Commentary on Washington State law and how it Relates to real Estate

Robert P. Dickson

Robert P. Dickson

Robert P. Dickson is an partner at Dickson Law Group, PS and a member of its real estate and environmental law practice groups. Though most of his work is carried out through commercial litigation, he focuses on real estate, corporate, and environmental law. Much of his practice consists of representing clients in advancing their real property rights against public as well as private entities. Mr. Dickson also teaches a real estate litigation course at the Seattle University School of Law. His experience includes: Easements Adverse possession and trespass Boundary line adjustments Unlawful detainer Land use/zoning Foreclosures Landlord/tenant Real estate transactions (e.g. Deeds of Trust, Promissory Notes, Real Estate Contracts, etc.) Model Toxic Controls Act (including CERCLA), and other environmental regulations Corporation and limited liability company formation and representation Administrative appeals Professional Associations Tacoma/Pierce County Bar Association Washington State Bar Association Young Lawyers Association J. Ruben Clark Society Master Builders Association Associated General Contractors Education Juris Doctorate, The George Washington University Law School, 2007 Bachelor of Arts, Brigham Young University, 2003 Bar Admissions Washington State Bar Association Western Federal District Court of the State of Washington Publications Zoning and Land Use Petition Act, Land Use and Environmental Law Chapter XXIII, Washington Lawyers Practice Manual Real Property Practice Chapter XIV, Section 9, Foreclosure and Realization, Washington Lawyers Practice Manual

Taxes and loan modifications: what’s the impact?

How does a loan modification effect a person’s taxable income?

1.      The general rule is that when debt for which a person is liable is canceled or forgiven, the canceled amount must be included in a party’s reported income.

Generally, if a debt for which a person is personally liable is forgiven, the forgiven amount must be included in that person’s income.   The IRS defines debt to include any indebtedness for which one is personally liable, or subject to which one holds property.  If a person is not personally liable for a debt, the cancellation income will need to be included if a person retains the collateral and either: (1) the lender offers a discount for the early payment of the debt, or (2) the lender agrees to a loan modification that results in the reduction of the principal balance of the debt.

Taxes2.      There is an exception to the general rule for debt incurred to finance the purchase, construction or substantial improvement of a person’s residence.

A person can exclude canceled debt from income if it is qualified principal residence indebtedness.  Qualified principal residence indebtedness is any mortgage a person took out to buy, build or substantially improve his or her main home.  The mortgage must be secured by the main home.  A person’s main home is the home where he or she ordinarily lives most of the time.  A person may only have one main home at any one time. The IRS has not provided guidance on what it considers a “main home,” but does say it will look at the facts and circumstances in every case.  A person is limited to excluding $2 million of qualified principal residence indebtedness.  If a person excludes canceled qualified principal residence indebtedness and continues to own the home after the cancellation, the person must reduce the basis of the home by the amount of the canceled indebtedness, but may only reduce the basis to zero.  The legal authority for this memo comes from IRS Publication 4681, except where other authorities are cited.

Photo: cooldesign

What can a landlord do with personal property left over from a tenant?

Under RCW 59.18.310(b) the landlord may immediately enter and take possession of any property of the tenant found on the premises and may store it in a reasonably secure place if the tenant defaults in rent and reasonably indicates the intention not to resume tenancy.   The landlord must make reasonable efforts to provide the tenant with notice containing the name and address of the landlord and the place where the property is stored, and informing the tenant that a sale or disposition of the property shall take place pursuant to RCW 59.18.310, and the date of the sale or disposal, and the tenants right to have the property returned prior to the sale under RCW 59.18.230.  The landlord may satisfy the notice obligations by mailing it first class, postage pre-paid to the tenant’s last known address and to any other address provided by the tenant.

The landlord must return the property to the tenant after the tenant has paid the actual or reasonable drayage and storage costs, whichever is less, if the tenant makes a written request for the return of the property before the landlord has sold or disposed of the property.

dsasadassaAfter 45 days from the date of the notice the landlord may sell or dispose of the personal property and apply any income from the sale against moneys due, including actual or reasonable costs of drayage and storage, whichever is less.

If the property is less valued at less than $250 the landlord may sell or dispose of the property after 7 days from the date of the notice of sale or disposal is mailed or personally delivered, provided the landlord makes reasonable efforts to notify the tenant.

If a writ of restitution has been executed by the sheriff, RCW 59.18.312 applies and the landlord’s rights differ slightly.  The landlord “shall” enter and take possession of tenant property found on the premises, and may store the property in a reasonably secure place, with the option of selling or disposing of the property.  The landlord must store the property if the tenant serves him with a written request to do so within 3 days after service of the writ.  Without such service the landlord may elect to store the property.  If the tenant objects to the storage the property must be deposited upon the nearest public property and may not be stored by the landlord.

Before the landlord is entitled to a sale of the property valued at over $250 he must give notice to the tenant via first-class mail or personal delivery.  For property valued at $250 or less the landlord may sell or dispose of the property after seven days from the date the notice is mailed or delivered to the tenant.  Any income generated by the sale may be applied against any moneys due the landlord for drayage and storage of the property.

 

Photo Credit: Bill Longshaw, at Freedigitalphotos.net

What is a deed-in-lieu?

dsadsadasDebtors who have defaulted on their obligations under a real estate security agreement typically face foreclosure, either judicial or non-judicial.  A deed in lieu of foreclosure is another type of procedure to deal with a distressed property.  A deed in lieu is a transfer to a lender of title to real estate that fully or partially satisfies the debt that the property secures. These transactions may have significant benefits for both parties. First, a deed in lieu saves much of the time and cost of a foreclosure and gives the lender more direct and immediate control of the property. A deed in lieu may also be beneficial to the debtor if he or she just wants to convey the property and essentially be done with it.

 

While deeds in lieu have these advantages there are some potential pitfalls to this procedure.  First, if there are junior mortgages or liens on the property the deed in lieu does not serve to extinguish those liens.  In the event that there are junior liens, chances are good that unless the senior and junior lienholders negotiate an agreement the junior liens will be advanced against the title in the senior lienholder’s hands.  Second, a deed in lieu may be considered to be an equitable mortgage and not a complete conveyance. Only one Washington case has held found a deed in lieu to be an equitable mortgage, but depending on the nature of the transaction it remains a possibility.  Finally, a deed in lieu may be set aside on the grounds of fraud or overreaching. Washington courts have failed to do so thus far but other jurisdictions have done so, particularly when the value of the land exceeds the indebtedness or when the lender is desperate or suffers a disability.

With these advantages and possible pitfalls in mind, but before a deed in lieu is actually conveyed, the mortgagor and the lender should enter into an agreement that covers these details.

Photo Credit: Renjith Krishnan/FreeDigitalPhotos.net

Foreclosing on an agricultural property – what you need to know

dsaWhen a party forecloses on residential or commercial property they may have options on how to do so. However, when the property being foreclosed on is being used for agricultural purposes Washington law only permits judicial foreclosure. RCW 61.24.030(1). Real property is considered “used for agricultural purposes” if it is used in a manner that produces crops, livestock or aquatic goods. RCW 61.24.030(2). Despite these fairly strict protections for agricultural land, lenders may have alternatives if they draft a deed of trust.

In a recent but unpublished decision a state appellate court upheld a party waiving the right to a judicial foreclosure based solely on the fact that the land was being used for agricultural purposes. Schroeder v. Haberthur, unpublished 2011 WL 4599661 (Oct. 6, 2011). Additionally the parties to real estate transaction may stipulate in a deed of trust that the land is not and will not be used for agricultural purposes. The grantee of the deed of trust may require the grantor to warrant in the deed of trust that the land will not be used for agricultural purposes without the consent of the grantee. Id. Absent such agreements however, deeds of trust and power of sale foreclosure are unavailable for agricultural land and foreclosure must occur judicially.

Photo Credit: federico stevanin

Foreclosure Fairness Act: Links and Resources

Here are some useful links to assist those wanting more information about the Foreclosure Fairness Act:

Department of Commerce, FFA timeline

Washington State Department of Commerce, foreclosure page

Washington State Housing Finance Commission (good resource for home ownership issues)

US Department of Housing and Urban Development (housing counselor search)

Dickson Law Group (law firm short sale and loan modification expertise…and the sponsor of this great blog, of course.)

Department of Financial Institutions – Home ownership page

 

Foreclosure Fairness Act Guide

17994ju9klmmlpuRecently, I’ve had the privilege to address some professional groups regarding the latest developments on foreclosure law in Washington State.  A lot has changed in the world of foreclosures due to the July 22nd passing of the Foreclosure Fairness Act (FFA).  The Department of Commerce has published a helpful timeline which traces the path of the new foreclosure procedures and homeowner mediation rights created by the law.  Using that as a starting point, I’ve created my own table which outlines the step-by-step process of a foreclosure under the FFA:

 

Step

Action

Notes

1

 Notification of Rights/Initial Meeting Option:

60-days prior to Notice of Default: lender must notify homeowner by letter and telephone of right for in-person meeting (must notify mediation right—must be requested before Notice of Trustee Sale).

Meeting: if borrower elects to have an in-person meeting, the parties will discuss

(i) the borrower’s financial ability to modify or restructure the loan, and

(ii) Explore options to avoid foreclosure, such as a short sale or deed in lieu of foreclosure.

 Must be both a phone call and letter. This is interesting because it requires bank to make two forms of contact.  If the borrower does timely respond, the lender must wait to send the Notice of Default until ninety (90) days after the FFA Notice was sent.

2

 Mediation Request:

Request Mediation through attorney or housing counselor through the Department of Commerce.

 This is an option up until the Notice of Trustee Sale is recorded.  Once the Notice of Trustee Sale is recorded, the option expires.

Mediators are largely from non-profit dispute resolution centers (“DCRs”)

3

 Mediation Notification:

Within 10 days after getting mediation request, Dept. of Comm. Notifies all parties and selects a mediator.  The Deed of Trust Trustee will also be notified.

 Dept. of Comm. will also notify the parties of the required documentation.

4

 Mediation Schedule:

Scheduled no less than 45 days after mediator selected. This can be agreed-upon by the parties, but 45 days is the default.

Mediator sets time at least 15 days prior to mediation.

 

 Homeowner may be represented by an attorney of other advocate, including a housing counselor.  At the mediation, the lender must have someone of authority to modify or negotiate an agreement (can be by phone)

5

 Documents:

Homeowner – (1) Financial statements, (2) current/future income, (3) debts/obligations, (4) 2 years tax returns.

 

Lender – (1) Loan balance, (2) list of fees/charges, (3) payment history, (4) net present value and loan inputs (5), (6) copy of note/deed of trust

 Not providing documents in a timely manner is often the trigger-point for negotiating in bad faith.  It is vital the individuals provide those documents on time and as completely as possible.  If they are NOT complete, the party must have an explanation.

6

 Mediation:

During the mediation, mediator will encourage the parties to look at all options, and provide a written certification within 7 days after mediation that the parties acted in good faith.

 

Considerations:

1.      Borrower’s economic circumstances

2.      Net present value of modified loan vs. anticipated recovery at foreclosure

3.       Loan mod and net present value calculations are established by the FDIC or other programs

4.       Other loss mitigation guidelines (fed. insured loans)

 

Mediation fee maximum of $400; and can last up to three (3) hours.  It is also split equally between the parties (borrower/lender).

 Parties are obligated to act in good faith. Mediator will adjudge whether parties acted in good faith towards a resolution.

Bad Faith:

(i) failure to participate in the mediation,

(ii) failure to timely share required information,

(iii) failure to pay the party’s share of the mediation fee,

(iv) failure to send an authorized representative to the mediation, and

(v) a request by the lender that the borrower waive future claims.

Good Faith:

(i) Communicate openly and understand/listen to borrower

(ii) Flexibility

(iii) Commitment to keep agreements

7

 Conclusion:

Parties come to an arrangement (loan mod, short sale, etc.). The mediator will establish terms of the resolution and provide the FFA certification on the Dept. of Commerce’s form.

 Homeowner may enjoin the sale of the property if the bank did not mediate in good faith.

Picture credit: jscreationzs,

California courts upholding MERS foreclosure methods, inspite of note/deed of trust issues

Housing Wire‘s website had an interesting little article about some decisions that are coming out of California regarding MERS and its ability to foreclose on properties without having property assignment of the deeds of trust.

I speak with a lot of individuals who approach foreclosure from the standpoint that if the foreclosing entity does not have both the note and deed of trust assigned to them, they therefore cannot foreclose.  MERS (Mortgage Electronic Registration System) presented a problem because it dealt with many of these types of arrangements.  We are now starting to see that the court is not buying that argument, and that at a minimum, MERS may act as an agent on behalf of banks to execute their rights under deeds of trust.

I’m sure there will be more battles forthcoming regarding this issue, but California seems to be laying out at least an initial trend.

The most telling quote from the short article is the following:

“MERS’ legal standing as mortgagee, or agent of the note holder, gives MERS the authority under California law to take action on behalf of the owner of the note,” said Janis Smith, MERS vice president of corporate communications.

(Granted, it’s from MERS, so take that into consideration.)

Who can be compensated for negotiating short sales?

Late last year, the Department of Financial Institutions published a helpful guide regarding short sales and loan modifications. In particular, the DFI intended to provide clarification in plain terms to the RCW 31.04 (Consumer Loan Act or “CLA”) and RCW 19.146 (Mortgage Broker Practices Act or “MBPA”).

Because short sales deal with two specific areas of expertise, in particular real estate transactions and negotiation with creditors (for forgiveness of debt), the regulations outlined in the MBPA and CLA are relevant.  This is because the DFI monitors and regulates loan modification and short sale negotiation services.  Simultaneously, the Department of Licensing regulates the real estate brokerage services that pertain to the actual short sale transactions.

Put simply: because short sales involve both a (1) transaction of real estate and (2) a negotiation with creditors regarding loans (and usually, deficiencies), the DFI and the Dept. of Licensing have an interest.  So, the broader question is “who can get compensated for short sale negotiation services?”  The short answer is “it depends.”

The DFI’s December 2010 bulletin on the subject states the following:

Entities engaging in short sale negotiations for compensation must obtain a license under the CLA or the MBPA, and the individuals who conduct loan modification activities on behalf of such entities must obtain a mortgage loan originator license under one of those two acts. Short sales conducted as part of the negotiation of a real estate transaction by a licensed real estate broker do not require licensure under the CLA or the MBPA, unless the real estate broker is paid separately for the short sale negotiation, in addition to receiving a commission for the real estate transaction. However, this does not extend to unlicensed assistants.
The MBPA and the CLA licensing exclusions for real estate brokers do not apply to real estate brokers who act solely as third-party short sale negotiators or loan modification services providers.Negotiating short sales for a fee is not an activity that requires a real estate license; therefore, a loan originator license from DFI is required if that is the only service the real estate licensee provides.
Real Estate licensees must be providing real estate brokerage services for the transaction in order to negotiate a short sale on behalf of either party to the transaction. Real Estate licensees may not charge any additional fee above the normal and customary commission to provide short sale negotiation services.

http://www.dfi.wa.gov/cs/pdf/short-sale-guidance.pdf

In plain English, the following may receive compensation for negotiating a short sale:

1.  Real estate broker — A broker can get paid for a short sale, BUT only if the fee is not in addition to the commission.  The broker cannot be paid anything above the commission, regardless of how much effort was expended in facilitating the short sale.

2.  Loan originator licensee OR Attorney — This individual can get paid for the actual short sale negotiations, even if he is a third-party to the transaction, however, he cannot be paid commission from a sale in the same fashion as a real estate broker.  If short sale negotiations is the only service provided, a loan originator’s license is required.

3.  Real estate broker with a loan originator OR law license — If someone has both their real estate broker’s license AND a loan originator or law license, he is eligible for both the commission and a separate fee for negotiating the short sale.  Think of this as the best of both worlds.

The above regulations can be summed up the following way — if you are hoping to get a fee for a short sale, you have to be a lawyer or a loan originator.  You cannot only be a real estate broker and expect to receive payment beyond the commission you would otherwise be entitled to in a normal real estate transaction.  For those of you reading this article who are homeowners or prospective short sale buyers, do not be fooled.  If someone is asking for payment beyond the commission for short sale negotiation services, make sure they have the proper licensing.

For more information on this subject, please visit http://www.dfi.wa.gov or http://www.dol.wa.gov, or review RCWs 31.04 and 19.146.  If you wish to search someone’s licensing status, you can also find that information at the DFI and DOL websites.  For attorney’s, you can search for that individual’s status at pro.wsba.org.

Tax implications for short sales and foreclosures

I am often asked by clients what the tax implications are should they choose to pursue a short sale or their property is the subject of a foreclosure. Technically, and they’re right. Debt obligations that are forgiven are usually counted as income to that individual. For example, if you obtain a home loan for $300,000 but sell the property via the short sale process for $200,000, that $100,000 difference that you are no longer required to pay would be taxable as income under normal circumstances. In 2007, the federal government passed the “Mortgage Forgiveness and Debt Relief Act.”

The IRS describes it as follows:

“If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.”

Cancellation of Debt is not always taxable, however. According to the IRS there are some exceptions:

–Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
–Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
–Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
–Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your 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. That is, the lender cannot pursue you personally in case of default. 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

See Publication 4681.

The Mortgage Forgiveness Debt Relief Act of 2007 allows homeowners who have benefited from debt cancellation—usually from a short sale, deed-in-lieu of foreclosure, or foreclosure—to exclude the “income realized” from the forgiveness. Exclusion of income resulting from a cancellation of debt means that the amount forgiven or waived from the creditor (usually a bank) is not considered income and is excluded from determining your federal income tax basis.

Going back to the example in the first paragraph, the $100,000 debt that was cancelled would be excluded from that individual’s income of that year. In a normal year (without the Act in place), if that person made $50,000, but was forgiven $100,000 through a short sale, he or she would be required to include that sum as income for that year, making his income $150,000 and subject to the corresponding tax rate. Because that $100,000 is excluded from his income by virtue of the Mortgage Forgiveness Debt Relief Act, his tax rate is preserved at the $50,000 level.

The above information can be found at the following link: http://www.irs.gov/individuals/article/0,,id=179414,00.html

I would also refer you to an in-depth review of the law at http://www.homesalessandiego.com/blog/mortgage-debt-forgiveness-law/.

*Lawyers at Dickson Steinacker, PS are NOT tax specialists. Federal income taxes are a serious matter and should be dealt with through counsel from a qualified accountant or tax attorney. Because much of our business deals with real estate issues such as short sales, foreclosures and loan modifications, we feel it is important to be cognizant of the broader implications of debt cancellation (hence, the above blog entry). If you are in need of more detailed/specific guidance for your tax matters, we recommend contacting a tax attorney or qualified accountant. Do not rely solely on this entry for your tax strategy.

Foreclosures: Washington State is a “non-recourse” state (sort of)

Sign_of_the_Times-ForeclosureOne of the common statements made to me when new clients call to discuss their foreclosure, is the following:  “I don’t care if there is a deficiency when the bank forecloses on my property because Washington is a non-recourse state,” implying that he or she is free of having to pay a deficiency should the house sell for less than what is owed.  The response I always give to that proclamation is “it depends.”

Banks may choose between two options when deciding how to foreclose on property.  The most common (by far) is the non-judicial foreclosure.  This type of foreclosure is straightforward: the bank uses its leverage under their Deed of Trust on the home (think of the Deed of Trust as a very powerful lien…which it is) to compel a sale by the trustee that services the Deed.  This sale is called a trustee sale.  Once the property is sold to an innocent third party purchaser at the trustee sale, the bank is barred from collecting any deficiency on the collateral. For example, if your home is worth $300,000 and the bank forecloses on the property through the non-judicial foreclosure method and nets only $200,000 in the sale, the balance of the $100,000 cannot be collected from the borrower.  Thus, while the credit standing of the borrower may have taken a big hit, he or she no longer has to worry about satisfying that debt obligation.

As you might expect, foreclosures are not always that rosy: there lurks another option that banks may use at their discretion: the judicial foreclosure.

A judicial foreclosure is executed through the courts and is easily identified because it is an actual lawsuit against the homeowner.  How is this possible, you ask?  Why doesn’t the bank just go after the Deed of Trust and sell the property?  A judicial foreclosure goes one step further than regular non-judicial foreclosure: it not only allows the bank to compel a sale of the property, but it provides an avenue by which the bank can obtain a deficiency judgment for whatever balance was lacking in the sale.  Going back to our example above, if that individuals home is sold for the $100,000 deficiency, the bank can move the court to have that sum converted into a judgment against you. Judgments are nasty because they become automatic liens on all real and personal property.  With a judgment a bank can garnish wages and pursue other avenues against the borrower’s assets.

It is still a mystery to me why some people are pursued via judicial foreclosure rather than non-judicial foreclosure.  However, if I had to guess why they choose that option, I would have to say it’s because they suspect (right or wrong) that the borrower has money to cover the judgment.