Short Sale, Foreclosure and Strategic Default

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Saturday, August 11, 2007

Tax liability for non recourse loans?

I spoke with a Carlsbad and Point Loma homeowners this week and they wanted to know if they would be responsible for deficiency judgments and or potential tax liability.

Of course the tax deficiency question revolves around the issues of whether a loan is a recourse or non recourse loan. Since we have already covered those questions recently in this blog we will move to the next question.

Will there bill tax liability if the loan is forgiven. While I knew the answers, I did not have legal support for my opinion. If a lawyer does not have the law, the case, or the code, he or she will not feel comfortable giving his opinion. (this is why lawyers have a tendency to qualify their responses). So, after spending some time reading IRS publications I now have the support I need to give my opinion.

Since this topic of tax liability and loan forgiveness can be somewhat complicated, I am willing to answer a few questions here on this blog. Please submit your questions as comments.

Friday, August 10, 2007

Without Jumbo loans are more short sales and foreclosures inevitable?

Loan broker jonathan santiago said this:
For more on what the Federal Reserve is doing now, check out: http://www.bloomberg.com/apps/news?pid=20601087&sid=aVxY19yfBpAI&refer=home

For the recent news regarding Countrywide and Washington Mutual, check out: http://www.bloomberg.com/apps/news?pid=20601087&sid=aVuWc7w4pjhY&refer=home

It's not just stated loans that are getting higher rates. Jumbo loan rates are getting higher too (A Jumbo loan has a loan amount over $417,000). It doesn't matter if your clients have a score of 800 and have tons of reserves. Any non-conforming loan (basically a loan that Fannie Mae and Freddie Mac don't purchase) is viewed as too risky. No one wants to buy those kinds of mortgage-backed securities unless they have a higher rate or return which means a higher interest rate for your borrower. (The Saga of the US Mortgage Market has more details).

Will the Federal Reserve come to the rescue? While the market is certainly hoping so, there are still some experts out there who feel that they won't cut rates. Cutting rates may be seen as a panic move and would roil the markets even further. Instead, they may just keep adding cash to the system thereby increasing liquidity for these lenders and making sure they stay afloat. It's a real catch-22 for the Federal Reserve and a task that Ben Bernanke faces that no other Federal Reserve Chairman has ever faced before. Hold on folks...it's already a real bumpy ride!
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Former New York Stock Exchange corporation are now trading at pennies on the dollar.

"HomeBanc Corp., an Atlanta-based mortgage lender, filed for bankruptcy protection today, two days after saying it would sell some of its assets to Countrywide. The company said Aug. 7 bankers had cut off credit and left it unable to fund loans."

from bloomberg.


I can't imagine prices in San Diego staying where they are if people can not get jumbo loans at reasonable rates. If the fed does not wish to figure this problem out we could be in real trouble. Although the equity in my house is getting crushed, I can't help but predict short sales and foreclosures are going to skyrocket in the high priced ares like San Diego and other parts of California.

Wednesday, August 8, 2007

Bad faith waste of a foreclosure property

Many people working in Real Estate in San Diego have seen nice homes in nice subdivisions trashed by homeowners who were subject to foreclosure actions. California homeowners should be aware that bad faith abuse and possibly even omissions to act could take the homeowner out of the protection anti-deficiency provision of California law.

Any deliberate impairment of the security (real estate for our purposes) and sometimes omissions causing impairment to the security could subject homeowners to deficiency proceedings.

California anti-deficiency law

Two fairly common "non standard" transactions which therefore do not merit California 580b protection are:

1. an unsecured note
2. an action for recovery against a guarantor of a note. I also saw a note about letters of credit not being subject to 580b protections.

There are other exceptions.

pre-foreclosure - non-recourse loan?

Does the second have right to go after the borrower. It seem that there is a basic rule and a caveat

The basic rule is that 580b protection would apply in standard transactions with sold out juniors.

However the 9th circuit has made a ruling which seems to leave this area of the law somewhat open to good arguments. In the Prestige case the court distinguished cases in which the security was exhausted by a senior sale without giving us much further guidance.

I am just thinking this through but we seemed to be left with the the strange conclusion that an upside down homeowner worried about deficiency may be "incentivised" to make sure the second is "sold out".

Also note this information does not necessarily apply to non standard transactions or construction loans. And seriously please have your situation reviewed by a California attorney. The above information is a quick overview at best. If you were my client I would do a great deal more research before giving any "advice".

antideficiency, recourse and non recourse loans

Many of the questions I have been getting lately come from people with a first and a second loan. The second is usually very underwater and the question is - will the bank come after me. So in with respect to this scenario lets answer the question.

Answer - it depends.

Purchase money loans were once characterized as loans for the seller of the property. California extended the law to third parties who provided loaned funds to the buyer to purchase the property from the seller.

California Code of Civil procedure section 580b in general stands for the fact the buyer is protected from deficiency judgments after foreclosure from the seller of the property. A buyer would also be protected from third parties who provided funds for the purchase of the property.

For the purposes of this discussion please remember that lenders can and do attempt to get around the 580b protection by arguing the transaction was not a standard transaction. (which is why I have all the disclaimers at the bottom of the page about having your facts reviewed by licensed attorney.)

Monday, August 6, 2007

No Money Down Disappearing as Mortgage Option - washingtonpost.com

No Money Down Disappearing as Mortgage Option - washingtonpost.com

No money down mortgages or 100% financing are becoming rare as major lenders have pulled out of the market.

I remember back in the late 90s when people needed to put down 20% or get very unfavorable rates. In fact even in 2003, going with less than 10% down sometimes caused a penalty in your rates

SignOnSanDiego.com > News > Metro -- Foreclosure agents bask in bad times

"SignOnSanDiego.com > News > Metro -- Foreclosure agents bask in bad times: "Today, of the nearly 24,000 listings of resale houses, condominiums and mobile homes, roughly one-fifth were identified by Sandicor, a local multiple listing service, as distressed properties either in foreclosure or approaching the stage where owners could lose their homes.

Agents who specialize in the properties, known as real-estate-owned homes, or REOs, say they're having a field day. While it may be a bit morbid there is a certain side of the real estate industry which does well in bad times."

If one fifth of the properties are distressed one would have to wonder what is keeping the prices up. Over the weekend I noticed some home in Carlsbad which were REO listings. And these listings were priced significantly below the market. Homes were for sale for 700 thousand or less which buildes were attempting to sell for over 800,000 in January.