepting $320,000 net proceeds and waiving the $130,000 deficiency balance. Bryan still had outstanding medical bills to pay, so he looked up the insolvency clause.

Immediately before the debt was forgiven, Bryan owed:
mortgage debt: $450,000
car loan: $25,000
credit cards: $3,000
business debts: $40,000
outstanding medical bills: $60,000
TOTAL OWED: $578,000
Immediately before the debt was forgiven, the assets Bryan owned were:
bank account: $2,000
home value: $350,000
car (fair market value): 40,000
household goods, clothing, etc.: $40,000
retirement savings: $45,000
TOTAL ASSETS OWNED: $477,000

At the time that the lender waived the deficiency, Bryan owed $578,000. Everything he owned was worth $477,000. This means that he was insolvent by $101,000.

Forgiven debt is considered by IRS to be like income. Bryan’s forgiven debt of $130,000 was greater than the amount of his insolvency - so it brings him back to solvency.

The forgiven debt is exempt from income tax up to the extent of the insolvency. This means that $101,000 of the $130,000 forgiven debt is exempt from income tax. The remaining $29,000 is taxable.

To find out whether you can use Insolvency to keep from paying income tax on your forgiven debt after a short sale, download the IRS’s Insolvency Worksheet.

And don’t worry too much about the end-of-2012 deadline for the Mortgage Debt Relief Forgiveness Act - because there are many other options for avoiding paying income tax on forgiven debt.

We at Seattle Short Sales, Inc., are a team of legal, tax, and real estate professionals who have joined forces. If you would like us to take a look at your situation, to see which solution works best for you, please contact us for a no-obligation, no-fee consultation - either by phoning us at 1-800-603-3525, or by filling out the contact form at the top of this page.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

My Lender Waived My Deficiency - But Now Do I Have to Pay Tax on It?

Seattle Short Sales - Wednesday, August 08, 2012

This article is Part 1 of a series on the tax implications of forgiven debt. Part 1 deals with the Mortgage Debt Relief Forgiveness Act of 2007, which relieves homeowners of having to pay tax on forgiven mortgage debt. That Act expires at the end of 2012 - so Part 2 will look at other options for avoiding paying tax, and specifically at insolvency: what insolvency is, and how you can apply this clause.

As a result of the financial crisis, thousands of American homeowners have had to find a way out of paying a mortgage that they can no longer afford. While it is great for a homeowner to have a portion of their debt forgiven, this forgiven debt may possibly have tax implications: because the IRS treats the forgiven debt as if it were income.

That is the way that it used to work. However, the Mortgage Debt Relief Forgiveness Act of 2007 was drafted because so many homeowners were in need of help as a result of the financial crisis: declining home values and, in many cases, loss of income. Many Americans could no longer afford their mortgage payments. But their homes were worth less than the balance owing on the mortgage, so selling the home was not an option.

Many have been able to negotiate loan modifications or to negotiate a short sale with their lender. Many others have been foreclosed upon. All of these options can result in “forgiven debt” (in the case of a loan modification, if there was a principal reduction, and in the case of short sale or foreclosure, the portion of the mortgage that remains unpaid). The Mortgage Debt Relief Forgiveness Act of 2007 recognizes that special circumstances prevail right now. It allows homeowners who have had mortgage debt forgiven on their principal residence between January 1, 2007, and December 31, 2012, to not have to declare that forgiven debt as income. If your debt was forgiven during that period, you do not have to pay income tax on it.

The Mortgage Debt Relief Forgiveness Act of 2007 applies specifically to a home that is your principal residence. It does not apply to vacation homes or rentals. It can be used for debt that is forgiven on a first mortgage (provided that the mortgage is secured by that same home), and it can also be used on second mortgages secured by that home as long as the mortgage or line of credit was used to buy, build, or substantially improve the home.

In other words, if the second mortgage was taken out to pay credit card debt, or to buy a new car, then the second mortgage debt will not be exempt from income tax through to the Mortgage Debt Relief Forgiveness Act.

However, there are ways outside of that Act to avoid paying income tax on forgiven debt - such as demonstrating insolvency - and those clauses will continue to apply even after the December 2012 expiry of the Mortgage Debt Relief Forgiveness Act. Part 2 of this series will look at insolvency: what it is, and what you need to do to use insolvency to avoid paying income tax on your forgiven mortgage debt.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

How to Settle Your Remaining Mortgage Debt After Your Short Sale Closing

Ross Kilburn - Monday, July 16, 2012

Ideally in a short sale, you settle all of the debt once and for all. Whether you have two mortgages, a mortgage and a home equity line of credit, or a mortgage and a credit card lien, the goal is to get a full settlement and a waiver of deficiency rights by both lien holders.

But, sometimes, you can't settle all the debt in the short sale. Let's go over what to do if that happens. First, a little review on the mortgage settlement process.

First liens are pretty easy to settle in almost all cases

 In Washington state, it is pretty straightforward to get the foreclosing first lien holder to agree to a full settlement in a short sale. The reason is that by law, if the property were instead to go to foreclosure, the first lien holder would lose their right to pursue the borrower for the deficiency. So, therefore, they don't usually press too hard during the short sale for deficiency rights, as that might scare away the borrower and result in a foreclosure, which wouldn't do them any good.

Why junior liens don't just roll over and die

What about the junior lien holder? Well, in a foreclosure, the junior lien holder doesn't give up their right to pursue the borrower for the deficiency. So therefore, there is a good chance that in a short sale, the lien holder won't be motivated to waive their deficiency rights. As a result, in a short sale, most of the efforts are focused on finding ways to get the junior lien holder enough money so that they are compelled to fully settle the debt.

Some banks are easy to work with

Here is the good news. If your 2nd loan is with a large bank/servicer, such as Bank of America or Chase, there is a good chance that you will walk away with a full settlement. If you want to see what your bank will probably do, enter their name in our Short Sale Approval Letter Search Engine and review a recent short sale approval letter and you can review the exact settlement terms. You'll see that quite a few 2nds settle for the amount that the 1st is allowing them in the short sale. Also, many 2nds that require a cash contribution, only require a total of around 10% of the debt to settle.

Credit unions can be fierce 

Now the bad news. If you have a 2nd with a credit union, such as BECU or WSECU, they most likely won't do a full settlement in the short sale. Some Wells Fargo seconds also refuse to offer full settlements during the short sale, and require the borrower to work something out after the short sale closing.

A Wells Fargo second is relatively easy to settle after closing. If you have cash available, you can offer them around 20% of the unpaid principal balance (UPB) and have a very good shot at settling, all things considered.

Let's look at credit unions. Typically, they will be much tougher to deal with. They will be looking for more like 50% of the UPB to settle.

If you don't have cash to offer the bank, and you want to finance the settlement, then you need to expect the total amount to go up.

Strategy 1: Always send in a bankruptcy schedule with your settlement offer 

That being said, if the borrower looks terrible (financially) on paper, then threatening bankruptcy may convince the creditor to settle for less. But don't just verbally threaten to file BK. Get a bankruptcy attorney to work up a BK schedule and submit that to the lender for review along with the settlement offer. 

Strategy 2: Engage, but slow play the lender

Here's a tip. As a general rule, you don’t want to ignore the lender. They will just file suit. The suit will be their attempt to get a judgment, and the right to garnish wages. If you are the borrower, you want to keep talking to the lender…periodically…and consistently express a desire to settle the debt somehow. Surprisingly, a good percentage of the time, the lender gets tired of the offers going back and forth and the file just ends up in some sort of collection purgatory. That of course, is a great thing.

Strategy 3: "Move" out of state

The key is leverage. As mentioned, bankruptcy is the ultimate leverage. Moving out of state is also very helpful. Opening up a mailbox in a new state, and providing that as your new forwarding address is one possibility. Most lien holders will not go to the effort to get a local judgment and then transfer the judgment to the new state where they will be forced to hire new attorneys to collect. Usually it is in the client's best interest to just go dark if they are 'moving' out of state. 

Another thing to always do before settling with the 2nd. Review the reconveyance paperwork filed by the 2nd after the short sale. We have found a number of lenders mess up and fully reconvey their lien with "full satisfaction of the debt" language.

The bottom line is that there are a variety of highly effective settlement options and strategies available to every borrower that can be customized to their exact situation.

If you are in a situation where you need to settle your debt, simply call our office at 1-800-603-3525 for a free consultation with one of our attorneys.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

 

Can’t See The Forest for the Trees: CitiMortgage and HUD Dispute about the Details of Borrower Eligibility for the FHA Preforeclosure Sale Program

Seattle Short Sales - Friday, October 21, 2011

Here is an interesting case, of not being able to see the forest for the trees: the dispute between HUD and CitiMortgage regarding evaluating borrower eligibility for FHA’s Preforeclosure Sale Program (PFS). While HUD focuses on the details of borrower eligibility for the PFS program, CitiMortgage contends that the details of the plan are less important than the overall aim: cutting losses for both borrowers and lenders.

The HUD’s Office of Inspector General has released its new audit report of Citimortgage, Inc. According to the HUD audit report, CitiMortgage did not properly determine borrower eligibility for FHA’s PFS program. Included in the 103-page audit report is CitiMortgage’s response to the HUD claims.

Guidelines for the FHA PFS program are outlined in FHA Mortgagee Letter 2008-43, a letter to all lenders which outlines the aims of the PFS program.

FHA provides mortgage insurance for loans by borrowers who are considered to be “risky” - whose credit history is poor or moderate, or who can only come up with a small deposit.

The FHA PFS program is for borrowers who have an FHA-insured loan, and who find themselves unable to meet their mortgage payments, and unable to sell the home because it is worth less than the balance owing on the mortgage. The PFS program helps borrowers to avoid foreclosure by providing cash incentives to both borrowers and lenders, to encourage them to negotiate a pre-foreclosure sale, rather than let the mortgage proceed to foreclosure.

The dispute between HUD and CitiMortgage comes from different interpretations of eligibility criteria outlined in FHA Mortgage Letter 2008-43. HUD works with numerous lenders; they identified CitiMortgage for this audit because of “an issue identified
in a prior review and a review conducted by HUD’s quality assurance division.”

HUD reviewed 68 loans that CitiMortgage had submitted claims on. Claims paid out by HUD on these loans included mortgage insurance payments (on the deficiency balances) as well as incentive payments to both borrowers and lenders. According to HUD’s review, though, CitiMortgage did not properly determine borrower eligibility for the FHA PFS program for 63 of these loans. A total of nearly $5 million was paid out by HUD to CitiMortgage for those 63 loans. The auditors have recommended that CitiMortgage reimburse HUD for these claims.

The report details, case-by-case, examples where HUD contends that CitiMortgage did not determine borrower eligibility criteria. According to HUD, CitiMortgage did not follow eligibility guidelines detailed in Mortgage Letter 2008-43, including:

  • borrowers’ reason for default is a result of an “adverse and unavoidable situation”
  • expenses and income claimed by borrowers were not independently verified by CitiMortgage
  • borrowers with assets were not required to repay the indebtedness through a repayment plan
  • borrowers who were still current on their mortgages were accepted into the plan, and HUD disputes CitiMortgage’s determination of borrowers facing “imminent default”

CitiMortgage has responded to the audit (their response is included in the audit report as Appendix B), defending their practices, and indicating that only 7 of the 63 examples that HUD has presented have any merit.

Most significantly, though, CitiMortgage’s Director of Default Servicing, Brian McWhorter, wrote in his response to HUD:
“In our view, if the changes recommended in the draft report are implemented, the PFS process would slow down and negatively impact borrowers by now allwing them to qualify for a short sales treatment, possibly resulting in foreclosure and a higher loss.”

McWhorter goes on to explain that, in all of the sampled cases, the pre-foreclosure sale that was executed represented a lower loss to CitiMortgage than a foreclosure proceeding followed by an REO sale would have.

Avoiding foreclosure, through FHA’s Preforeclosure Sale Program and through numerous other short sale and foreclosure-prevention programs that exist, is in everyone’s best interest. The faster that short sales can be processed, the more foreclosures will be avoided - and the more quickly our housing market will turn towards recovery.

For more information, download The Homeowner's Guide to the U.S. Government Short Sale Programs, our free in-house guide to the FHA PFS program as well as to VA, HAFA, Freddie Mac, and Fannie Mae short sale programs.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Numbers in For First Half of 2011: We Have Discounted Over $18 Million in Mortgage Debt for Distressed Homeowners So Far This Year

Seattle Short Sales - Tuesday, July 12, 2011

We’ve already presented you with recent numbers straight from the Federal Housing Finance Agency: more and more distressed homeowners nation-wide are taking advantage of short sales to relieve themselves of mortgages that they can no longer afford. http://seattleshortsales.com/_blog/Short_Sale_Blog/post/Short_Sales_Continue_to_Grow_in_Spite_of_Decline_in_Other_Foreclosure_Prevention_Actions/

Well, our own numbers at Seattle Short Sales, Inc., are now in for June. And they clearly show that short sales are growing here in the Seattle area. Comparing the number of short sale approval letters that we negotiated over the last six months of 2010 to those from the first six months of 2011, we found that:

  • The number of new short sale approval letters that we were able to obtain from lenders grew by 43% over the six month period. In the last half of 2010 we negotiated 123 approval letters for our homeowners, and in the first half of this year that number was up to 176 new approvals.
  • The average discount that the homeowner received on their balance owing also grew by 6% in the first half of this year, compared to the last half of 2010. In the second half of 2010, the average discount a homeowner received from their lender to pay out their mortgage was $96,480. But in the first six months of this year, that average discount had grown to $102,278.
  • The total mortgage debt that we managed to get discounted for our homeowners grew by 52%. The total mortgage debt discounted for all the approval letters we negotiated in the second half of 2010 was $11,867,000. For the first half of 2011, that total debt discount was up to $18,000,001.

The majority of our short sale approval letters come with full deficiency waivers. This means that the homeowners, who were in a negative equity situation (owing more on their mortgage than the house was worth) are not responsible for paying back the debt discount - the shortfall on the discounted amount they paid back of their loan. They were able to rid themselves of the mortgage that they could no longer afford, and are free to get a new financial start in life.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/


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