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

Categories for

Foreclosure Fairness Act Guide

Posted on December 30, 2012 by Robert P. Dickson

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,

Tags: , , ,

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

Posted on December 30, 2012 by Robert P. Dickson

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.)

Tags: , , ,

Tax implications for short sales and foreclosures

Posted on December 30, 2012 by Robert P. Dickson

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.

Tags: , , ,

Thoughts on forensic audits and what they can (or can’t do) for you

Posted on December 30, 2012 by Robert P. Dickson

Lately I’ve been fielding calls from individuals that have obtained what are called “forensic audits” of their mortgage documents.  Usually, this is in conjunction with a difficult scenario that they have found themselves in, where they are behind on their payments and are looking for any ammunition to defend against a foreclosure.  In theory, a forensic audit is straightforward: a company will comb through your mortgage documents for “violations” or other signs of misconduct by the lending institutions.  This is usually not too difficult a task given that many of the regulations that control these transactions are extremely technical.  Violating them is easy, in other words.

The bigger issue is what to do with the violations when they are discovered.  There has not been a tremendous amount of precedent in this regard (at least in Washington, there hasn’t been), but I would advise against the notion that faulty mortgage documents equal borrower keeping home.  That is not likely to happen for a few reasons — first, the bank did loan money out to the individual, which technically, would need to return the funds if the transaction were undone and reset; second, the parties relied and acted upon the loan.  A court could reset the entire mortgage and order that, if possible, the parties be put back to their proverbial starting points.  This obviously present a problem in and of itself, given that the home may be underwater and the borrower may not have the funds to refund the bank for the money issued in the original loan.

So, in short, for those of you leaning on a forensic audit as the resolution to your mortgage predicament, I’d make sure to have a backup plan.

Tags: ,

Foreclosures in Seattle spiked in June

Posted on December 30, 2012 by Robert P. Dickson

This blog post from the Seattle Bubble Blog is quite informative about the most recent foreclosure assessment for the Seattle area.  Perhaps we are starting to see the second waive of foreclosures?

Though I’m sure we will eventually turn this market around, it seems to be clear that we are in it for the long haul.  It does not help with the recent news that Colliers closed its offices in Tacoma, and GVA Kidder Mathews intends to drop its affiliation with GVA (national brand/presence) in the coming months.

One can’t help but wonder whether or not the days of consistent 6–9% annual home appreciation are gone…at least for the foreseeable future.

Tags: ,

Walking away from a home, may cost you more than you think

Posted on December 30, 2012 by Robert P. Dickson

According to this article, published on AOL’s real estate section, if a homeowner simply “walks away” from a mortgage, Fannie Mae is raising the stakes.  Here is a short quote from the article:

Here’s the breakdown for eligibility depending on how you got out of your last mortgage:
Deed-in-Lieu of Foreclosure> — reduced from four years to two years if you can put down 20 percent on your house, four years if you can only put down 10 percent.

Preforeclosure Sale — remains at two years if you can put down 20 percent, four years if you can only put down 10%.

Short Sale — will be the same as pre-foreclosure sale. Currently there are no set rules for short sale.

Strategic Default (Walk Away) — seven years.

 

Tags: , , , , , ,

Important things to keep in mind when facing foreclosure

Posted on December 30, 2012 by Robert P. Dickson

BSpencerhomeIn a recent case, the issue arose as to what options a party has when their home has already been foreclosed upon, and sold in a trustee’s sale.  Washington’s Deed of Trust Act provides direction for this issue in RCW 61.24.130.

As interpreted in In re Marriage of Kaseburg,126 Wash.App. 546, 108 P.3d 1278 (2005), a party waives the right to post-foreclosure-sale remedies under the Deed of Trust Act where the party:

  1. received notice of the right to enjoin the sale;
  2. had actual or constructive knowledge of a defense to foreclosure prior to the sale; AND
  3. failed to bring an action to obtain a court order enjoining the sale

This Act provides a the only manner in which ANY party may prevent or restrain a trustee’s sale on any proper ground, once the foreclosure has begun with a “receipt of the notice of sale and foreclosure.”  Id. at 236.

It would seem that the safeguards required before a trustee’s sale can go through, influenced what that legislature allows in post-foreclosure-sale remedies.  In other words, even if there is a valid reason to undue a trustee’s sale, you must take those steps prior to the sale.  IF, of course, you did not receive proper notice and were not aware of the sale, you are NOT barred from bringing an action to stop the sale.

To be safe, if one is facing a foreclosure and his/her home has a scheduled trustee’s sale date, the best thing is to hire an attorney to initiate the legal process.  At a minimum, therefore, the home owner is not guilty of waiving his or her rights to post-foreclosure-sale remedies and can forestall the process before it is too late.

Tags: , , , , , ,