Your Options To Avoiding Foreclosure

California Foreclosure Timeline

Mon, 02 Nov 2009 14:33:13 GMT

California Foreclosure Timeline

Copyright© 2008, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). Permissionis granted to C.A.R. members only to reprint and use this material fornon-commercial purposes provided credit is given to the C.A.R. LegalDepartment. Other reproduction or use is strictly prohibited without theexpress written permission of the C.A.R. Legal Department. All rightsreserved.

When a real estate transaction involves a property in foreclosure, knowing the foreclosure timeline helps you as the real estate agent to assess whether you have enough time to close escrow before the foreclosure sale. Starting September 8, 2008, California has a special foreclosure timeline for loans originated between 2003 and 2007, inclusive, which are secured by owner-occupied residences. Indeed, loans involved in short sales are likely to be owner-occupied loans from the years 2003 to 2007, which was the heyday for subprime lending. The special foreclosure timeline does not apply if the borrower has filed for bankruptcy, surrendered the property, or contracted with a person or entity whose primary business is advising people, who have decided to leave their homes, on how to extend the foreclosure process and avoid their contractual obligations. The special foreclosure timeline will remain in effect until January 1, 2013. (Cal. Civ. Code § 2923.5.)

FORECLOSURE TIMELINE FOR OWNER-OCCUPIED REAL PROPERTY LOANS (made from 2003 to 2007)

The approximate minimum time frames for the non-judicial foreclosure of owner‑occupied real property loans made from 2003 to 2007 are as set forth below. In California, most lenders elect to foreclose non-judicially by conducting trustees' sales, not by judicial foreclosure.

Pre-Foreclosure Period

A lender may initiate the foreclosure process when a borrower defaults on a loan, such as by missing a mortgage payment. However, a slight delay may not justify acceleration and foreclosure by the lender. Hence, in practice, lenders generally wait a few months after a missed payment before starting the foreclosure process.

Day 1: Lender Contacts Borrower

For owner-occupied loans from 2003 to 2007, a lender initiating the foreclosure process must generally contact the borrower by phone or in person to assess the borrower’s financial situation and explore options for avoiding foreclosure. During the conversation, the lender must inform the borrower of the right to meet with the lender within 14 days. The lender must also give the borrower the toll-free number for finding a HUD-certified housing counseling agency.

Day 31: Filing of Notice of Default

For owner-occupied loans from 2003 to 2007, the lender may file a notice of default 30 days after contacting the borrower to explore options for avoiding foreclosure. The notice of default must be filed in the county where the property is located and a copy must be mailed within 10 business days after recordation to the borrower and all other persons who have requested such notice. The notice of default informs the borrower of the default. It must also include the lender's declaration that it has contacted the borrower to explore options for avoiding foreclosure, tried with due diligence to contact the borrower, or the borrower has surrendered the property.

Day 121: Filing of Notice of Trustee’s Sale

Three months after the filing of the notice of default, the lender may record a notice of trustee’s sale setting forth the date, time, and place of the upcoming trustee’s sale. Because of the gravity of a notice of trustee’s sale, it must be widely disseminated. The notice of trustee’s sale must be recorded, posted, mailed to the borrower and others, as well as published once a week for three consecutive weeks in a newspaper of general circulation.

Day 145: Deadline to Cure Default

Up to five business days before the trustee’s sale, the borrower may reinstate the loan by curing the default or paying the missed payments plus allowable costs. After the reinstatement period expires, the borrower still has the right to redeem the property by paying the entire debt, plus interest and costs (not just the arrearage), before the bidding begins at the trustee’s sale.

Day 152: Trustee’s Sale

Although California law allows a trustee’s sale to take place 20 days after the posting of the notice of trustee’s sale, lenders customarily wait at least 31 days instead to help protect against federal tax liens. At the trustee’s sale, the property is sold through a public auction to the highest bidder. Title is transferred to the successful bidder by trustee’s deed.

USING THIS FORECLOSURE TIMELINE

A foreclosure timeline helps you as a listing agent ascertain whether you have enough time to market and sell the property as a short sale. Depending on the stage of foreclosure the homeowner is in (“Foreclosure Stage”), the chart below gives you the total time frame you have, at a minimum, to sell a property as a short sale before the trustee’s sale occurs (“Minimum Time Left to Sell”).

Foreclosure Stage	Minimum Time Left to Sell
Homeowner just missed making mortgage payment for the first time.	About 6 to 8 months total
Homeowner has just been contacted by the lender to explore options for avoiding foreclosure.	About 5 months total
Notice of default has just been filed.	About 4 months total
Notice of trustee’s sale has just been filed.	Date of trustee’s sale is on notice of sale

As an example, if a notice of default has just been filed, you have a minimum of about four months to sell the property before the trustee’s sale may occur. That’s four months not only to find a buyer, but also to get the lender to approve the short sale and close escrow. The short sale lender may agree to postpone the trustee’s sale in some situations (such as when there’s an accepted offer), but be sure to get any agreement for a postponement in writing.

FORECLOSURE TIMELINE FOR OTHER TYPES OF LOANS

For loans that are not secured by owner-occupied real property or not madefrom 2003 to 2007, lenders are not required to contact the borrowers to exploreoptions for avoiding foreclosure. For these loans, the total minimum timefor the foreclosure process is roughly only 122 days, not 152 days. Ifthe lender is not required to contact the borrower, the foreclosure processtakes a minimum of about 4 months from the filing of the notice of default tothe day of the trustee’s sale.

This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit C.A.R. Online at www.car.org.

Readers who require specific advice should consult an attorney and accountant.

The information contained herein is believed accurate as of December 2, 2008. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.

Deficiency Judgments and California Law

Mon, 02 Nov 2009 14:21:20 GMT

Deficiency Judgments and California Law

Copyright© 1993, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) Permission is granted to C.A.R. members only to reprint and use this material for non-commercial purposes provided credit is given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R. Legal Department. All rights reserved.

Table of Contents

I.    Introduction

II.   The General Rules

III. Exceptions To The General Rules

A. Fraud

B. Bad Faith Waste

C. Non Standard Transactions

D. Sold Out Junior Lienholders

E. Environmentally Impaired Properties

IV. Exception To The Exceptions

V.   Waiver Of Anti-deficiency Protection

VI. Third Parties

A. Guarantors

B. Real Estate Brokers

C. Mortgage Brokers

D. Broker's Commission

VII. Conclusion

I. Introduction

Loan . . . . 2. Something lent; esp. a sum of money lent, often for a specified period and repayable with interest. . . . (Webster's New World Dictionary, 2nd College Edition, 1976)

Loans are often evidenced by a written agreement called a promissory note. In a typical real estate transaction in California the note is secured by a trust deed on the real estate. Loans are made by a variety of sources such as institutional lenders (banks, savings and loans, and pension funds), private investors, mortgage bankers, and sellers. For some purposes (such as usury limitations), a seller who allows the buyer to make payments over time is not considered to have made a loan but rather to have given an extension of credit. For the remainder of this article, however, unless otherwise stated, seller carry-backs will be considered loans. Loans are made for a variety of purposes such as to purchase a property, refinance an existing loan, or pull equity out of a real estate asset in order to buy goods, pay off debts, or make investments.

The expectation of the lender at the time the loan is originated is that the borrower will make payments called for by the note and eventually pay off the loan in full. There are times, however, when a borrower is unable to meet its contractual obligation and defaults on the note. When a borrower defaults, California law generally requires a lender with a secured interest in real estate to foreclose on the real property securing the loan before proceeding against the borrower for collection of the debt. This procedure is known as the "One Action Rule" or the "One Form Of Action Rule" and is found in California Code of Civil Procedure section 726 which, in part, states:

There can be but one form of action for the recovery of any debt or the enforcement of any right secured by a mortgage upon real property. . .

While this section appears to give a lender a choice of how to proceed to collect a debt, it has been interpreted to mean that a lender must pursue the security first. (Walker v. Community Bank, 10 Cal. 3d 729 (1974).) Only after the security (real estate) has been foreclosed upon can a lender pursue a borrower personally for collection on the debt.

Also, even though the statute makes reference to a mortgage, it applies to a deed of trust as well. (Security Pacific Bank v. Wozab (1990), 51 Cal. 3d 991, Bank of California v. Leone, 37 Cal. App. 3d 444 (1974).)

A lender can bring a judicial foreclosure, which involves the filing of a lawsuit for collection of the debt and obtaining a court order for the sale of the property. If the documentation is proper, the lender has the right to bring a nonjudicial foreclosure, or trustee sale, to acquire the security. In certain instances, California law prohibits the lender from pursuing the borrower at all. In those instances the "security first" rule of Code of Civil Procedure section 726 really becomes a "security only" rule.

This article will discuss circumstances under which a secured lender can pursue a borrower, or someone else, personally for a recovery of an unpaid debt as well as when a lender is prohibited from seeking any redress beyond the secured real property. The steps of the foreclosure process itself will not be addressed except when necessary to an understanding of how a particular step affects a lender's ability to seek compensation beyond the secured property. For purposes of this article, the difference between the amount of the unpaid balance on a loan and the amount recovered from the security is referred to as a deficiency judgment.

II. The General Rules

California has enacted anti-deficiency legislation which is found in Code of Civil Procedure sections 580b and 580d. Code of Civil Procedure section 580b prohibits deficiency judgments based on the character of the loan at the time it is made. A lender whose loan is made for the purchase of residential property containing one-to-four units, one of which the borrower intends to occupy, and whose loan is secured by that same property, may only pursue the security and not the borrower. Additionally, section 580b prohibits a seller who has carried back a loan as part of the sales price of the property from obtaining a deficiency judgment against a defaulting borrower. This seller carry-back rule applies to any type of property, not just residential one to four. The statute reads as follows:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein.

Notice that section 580b does not refer to a seller but instead to a deed of trust given by the vendor to receive payment of the purchase price. The term vendor has been interpreted to include not just sellers but also previous lienholders who allow their liens to be assumed in order to effectuate a sale. (Costanzo v. Ganguly, 12 Cal. App. 4 1085 (1993).) Thus, even these prior lienholders/"vendors" are prevented from obtaining a deficiency judgment.

The prohibition on deficiency judgments found in Code of Civil Procedure section 580d, on the other hand, does not depend on the character of the loan, but rather on the process of the foreclosure action. Section 580d prohibits deficiency judgments when the property is sold through the exercise of a power of sale clause contained in the deed of trust. Thus, section 580d applies to nonjudicial, or trustee's sales, regardless of the type of property or the character of the loan.

As a result of section 580d, deficiency judgments, with limited exceptions, are only permitted following a judicial foreclosure. Even so, there are limitations on the amount of a deficiency following a judicial foreclosure. The amount of the deficiency judgment allowed is the lesser of:

The amount by which the debt exceeds the fair value of the property at the time of the foreclosure sale or
The amount by which the debt exceeds the sales price of the property at the foreclosure sale.

(Cal. Code Civ. Proc. § 726(b).)

For example, if a lender was owed $300,000 at the time of the foreclosure sale and a successful bidder at that sale paid $225,000, but the property's fair value was $250,000, then the maximum deficiency judgment allowed would be only $50,000. This is the case because the difference between the debt and the fair value ($300,000 - $250,000 = $50,000) is smaller than the difference between the debt and the amount received ($300,000 $225,000 = $75,000).

In order to obtain a deficiency judgment, a lender must apply to the court for a deficiency judgment within three months of the judicial foreclosure sale (Cal. Code Civ. Proc. § 726(b)).

When reviewing the general rules regarding deficiency judgments, it is important to remember that any single rule which prohibits deficiency judgments will be effective regardless of the other rules. For example, the seller who carries back a loan as part of the sale of an office building cannot obtain a deficiency judgment even following a judicial foreclosure. (Cal. Code Civ. Proc. § 580b.) Similarly, even if a judicial foreclosure action is pursued, a bank which has made a purchase money loan on an individual condominium which was to be owner occupied cannot obtain a deficiency judgment. (Cal. Code Civ. Proc. § 580b.)

III. Exceptions To The General Rules

Remember, the general rules governing deficiency judgments are:

^. A lender must pursue the security before pursuing a borrower individually for a debt;

^. No deficiency judgment is allowed following a trustee's sale;

^. No deficiency judgment is allowed when the loan is a seller carry back; and

^. No deficiency judgment is allowed when the loan is a purchase money loan for residential property containing one-to-four dwelling units.

Of course in law, as in life, there are always exceptions to the general rules and such is the case with the law of deficiency judgments.

A. Fraud

In spite of the anti-deficiency rules, a lender is permitted to sue a borrower for damages if the borrower fraudulently induced the lender into making the loan in the first place. This is true whether the foreclosure sale is judicial or non-judicial and whether or not the loan is purchase money. The Code of Civil Procedure even allows for the collection of punitive damages up to 50 percent of actual damages. However, if the loan is secured by a single family owner-occupied, residential property in an amount not exceeding $150,000, annually adjusted, then the Code exemption does not apply. (Cal. Code Civ. Proc. §§ 726(f), (g) & (h).)

B. Bad Faith Waste

Waste can be defined as the failure of the borrower to maintain the property. While the general anti-deficiency rules apply if the borrower has allowed a waste to occur, California courts have allowed actions for a deficiency judgment in the event the borrower has committed "bad faith waste." (Cornelison v. Kornbluth,15 Cal .3d 590 (1975).) This is true whether the foreclosure sale is judicial or non-judicial and whether or not the loan is purchase money.

Bad faith waste is an injury to the property by the action or inaction of the person in possession which is reckless, intentional, or malicious. Only the damage resulting from bad faith waste, as opposed to decline due to market conditions or ordinary waste, is recoverable. (California Real Estate 2d, Miller & Starr, section 9:195, p. 620,section 9:50 pp. 136-137.)

C. Non-Standard Transactions

The Code of Civil Procedure section 580b's prohibition against deficiency judgments only applies to standard transactions. (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963).) For example, a seller who carries back a loan secured by a first deed of trust would be subject to section 580b. The same would be true of a seller who carries back a loan secured by a second deed of trust when the senior lien secures a conventional loan. However, the courts have held that a seller of vacant land who subordinates a seller carry-back loan to a commercial construction loan is not barred from obtaining a deficiency judgment following a judicial foreclosure. (Spangler v. Memel, 7 Cal. 3d 603 (1972).)

It is interesting to note that one court has held that a construction lender supplying funds for construction of a borrower's personal residence (a situation we may think of as both non-standard and non-purchase money) was barred by section 580b from obtaining a deficiency judgment. (Prunty v. Bank of America,37 Cal. App. 3d. 430 (1974).)

Yet, a borrower who takes out a construction loan for improvements or repairs, but not to finance a personal residence, is subject to a deficiency judgment. (Allstate Sav. & Loan Ass'n v. Murphy, 98 Ca;. App. 3d 761 (1979).) It is not always easy to determine whether a loan is a standard transaction subject to the purchase money and seller carry-back restrictions on deficiency judgments or a non-standard transaction in which a deficiency may be obtained.

D. Sold Out Junior Lienholders

The security first rule does not prohibit a lender from suing directly on the debt when the security is legally worthless. Legally worthless is to be distinguished from economically worthless. For example, let's say a buyer borrows $800,000 from a lender secured by a first trust deed in order to purchase a $1,000,000 property. Subsequently, the same person borrows an additional $200,000 secured by a second trust deed. The junior lienholder appraised the property at that time at $1,250,000. If market conditions change and the property drops in value to $800,000, and the borrower stops making payments on this second loan, the junior lienholder must foreclosure rather than sue on the debt. While the junior security has no economic value, it is still legally valuable. On the other hand, if in our example, a senior lienholder foreclosed, resulting in the property being conveyed free and clear of the junior lien, then the junior security, in and of itself, has no value. In that situation, the junior lienholder can sue the borrower directly on the note. (Roseleaf Corp. v. Chierighino, supra.)

The sold out junior lienholder is unable to take advantage of this exception if the junior lien secures a standard purchase money loan. (Brown v. Jensen, 41 Cal. 2d 193 (1953).)

Additionally, the worthless security exception does not apply if the lender itself has taken some action to make the security worthless. A recent case has held that a lender which had both a first and a third deed of trust on a property could not pursue the borrower directly on the debt secured by the third trust deed if the lender had caused the third to be relinquished by foreclosing on its own first trust deed. (Simon v. Superior Court (Bank of America), 4 Cal. App. 4th 63 (1992.) A creditor who loses it's security through a culpable act does not come within the exception to the security first rule. (California Mortgage and Deed of Trust Practice, 2nd edition, Roger Bernhardt, section 4.7, p. 192.)

E. Environmentally Impaired Properties

For loans, extensions of credit, guaranties, or other obligations secured by real property made, renewed, or modified between January 1, 1992 and December 31, 1999, a lender may elect to waive its security and pursue it's rights as an unsecured creditor, notwithstanding Code of Civil Procedure section 726, if the secured real property is environmentally impaired.

A lender does not have this option, however, if the security is a unit in a residential common interest development or residential property containing 15 or fewer units. A lender also does not have this right if the environmental hazard was not knowingly or negligently created, caused, or contributed to by the borrower or any related entity and, at the time of the secured obligation either the borrower was unaware of any environmental hazard or, if aware, disclosed such information to the lender. (Cal. Code Civ. Proc. § 726.5.)

IV. Exception To The Exceptions

As noted above, a lender is not barred by the one action rule, section 580b, or section 580d from pursuing a borrower for a deficiency judgment if the borrower had committed fraud in the inducement of the loan or bad faith waste upon the property prior to the foreclosure sale. However, even in those cases, a lender cannot pursue the borrower if there is no deficiency. Thus, a lender who submits a full credit bid for the property at a trustee's sale is deemed to have received property worth the amount of the bid. A full credit bid represents a satisfaction of the unpaid debt. Even if the property is actually worth less than the amount credit bid at the foreclosure sale, the full credit bid in and of itself cuts off a lender's right to a deficiency judgment against the borrower who has committed fraud or bad faith waste. (Western Federal Savings v.Sawyer, 10 Cal. App. 4th 1615 (1992); Cornelisun v. Kornbluth, supra.)

V. Waiver of Anti-deficiency Protection

The anti-deficiency protections cannot be waived by a borrower contemporaneous with or upon renewal of a secured loan. (Cal. Civ. Code § 2953; Freedland v. Greco,45 Cal. 2d 462 (1995).) However, anti-deficiency protections can be waived subsequent to the loan being made if the waiver accompanies some event other than a renewal. For example, a waiver in connection with an extension of a loan or some other consideration or concession by the lender can be valid. (California Mortgage and Deed of Trust Practice, supra, section 4.49, p. 231, California Real Estate 2d, supra, section 9:174 p. 585.)

Each of the anti-deficiency protections must be waived separately. A waiver of the purchase money protection ((Cal. Code Civ. Proc. § 580b) will not have an effect on the protections afforded the borrower after a trustee sale has been conducted ((Cal. Code Civ. Proc. § 580d).

VI. Third Parties

A. Guarantors

In certain situations a lender can look to others for compensation for the loss suffered by the lender. One of these situations is where the note has been guaranteed by a third party. The following rules concerning guarantors only apply to true third party guarantors since a principal obligor under a note cannot guarantee his/her own performance. For example, a guarantor who is a partner of a general partnership is entitled to the same anti-deficiency protections as a partner who is not also a guarantor. The reason being that a general partner is personally liable for partnerships debts. This rule holds true even if the note is a non recourse note. (Westinghouse Credit Corp. v. Barton, 789 F. Supp. 1043 (1992).) Also, if individual shareholders guarantee a debt for a corporation which is nothing more than a "sham" or the alter - ego of guarantor/shareholder then the anti-deficiency rules protect the guarantor. (Valinda Builders v. Bissner,230 Ca;. App. .2d 106 (1964).)

A lender who forecloses non-judicially against a property is precluded from seeking a deficiency against a guarantor. (Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968).) However, although not yet clarified by the California Supreme Court, there remains a possibility that a lender can pursue a guarantor of a purchase money debt for a deficiency remaining after a trustee's sale. (Mortgage and Deed of Trust Practice, supra, section 8.15 and California Real Estate 2d, supra, section 9:198.)

A lender who judicially forecloses retains a cause of action against the guarantor for any deficiency. It is unclear however, whether the guarantor's liability is limited by the fair value rule of Code of Civil Procedure section 726.

A guarantor may waive the protections afforded by the one-action and anti-deficiency rules. Thus, the guarantor can give up the right to have the lienholder foreclose on the security before taking recourse against the guarantor. The guarantor can also give up the protections afforded by Code of Civil Procedure sections 580b and 580d. Once the guarantor pays, the guarantor is subrogated to the security, if any is left, held by the lender and may use it against the borrower subject to any defenses the borrower would have against the lender.

The guarantor's waiver is enforceable if it is clear and specific enough to adequately advise the guarantor what rights are being waived. (Gradsky, supra; Cathay Bank v. Lee,18 Cal. Rptr. 2d 420 (1993).)

B. Real Estate Brokers

1. Mortgage Brokers

A lender who has used the services of a mortgage broker may have another source to look to when a loss cannot be recovered from the secured property or the borrower. The case of Barry v. Raskov, held that a mortgage loan broker is liable to a lender for the fraud or negligence of an independent appraiser it hired to appraise the security property. (Barry v. Raskov, 232 Cal. App.3d 447 (1991).)

Essentially, the court held that the lender had a valid action against the mortgage broker since the duty to obtain an appraisal is not delegable and a broker who relies on an appraiser is responsible for the fraudulent or negligent performance of that appraiser.

2. Broker's Commission

A broker who takes a commission in the form of a note secured by the property to be purchased is treated as a lender but not a vendor for purposes of section 580b. (Kistler v. Vasi,71 Ca;. 2d 261 (1969).) Thus, a broker who takes a commission in the form of a note secured by commercial property is not precluded from obtaining a deficiency judgment following a judicial foreclosure sale.

VII. Conclusion

So, did you follow all of that? If so, congratulations! The way I see it, the lesson to be learned is that, usually, deficiency judgments cannot be obtained,. . . but sometimes they can.

Lenders have an improved chance of receiving a deficiency if:

^. The loan is secured by commercial, as opposed to residential, property;

^. The loan is a refinance or other non-purchase money transaction;

^. The lender pursues a judicial rather than a non-judicial foreclosure; or

^. The borrower has signed a waiver of the various anti deficiency protections.

Borrowers, on the other hand, are least likely to suffer the consequences of a deficiency judgment if any of the following factors are present:

^. The loan was used to purchase a residential property to be occupied by the borrower;

^. The loan is made by the seller of the property; or

^. The lender pursues a trustee's sale rather than a judicial foreclosure.

Beyond these general rules of thumb, the only way to know for sure if a deficiency judgment can be obtained is to examine the facts surrounding a particular loan and then to analyze those factors in light of the rules enumerated here and in the law.

NOTE: This article may be cited as: Kalin, Deficiency Judgments and California Law, 11 LEaDeR 2 (1993).

Written by Neil D. Kalin, Senior Counsel-Manager, C.A.R. Member Legal Services, October 1993.

The information contained herein is believed accurate as of October 1993. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.

List of Non-Profit Groups and other useful information.

Mon, 02 Nov 2009 13:26:09 GMT

List of Non-Profit Groups and other useful information.

1) Hope Now Alliance: 1-888-995-HOPE www.hopenow.com

2) HUD Approved Counselors: 800-569-4287

3) California Bar Association Real Estate Information Page: www.foreclosureinfoca.org

4) Debt Collections Information: 1-877-FTC-HELP www.ftc.gov

Taxation of Foreclosures and Short Sales

Mon, 02 Nov 2009 13:07:57 GMT

Taxation of Foreclosures and Short Sales

Copyright© 2008, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) Permission is granted to C.A.R. members only to reprint and use this material for non-commercial purposes provided creditis given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R. Legal Department. All rights reserved.

Introduction

It has been some time since the real estate industry, on a large-scale basis, has had to deal with foreclosures, deeds in lieu of foreclosure, short sales and other distress sales of real property. Unfortunately, distress sales of real property, resulting from a convergence of tightening credit, falling property values, and the consequences of prior lending practices, are all too common currently and do not appear likely to end any time soon.

Seemingly adding insult to injury, owners of real property facing a distress sale, and generally already under financial strain, may be unpleasantly surprised to learn that two types of taxable income can result from a foreclosure, deed in lieu of foreclosure, or short sale: capital gains and forgiveness of debt (cancellation of debt) income. Both types of income can trigger unexpected taxes for the owner.

This legal article discusses the income tax consequences to the borrower in the event of foreclosure, the event the borrower simply transfers title to the lender (deed in lieu of foreclosure), and if the borrower sells the property to another in a short sale in which a lender accepts less than the balance due on the loan as payment in full.

Q 1. Are foreclosures, deeds in lieu of foreclosure, and short sales subject to federal tax income taxation?

A Yes. However, the income is taxed differently depending on several factors, including whether there was a foreclosure, a deed in lieu of foreclosure given to the lender, or a short sale (a sale where the lender agrees to reduce the amount owed in order to facilitate a sale), and whether the underlying debt is "recourse" (the borrower is personally liable for the debt) or "nonrecourse" (the borrower is not personally liable for the debt).

For federal income taxation as a result of foreclosure, see generally 26 U.S.C. §§ 1001 through 1016. For federal income taxation of short sales, see generally 26 U.S.C. §§ 61, 108 and 1001 through 1016.

TAXATION OF FORECLOSURES OR DEEDS IN LIEU OF FORECLOSURE

Q 2. What is the difference between a foreclosure and a deed in lieu of foreclosure?

A A foreclosure refers either to a trustee's sale foreclosure (not a judicial proceeding) or to a judicial foreclosure (a judicial proceeding). A deed in lieu of foreclosure means that the lender has agreed to accept title to the property and the borrower transfers title to the lender rather than waiting until the lender forecloses on the property. A deed in lieu of foreclosure is not a special instrument. It is simply a conveyance of the property to the lender by grant deed or quitclaim deed; and, in exchange, the lender cancels the promissory note secured by the real property. In this way the lender can avoid the foreclosure process to regain title to the property.

However, a borrower cannot simply transfer title to the lender without the lender's permission. Because some lenders have refused to negotiate and accept the deed in lieu of foreclosure, some creative homeowners have quitclaimed the property to the lender anyway, and have recorded the instrument without the lender's permission.

In 1993, the California legislature passed a statute to protect lenders from involuntary (and invalid) transfers of real property to the lender. The lender must record a "notice of nonacceptance of a recorded deed" in the county where the real property is located. Redelivering a grant of the real property back to the original homeowner (e.g., borrower) does not legally retransfer the title. (Cal. Civ. Code § 1058.5.)

A lender may not want to take a deed in lieu of foreclosure because taking title in this manner does not extinguish any junior liens. A foreclosure by a senior lienholder essentially wipes out all junior liens.

Q 3. How does the owner receive "income" from a foreclosure or a deed in lieu of foreclosure?

A A foreclosure proceeding, whether through a trustee sale or judicial foreclosure, and a deed in lieu of foreclosure given to the lender are treated the same as a sale for income tax purposes. The foreclosure or deed in lieu of foreclosure is reported on the taxpayer's tax return as a sale or exchange in the year the foreclosure is finalized or the deed in lieu of foreclosure is given to the lender.

In a foreclosure or deed in lieu of foreclosure, the owner can receive "capital gain or loss" as in any other sale of real property (i.e., be subject to capital gains taxation or receive a credit for a capital loss). Additionally, the owner can receive "forgiveness of debt" income. This is also referred to as "cancellation of debt" income. Whether the owner is subject to taxation on this income may depend on whether the debt is "recourse" or "nonrecourse." If the debt is a recourse debt, the owner may be deemed to have received taxable income in the amount of debt that is forgiven by the lender (except in certain situations discussed below where the owner will not be taxed). If the debt is nonrecourse debt, there is no taxable income from forgiveness (or cancellation) of debt, but the owner may be still be subject to capital gains taxation.

Q 4. What is "nonrecourse" debt?

A Under California law, a debt is considered "nonrecourse" when a loan is made under either one of the following two circumstances:

(1) When the loan is made to purchase a one-to-four unit property and the borrower intends to occupy at least one of the units, or

(2) When the seller carries back financing for all or a portion of the purchase price of any real property.

(Cal. Code Civ. Proc. § 580b.)

In the event of default by the borrower, the lender, or financing seller, is restricted to recovering the property with no right to proceed against the borrower for any deficiency should the property be worth less than the loan amount.

Q 5. What is "recourse" debt?

A Under California law, a "recourse" debt is one in which neither of the two exemptions in Question 4 occurs.

Examples of recourse debt are refinances of existing mortgages, home improvement loans, equity lines of credit, and loans other than seller financing, securing a debt for purchase of property that is not an owner-occupied one-to-four unit property. The lender is not limited to taking the property back and the borrower may be personally liable on the debt. If the lender chooses to foreclose using a trustee's sale, then the lender waives the right to go after the borrower for the deficiency despite the fact that the loan was a recourse debt. In order to go after a deficiency judgment, the lender must go through a judicial foreclosure process.

Q 6. How is the amount realized (taxable income) calculated for a "recourse" debt in a foreclosure?

A If the debt is recourse debt, meaning the owner may be personally liable for the debt, the amount realized is calculated in a two-step approach.

First, you take the difference between the Fair Market Value (FMV) of the property (usually the sales proceeds at the judicial foreclosure or trustee's sale) and the Adjusted Basis in the property. Generally, the Adjusted Basis consists of the purchase price of the property plus any capital improvements (less depreciation, if the property is investment property). This difference is the capital gain or loss. If the FMV exceeds the amount of the Adjusted Basis, then the borrower has realized a capital gain at the time of the transfer (foreclosure). If the Adjusted Basis exceeds the FMV, then the borrower has a capital loss.

Second, you take the difference between the amount of the cancelled debt (e.g., unpaid loan amount) and the sales proceeds at the foreclosure (FMV). This is the forgiveness of debt (cancellation of debt) income and it is treated by the IRS as ordinary income despite the fact that the borrower has received no cash at the time of the foreclosure.

However, if the cancelled debt amount is considered "qualified principal residence indebtedness" pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, there will be no taxation on this forgiveness of debt (cancellation of debt) income. See Question 9 for a definition of "qualified principal residence indebtedness."

RECOURSE DEBT

Example One:

1. The unpaid balance of the loan is $300,000;

2. The FMV of the property is $250,000;

3. The taxpayer's adjusted basis in the property is $200,000.

Assume the lender forecloses and will forgive the underlying debt.

Step one:

FMV ($250,000) less taxpayer?s adjusted basis ($200,000) results in capital gains for the taxpayer.

FMV $250,000

Less Adjusted Basis $200,000

Capital Gains $ 50,000

Step two:

Amount of cancelled debt (amount owed on $300,000 loan) less FMV ($250,000) is ordinary income to the taxpayer.

Amount Owed $300,000

Less FMV $250,000

Ordinary Income $50,000

Note: If a lender chooses to foreclose through a trustee's sale and is barred from obtaining a deficiency judgment by the one action rule under California Code of Civil Procedure Section 580d, it is likely the IRS will still consider that the underlying debt as a recourse debt and it will be subject to debt forgiveness income. (See Rev. Rul. 90-16.) However, there may be no taxation of this income under The Mortgage Forgiveness Debt Relief Act of 2007.

RECOURSE DEBT

Example Two:

If the FMV at the foreclosure sale is more than what the lender is owed, there will be no forgiveness of debt and, thus, no ordinary income to the taxpayer.

1. The unpaid balance of the recourse debt is $300,000;

2. The FMV of the property is $400,000;

3. The taxpayer's adjusted basis in the property is $200,000.

Step one:

FMV ($400,000) less taxpayer's adjusted basis ($200,000) results in capital gains for the taxpayer.

FMV $400,000

Less Adjusted Basis $200,000

Capital Gains $200,000

Step two:

The debt is fully paid (since the FMV of $400,000 exceeds the unpaid loan amount of $300,000) resulting in no forgiveness of debt.

Q 7. How is the amount realized (taxable income) calculated for a "nonrecourse" debt in a foreclosure?

A If the debt is nonrecourse, meaning the owner is not personally liable for any deficiency (beyond the value of the property), the amount realized is the difference between

(a) the greater of: (i) the FMV or (ii) the entire outstanding debt; and

(b) the adjusted basis of the property.

This amount is treated as capital gains and there is no taxation for forgiveness of debt income.

Even though the adjusted basis might exceed the FMV and the outstanding debt, generally no capital loss would be allowed because nearly all nonrecourse debt is associated with a principal residence. (Capital losses are applicable only to investment property.)

NONRECOURSE DEBT

Example:

1. The unpaid balance of the loan is $300,000;

2. The FMV of the property is $250,000;

3. The taxpayer's adjusted basis in the property is $200,000.

Greater of FMV ($250,000) or entire unpaid debt ($300,000) minus taxpayer?s adjusted basis ($200,000) results in capital gains to the taxpayer.

Greater of
   FMV ($250,000)
OR
    Unpaid Debt ($300,000)

Greater of the above $300,000

Less Adjusted Basis $200,000

Capital Gains $100,000

Q 8. How is a deed in lieu of foreclosure treated for tax purposes?

A A deed in lieu of foreclosure is treated as a sale and taxed just like a foreclosure.
See Questions 6 and 7 above.

TAXATION OF SHORT SALES

Q 9. What are the tax implications of a short sale?

A A short sale, where the lender agrees to reduce some or all of the outstanding debt, may give rise to forgiveness of debt income (also called "cancellation of debt" income). The amount of the debt that the lender agrees to write off is treated as "ordinary income" (as opposed to capital gains income which is taxed at a lower rate). Even though the lender may be taking this action to facilitate the sale by the owner who is under a notice of default and facing a foreclosure, the agreement between the owner and the lender is considered voluntary and the amount of the loan written off by the lender is treated as forgiveness of debt (cancellation of debt). The taxpayer will generally receive a 1099 tax form from the lender in the amount of the cancellation of debt.

This forgiveness or cancellation of debt which is treated as "ordinary income" under certain circumstances may or may not be subject to taxation. Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code §108(a)(1)(E) was added and provides that a taxpayer will not be taxed upon cancellation of debt income if the following conditions are met:

^. The property sold in the short sale is the taxpayer's principal residence, as that term is used in IRC §121.
^. The cancellation of debt is Qualified Principal Residence Indebtedness** under IRC Section 163(h)(3)(B).
^. The indebtedness is discharged after January 1, 2007 and before January 1, 2013. (The end date was increased by three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic Stabilization Act of 2008).

**Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct or substantially improve the residence. The income relief provided is capped at $1,000,000 in the case of a married person filing a separate return and $2,000,000 for all others.

Any reduction of indebtedness excluded by IRC §108(a)(1)(E) will be applied to reduce the basis of the taxpayer's principal residence, but not below zero. This could result in a higher amount of capital gains tax owed by the taxpayer.

Recently passed California law, SB 1055, conforms California Revenue and Tax Code Section 17144.5 to federal law with the following exceptions:

(1) The maximum amount of acquisition indebtedness is reduced to $800,000 for couples filing jointly and $400,000 for individual filers;

(2) The maximum amount of debt relief income that can be forgiven is $250,000 for couples filing jointly and $125,000 for individual filers; and

(3) California’s debt relief statute applies to property sold on or after January 1, 2007 and before January 1, 2009.

Finally, if the owner has owned the property for some time and has refinanced to take out some of the equity, the owner could be subject to capital gains taxation when selling the property as well. For example, the borrower has a remaining loan on the property when the borrower refinances in order to buy an investment property (or to buy a car, to take a vacation, consolidate credit card debt, etc.) and now owes $300,000 to the lender. Thus, the taxpayer's adjusted basis may be lower than the outstanding balance on the loan (see the example below).

The tax calculation would look like step one in calculating a foreclosure sale of recourse debt.

SHORT SALE

Example:

1. The unpaid balance of the loan is $300,000;

2. The sales price (FMV) is $250,000;

3. The taxpayer's adjusted basis in the property is $50,000.

Sales price (FMV $250,000) less taxpayer's adjusted basis ($50,000) results in capital gains for the taxpayer.

Sales Price (FMV) $250,000

Less Adjusted Basis $50,000

Capital Gains $200,000

Additionally, the taxpayer will have ordinary income from the lender's write off of any debt, which in this example would be $50,000 (** See the discussion above in this question to determine whether or not this would be taxable)

Loan Balance $300,000

Less Sales Price $250,000

Ordinary Income $50,000

TAX EXEMPTIONS

Q 10. Are there any other exemptions from the taxation of cancellation of debt income?

A Yes. There are four other circumstances, in addition to what was discussed in Question 9 where the taxpayer can get relief from taxation on cancellation of debt income:

(1) The taxpayer is insolvent (the taxpayer's debts exceed their assets, but the cancellation of debt is forgiven only to the extent of the insolvency);

(2) The debt is discharged as part of a bankruptcy proceeding;

(3) The debt discharged is qualified farm indebtedness; or

(4) The debt discharged is qualified business indebtedness.

For all of the above, any reduction in indebtedness will be applied to reduce the taxpayer’s basis in the property.

(26 U.S.C. §§ 108(a), 108(b), 108(c) and IRS publication 908.)

Note, however, it is likely that many taxpayers currently subject to cancellation of debt income will qualify for the insolvency exemption from taxation. Taxpayers should be advised to speak with their own tax advisors as to whether they meet the insolvency exemption.

Q 11. Are there any exemptions from the capital gains taxation in a foreclosure, deed in lieu of foreclosure or short sale if the property is a principal residence?

A Yes. If the sale, whether through a foreclosure or deed in lieu or short sale, generates capital gains and if the property was the seller's principal residence, the seller may be able to use the capital gains exclusion of $250,000 if single and $500,000 if married filing a joint return. This exclusion does not apply to ordinary income from cancellation of debt.

MISCELLANEOUS

Q 12. Which is better for an owner facing a distress sale: a foreclosure, a deed in lieu of foreclosure or a short sale?

A Any of these situations will impact the owner's credit negatively. Additionally, the owner may have a significantly different tax liability depending on the disposition of the property. Consequently, this is a question that the owner needs to discuss with their own tax advisor.

Q 13. What is a quick summary of these taxation rules?

	Recourse Foreclosure/ Deed in Lieu	Nonrecourse Foreclosure/ Deed in Lieu	Short Sale
Capital Gains	FMV Less Adjusted Basis	Greater of FMV or Outstanding Debt Less Adjusted Basis	FMV Less Adjusted Basis
Ordinary Income	Outstanding Debt Less FMV *	No Ordinary Income	Amount of Debt Forgiven*

*No Ordinary Income if "Qualified Principal Residence Indebtedness" (**See the discussion in Question 9)

Q 14. Does California follow the debt relief rules set forth above?

A Recently passed California law, SB 1055, conforms California Revenue and Tax Code Section 17144.5 to federal law with the following exceptions:

1. The maximum amount of acquisition indebtedness is reduced to $800,000 for couples filing jointly and $400,000 for individual filers;

2. The maximum amount of debt relief income that can be forgiven is $250,000 for couples filing jointly and $125,000 for individual filers; and

3. California’s debt relief statute applies to property sold on or after January 1, 2007 and before January 1, 2009.

Q 15. Where can readers obtain more information on the subjects covered above?

A Information is available from a variety of sources, including:

^. The Internal Revenue Service (IRS) (http://www.irs.gov/), which has detailed publications available for free on many tax related subjects.
^. The IRS Tele-Tax system, which is an automated voice message information system with recorded information on many commonly asked tax questions. Tele-Tax can be reached by calling 800.829.4477.
^. A tax professional, such as a certified public accountant, tax attorney, or enrolled agent.

Readers who require specific advice should consult an attorney and an accountant.

The information contained herein is believed accurate as of October 9, 2008. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.

Credit After Foreclosure, Bankruptcy, or Short Sale

Mon, 02 Nov 2009 13:03:13 GMT

Credit After Foreclosure, Bankruptcy, or Short Sale

Copyright© 2009, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) Permission is granted to C.A.R. members only to reprint and use this material for non-commercial purposes provided credit is given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited withoutthe express written permission of the C.A.R. Legal Department. All rights reserved.

One of the concerns a consumer has after experiencing a bankruptcy, foreclosure, or short sale (referred to as a "preforeclosure sale" by Fannie Mae) is the ability to obtain credit to purchase another home. Fannie Mae has updated its credit guidelines. This legal article summarizes those guidelines in Part I. In addition, since lenders use FICO scores in order to determine the creditworthiness of a borrower, this article covers the impact of a bankruptcy, foreclosure or short sale on FICO scores in Part II.

I. Fannie Mae Credit Guidelines

Q 1. How long is the time period after a foreclosure before a consumer can be eligible to obtain credit to purchase a home?

A Five years from the date the foreclosure sale was completed.

Additional requirements that apply after 5 years and up to 7 years following the completion date are as follows:

^. The purchase of a principal residence is permitted with a minimum 10 percent down payment and minimum representataive credit score of 680.

^. Purchase of a second home or investment property is not permitted.

^. Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility requirements in effect at that time.

^. Cash-out refinances are not permitted for any occupancy type.

(Source: FNMA Announcement 08-16, 6-25-08 )

Q 2. Why do the additional requirements for foreclosures in Question 1 only apply from 5 to 7 years following the foreclosure completion date?

A According to Fannie Mae policy in Part X, Section 103 of the Selling Guide, Fannie Mae requires only a 7-year history to be reviewed for all credit and public record information. The 7-year timeframe also aligns with the information provided by the borrower on the loan application relative to disclosure of a past foreclosure action. (Source: FNMA Selling Guide, 4-1-09. )

Q 3. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the foreclosure?

A Yes. Three years from the date the foreclosure sale was completed. The same additional requirements apply as listed in Question 1 except the minimum credit score of 680 is not required. (Source: FNMA Announcement 08-16, 6-25-08. )

Q 4. What are"extenuating circumstances" ?

A Fannie Mae describes "extenuating circumstances" as follows:

Extenuating circumstances are nonrecurring events that are beyond the borrower's control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower's claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower's inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).

The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.

(Source: FNMA Selling Guide, 4-1-09 at 391. )

Q 5. How long is the time period after a deed-in-lieu of foreclosure before a consumer can be eligible to obtain credit to purchase a property?

A Four years from the date the deed-in-lieu was executed.

Additional requirements that apply after 4 years and up to 7 years following the completion date are as follows:

^. Borrower may purchase a property secured by a principal residence, second home, or investment property with the greater of 10 percent minimum down payment ro the minimum down payment required for the transaction.

^. Limited-cash-out and cash-out refinance transactions secured by a principal residence, second home, or investment property are permitted pursuant to the eligibility requirements in effect at that time.

(Source: FNMA Announcement 08-16, 6-25-08. )

Q 6. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the deed-in-lieu of foreclosure?

A Yes. Two years from the date the deed-in-lieu was executed. The same additional requirements apply as listed in Question 4 after 2 years up to 7 years. (Source: FNMA Announcement 08-16, 6-25-08. )

See Question 4 for the definition of "extenuating circumstances."

Q 7. How long is the time period after a "preforeclosure sale" before a consumer can be eligible to obtain credit to purchase a property?

A Two years from the completion date. No exceptions are permitted to the 2-year period due to extenuating circumstances. (Source: FNMA Announcement 08-16, 6-25-08. )

Q 8. What is a "preforeclosure sale" mentioned in Question 6 and is that the same as a short sale?

A "A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satify the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer" (Source: FNMA Announcement 08-16, 6-25-08 ).

Although the terms preforeclosure sale and short sale have been used interchangeably, there is a significant difference for purposes of obtaining credit. For Fannie Mae purposes, a preforeclosure assumes that the borrower has been delinquent in paying his or her mortgage and the lender agrees to accept a lesser amount to avoid the time and expense of a foreclousre action. A short-sale, however, can also refer to situations in which the lender of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to faciiate the sale of teh property to a third party. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 9. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the preforeclosure (short) sale?

A No. There are no exceptions to the 2-year time period. (Source: FNMA Announcement 08-16, 6-25-08. )

Q 10. If a borrower sold his or her property as a short sale but was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?

A The loan will be eligible for delivery to Fannie Mae provided that the borrower's previous mortgage history complies with Fannie Mae's excessive prior mortgage delinquency policy--that is the borrower does not have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date--and the borrower has not entered into any agreement with the short sale lender to repay any amounts assoicated with the short sale, including a deficiency judgment. (Source: FNMA Announcement 08-16 Q&A, 8-13-08 ; FNMA Selling Guide, Part X, Chapter 3, Section 302.09. .)

Q 11. Are preforeclosure (short) sales and deed-in-lieu of foreclosure actions identified on a credit report?

A Preforeclosure sales may be reported as "paid in full" with a "settled for less than owed" remarks code, and the mortgage tradeline would indicate any recent delinquency. A deed-in-lieu may be reported by a remarks code indicating a deed-in-lieu. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 12. How long is the time period after a bankruptcy (all except Chapter 13) before a consumer can be eligible to obtain credit to purchase a property?

A Four years from the discharge or dismissal date of the bankruptcy action (Source: FNMA Announcement 08-16, 6-25-08 ).

Q 13. How long is the time period after a Chapter 13 bankruptcy before a consumer can be eligible to obtain credit to purchase a property?

A Two years from the discharge date and four years from the dismissal date (Source: FNMA Announcement 08-16, 6-25-08 ).

Q 14. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the bankruptcy (all actions)?

A Yes. Two years from the discharge or dismissal; however, no exceptions are permitted to the 2-year time period after a Chapter 13 discharge (Source: FNMA Announcement 08-16, 6-25-08 ).

See Question 4 for the definition of "extenuating circumstances."

Q 15. How long is the time period after multiple bankruptcy filings before a consumer can be eligible to obtain credit to purchase a property?

A Five years from the most recent dismissal or discharge date for borrowers with more than one bankrutcy filing within the past 7 years (Source: FNMA Announcement 08-16, 6-25-08 ).

Q 16. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the multiple bankruptcies?

A Yes. Three years from the most recent discharge or dismissal date. The most recent bankruptcy filing must have been the result of extenuating circumstances. (Source: FNMA Announcement 08-16, 6-25-08. )

See Question 4 for the definition of "extenuating circumstances."

Q 17. What is the difference between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy?

A Chapter 13 permits a borrower with a regular income to propose a plan to repay some or all of his or her obligations over a period of up to five years. A borrower who files a Chapter 7 is permitted to retain exempt assets and receive a discharge of the borrower's debts. Chapter 7 is a relatively quick liquidation process that is generally completed within 120 days. Chapter 7 cases are rarely dismissed. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 18. What is the difference between a Chapter 13 dismissal and a Chapter 13 discharge?

A A borrower who files a Chapter 13 can dismiss the case at any time (voluntary dismissal) or the case may be dismissed by the court based on the borrower's failure to comply with the requirements of the Bankruptcy Code or to make the required payments. If the borrower who files a Chapter 13 case makes all of the payments required by the plan, the borrower receives a discharge at the end of the plan. A borrower who doesn't make all the payment required by the plan may still receive a discharge if the court finds, among other things, that the borrower made a certain amount of the payments and the borrower's failure to make all of the payments was due to circumstances beyond the borrower's control. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 19. What are the requirements to re-establish a credit history?

A After a bankruptcy or foreclosure-related action, a credit history must meet the following rquirements to be considered re-established:

^. It must meet the requirements for elapsed time (as discussed in this article.

^. It must reflect that all accounts are current as of the date of the mortgage application.

^. it must include a minimum of four credit references. At least one of the references must be a traditional credit reference, and one of the references must be housing-related.

A housing-related reference must cover the period following the bankruptcy discharge or dismissal, foreclosure, or deed-in-lieu, and can be in the form of mortgage payments or rental payments.

If rental payments wre not reported to the crdit repositories, the lender must obtain copies of bank statements, money orders, or cnacled checks for the most recent 12-mnth period as a supplement to the rent verification.

^. It must reflect three of the four credit references, including rental housing references, as active in the 24 months preceding the date of the mortgage application.

^. It must include no more than two installment or revolving debt payments 30 days past due in the last 24 months.

^. It must include no installment or revolving debt payments 60 or more days past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.

^. It must include no housing debt payments past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.

^. It must include no new public records since the discharge or dismissal of the bankruptcy or the completion of the foreclousre-related action. Public records include bankruptcies, foreclousres, deeds-in-lieu, preforeclosure sales, unpaid jdugments or collections, garnishments, liens, etc.

(Source: FNMA Selling Guide, 4-1-09 at 392. )

II. Bankruptcy, Foreclosure, and Short Sale and the Impact on a FICO® Score

Q 20. What is a FICO® Score?

A A FICO® score is a number representing the creditworthiness of a person or the likelihood that person will pay his or her debts. The three credit reporting agencies, Equifax, Experian, and TransUnion, collect data about consumers in order to compile credit reports. The credit agencies use FICO® software to generate FICO® scores, which are then sold to lenders. Actually FICO® is just one of the several credit scoring systems available. The Fair Isaac Corporation (known as FICO®) created the first credit scoring system in 1958. Others are NextGen, VantageScore, and the CE Score. They all evaluate the creditworthiness of a borrower. However, FICO appears to be the most-used credit scoring system. A FICO® score is between 300 and 850. The higher the better the credit.

Each consumer has three credit scores at any given time for any given scoring model because the three credit agencies have their own databases, gather reports from different creditors, and receive information from creditors at different times.

Q 21. What factors go into determining a FICO® score?

A Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are closely-guarded secrets, FICO® has disclosed the following components and the approximate weighted contribution of each:

35% — Payment History – Late payments on bills, such as a mortgage, credit card or automobile loan, can cause a consumer’s FICO® score to drop. Paying bills as agreed over time will improve a consumer’s FICO® score.

30% — Credit Utilization - The ratio of current revolving debt (such as credit card balances) to the total available revolving credit (credit limits). Consumers can improve their FICO® scores by paying off debt and lowering their utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on their FICO® score.

15% — Length of Credit History – As consumer’s credit history ages, assuming they pay their bills, it can have a positive impact on their FICO® score.

10% — Types of Credit Used (installment, revolving, consumer finance) – Consumers can benefit by having a history of managing different types of credit.

10% — Recent search for credit and/or amount of credit obtained recently - Multiple credit inquiries for a consumer seeking to open new credit, such as credit cards, retail store accounts, and personal loans, can hurt an individual’s score. Applying for lots of new credit in a short period of time is also viewed as risky and can cause a drop in an individual’s score. However, individuals shopping for a mortgage or auto loan over a short period will likely not experience a decrease in their scores as a result of these types of inquiries.

(Source: http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx)

Q 22. How does a mortgage modification affect my FICO® score?

A FICO® credit scores are calculated from the information in consumer credit reports. Whether a loan modification affects the borrower's FICO® score depends on whether and how the lender chooses to report the event to the credit bureau, as well as on the person's overall credit profile. If a lender indicates to a credit bureau that the consumer has not made payments on a mortgage as originally agreed, that information on the consumer's credit report could cause the consumer's FICO® score to decrease or it could have little to no impact on the score.

(Source: http://www.myfico.com/crediteducation/questions/Mortgage_Modification.aspx)

Q 23. How does a bankruptcy affect my FICO® score?

A A bankruptcy is considered a very negative event regardless of the type. A bankruptcy is factored into your FICO® score until it is removed from your credit report. As long as the bankruptcy is listed on your credit report, it will be factored into your score. If you are considering bankruptcy as an alternative to foreclosure, keep in mind that it may have a greater impact on your FICO® score.

Typically, you can expect bankruptcies to remain on your credit report, from the date filed, as follows:

(1) Chapter 11 and Chapter 7 bankruptcies up to 10 years.

(2) Completed Chapter 13 bankruptcies up to 7 years.

These time periods refer to the public record item associated with filing for bankruptcy. All of the individual accounts included in the bankruptcy should be removed from your credit report after 7 years. (Source: http://www.myfico.com/crediteducation/Questions/Bankruptcy-Types.aspx)

If you plan to file a bankruptcy, here are some things you should do to make sure your creditors are accurately reporting the bankruptcy filing:

(1) Check your credit report to ensure that accounts that were not part of the bankruptcy filing are not being reported with a bankruptcy status.

(2) Make sure your bankruptcy is removed as soon as it is eligible to be "purged" from your credit report.

After a bankruptcy has been filed, the sooner you begin re-establishing credit in good standing, the sooner you can expect your FICO® score to rebound. A good practice is to obtain a secured credit card and continually make all of your payments on time. As time passes and the impact of the bankruptcy lessens, you might apply for a traditional credit card and also continually make all of your payments on time.

(Source: http://www.myfico.com/crediteducation/questions/Bankruptcy-Reach.aspx)

Q 24. How does a short sale, deed-in-lieu-of foreclosure. or a foreclosure affect my FICO® score?

A The alternatives to foreclosure, such as a deed-in-lieu of foreclosure or a short sale, aren’t any better as far as a FICO® score is concerned.

The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all "not paid as agreed" accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial or tax perspective, just that they will be considered no better or worse for your FICO® score.

If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact on your FICO® score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO® score.

(Source: http://www.myfico.com/CreditEducation/Questions/foreclosure-alternatives-fico-score.aspx)

Q 25. What won't affect my FICO® score?

A The following information is not considered by the FICO® scoring formula:

^. Your race, color, religion, national origin, sex, or marital status

^. Your age

^. Your salary, occupation, title, employer, date employed, or employment history

^. Where you live

^. Any interest rate being charged on a particular credit card or other account

^. Certain types of inquiries (such as promotional, account review, insurance or employment-related inquiries)

^. Credit counseling

^. Any information not found in your credit report

^. Any information that is not proven to be predictive of future credit performance

(Source: http://myfico.custhelp.com/cgi-bin/myfico.cfg/php/enduser/std_adp.php?p_faqid=55)

Q 26. Where can I get more information?

A This article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit C.A.R. Online at www.car.org.

Readers who require specific advice should consult an attorney and an accountant.

The information contained herein is believed accurate as of October 13, 2009. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.

The Truth About Mortgage Modifications

Mon, 02 Nov 2009 08:23:42 GMT

The Truth About Mortgage Modifications

The decisions you make as a homeowner today hold a profound impact on your financial future. However, it is important to safeguard yourself from misinformation and fraud. Get the facts regarding your situation and always have a contingency plan.

For those who qualify, a mortgage modification is the ideal remedy to their financial distress. I’ve prepared a FREE report on the truth about mortgage modifications to guide you through this important process. Simply provide your information below to get this valuable information, and feel free to pass it along to anyone who may need it. One homeowner lost to foreclosure is one too many!

As a Certified Distressed Property Expert, I have training and experience in providing solutions to homeowners facing financial hardship. Together, we can formulate a plan to get back on track.

If you have any unanswered questions, or your circumstances are urgent, please call me today.

Steven Weinberg
818-992-4896

Short Sale & Deed-In-Lieu

Contrary to what you may have heard, lenders actually want to avoid foreclosure wherever possible. That’s why they’re accepting more short sale and deed-in-lieu transactions everyday in an effort to eliminate unnecessary foreclosures. This is great news for homeowners facing financial distress.

To help you understand more about these two options, I’ve prepared a free report just for you, called ‘Short Sale & Deed-in-Lieu: Dignified Solutions.’ To receive your free report, please provide your information in the fields below.

I hope you’ll review these options carefully and pass this information along to those who may need it. I commend your efforts to finding a solution to the difficult financial situation that you or someone you know is currently facing. Providing the best advice and information in your time of need is my priority.

Let me help you evaluate your options and get you back on track to a secure financial future.

Avoiding Mortgage Modification Fraud

I Am An Agent Against Mortgage Fraud!

The last thing struggling homeowners need is to be victimized by fraud. Sadly, some people are preying on those who need help the most. Today, the real estate industry is the newest, biggest target for predatory schemes. In fact, the U.S. Attorney General, Eric Holder, stated that mortgage fraud cases are 400 percent higher than they were five years ago.

With nearly 1 in 6 homeowners unable to pay their mortgages, understand that you are not alone. Knowing your legitimate foreclosure-avoidance options is the best way to fight this terrible trend.

The report on this site will tell you how to avoid mortgage fraud schemes, as well as what solutions are available to you. Enter your information below and get the facts now!

Strategic Defaults are NOT Strategic

Walking Away Is NOT The Answer

You may have heard that a “strategic default” can be an appropriate and even beneficial reaction to an upside-down mortgage or impending foreclosure. While this idea is widespread, the truth is that default is never an easy road to choose, and rarely ever strategic.

Unfortunately, the ramifications of a “strategic default” are rarely explained, leaving many homeowners stranded on an island of misinformation. To assist you, I’ve prepared a free report outlining the myths and misrepresentations of strategic defaults.

Fill out your information below for this free report. Don’t hesitate. Get the facts today!

Options and Solutions

Thank you for visiting this site and taking the first step toward finding answers. I appreciate what it has taken for you to come here, and commend your efforts to get the facts about your situation. The current real estate environment can be frustrating, with misinformation and conflicting plans for how to proceed.

As a real estate broker, what I often see in troubled homeowners is a belief that they are alone with their challenges. Regrettably, over 70% of homeowners in foreclosure proceed without ANY visible assistance. This is not acceptable for the communities I serve.

That's why I've developed this site: to ensure you get the valuable resources that can reduce your financial strain and change your life for the better. As a CDPE I know the options for homeowners in foreclosure or delinquent on their mortgages, and I can send you a report detailing this information, prepared just for you.

Simply enter your information below and click "Send." I hope that you will review this information carefully, so that your next steps are the right steps toward a real solution.

Let me help you evaluate your options and get back on track to a solid, stable future.

Foreclosure Vs. Short Sale

As a Certified Distressed Property Expert, I have devoted my career to helping homeowners who face difficult situations, taking them from uncertainty to resolution. Lately I've found a lot of conflicting information going around, especially concerning short sales, which you should know about.

A short sale occurs when a lender accepts the selling price of a home, even if it is less than the full amount owed on the mortgage. For particular homeowners, this can be the best option to foreclosure. Yet, I still hear people suggest that short sales are basically the same as foreclosure.

This is absolutely wrong!

You need to have the CORRECT information. That’s why I'm glad you're here. To help, I’ve prepared a free report—just for you—that compares the realities of foreclosures and short sales side-by-side. Simply provide your information below, and I'll send you this report.

If you have any additional concerns about this issue, or your circumstances are urgent, please feel free to give me a call. I can help you evaluate your options and get you back on track to a secure financial future.

Steven Weinberg 818-992-4896

7 Short Sale Myths

There are millions of homeowners just like you who are looking for answers and don’t know what to do. You’re not alone and you’re in the right place.

As a Certified Distressed Property Expert, I have training and experience in providing solutions to homeowners facing financial hardship. Despite my best efforts, there’s still an overwhelming amount of misinformation about the options available, especially short sales.

To give you a better idea of the short sale option, and to set straight some of the myths you may have heard, I’ve prepared a free report just for you - please fill out the information below to receive your free report. This report will clarify the following myths:

The Bank Would Rather Foreclose Than Bother With A Short Sale
You Must Be Behind On Your Mortgage To Negotiate A Short Sale
There Is Not Enough Time To Negotiate A Short Sale Before My Foreclosure
Listing My Home As A Short Sale Is An Embarrassment
Short Sales Are Impossible And Never Get Approved
Banks Are Waiting On A Bailout And Not Accepting Short Sales
Buyers Are Not Interested In Short Sale Properties

These ideas are potentially harmful to homeowners seeking real solutions. I hope you’ll review this information for yourself or share it with a homeowner in need.

In these times, we all need to know the truth to know how to get back on track.

If you have any additional concerns about this issue, or your circumstances are urgent, please give me a call.

Steven Weinberg
818-992-4896

Your First Steps To Avoid Foreclosure

Your First Steps

In today’s market, 1 in 7 homeowners is having trouble paying the mortgage. More than 70% of these homeowners proceed without seeking assistance or getting the facts. Many do not even realize that foreclosure is a process, and that there is time to make decisions that may result in a better outcome.

You are not alone. Millions of other homeowners nationwide are in the same circumstances. To assist you, I’ve prepared a free report outlining the first steps a homeowner should take when facing a foreclosure.

Fill out your information below for this free report. Don’t hesitate. Get back on track today!

Greater of the above	$300,000
Less Adjusted Basis	$200,000
Capital Gains	$100,000

Sales Price (FMV)	$250,000
Less Adjusted Basis	$50,000
Capital Gains	$200,000

Loan Balance	$300,000
Less Sales Price	$250,000
Ordinary Income	$50,000