In a briefing by Credit Suisse this week, the financial giant?s opinion was that reducing principal balances of underwater mortgages is a risky idea that has not been shown to keep underwater borrowers from later defaults.  In my practice as a Florida real estate lawyer, that opinion flies in the face of borrower sentiment.  The guiding force in the Credit Suisse statement seems to be the ?moral hazard? argument, coupled with statistics about the failure of principal reductions helping homeowners.

As reported by Bloomberg News, Dale Westhoff on behalf of Credit Suisse said that of the 11 million ?underwater? homeowners, about 6.5 million have never missed a payment and 2 million more are making on-time payments after delinquency.  He said that widespread principal reductions may drive defaults much, much higher as borrowers seek the aid.  But he also said that such wholesale principal reductions have never been done before and the associated risk is unknown.  Furthering that argument, he said that if principal reductions are offered, it may create the concept that the lenders are guaranteeing the value of homes.

Others don?t share the same view.  I for one find that 50% of those that seek my assistance have decided that without a meaningful principal reduction, they are merely overpaying rent and having a debt obligation as well.  This sentiment was predicted as far back as 2001. [See my article A HOME WITHOUT EQUITY IS JUST A RENTAL WITH DEBT]. 

While Fannie Mae and Freddie Mac maintain a no principal reduction policy, New York Federal Reserve Bank President William Dudley said this month that without a significant turnaround in home prices and employment, a substantial portion of deeply underwater home loans (as in Florida) will ultimately default absent a realignment of principal to market value.  This concurs with the findings I make in my office everyday by speaking with troubled borrowers.

Will the argument that principal reductions will bring out a flood of applications for similar aid hold true ? I think the estimates of that flood are probably understated! - At least here in Florida.

The problem has been quantified by specialists as needing to avoid 8 to 10 million more distressed property sales through the application of principal reductions.  Although some programs for ?short refinancing? are in effect, with 125% caps that is not enough in the hardest hit states ? where the market value drops are far greater and the bulk of the problem loans exist.

From the macro viewpoint, short sale guru (as in billion dollar bets that the mortgage bonds would fail) Greg Lippmann wonders what the big deal is ? since investors write down their portfolios anyway and have been doing business like this for years.

 It seems to me that writing down the loan at the borrower level will have the added benefit of lowering losses on the loan underlying the mortgage bonds, therefore stabilizing that market.  Without the help to the first tier borrower ? the homeowner ? the homeowners? later default simply makes the foundation upon which the bonds are created subject to disintegration.  If we don?t see principal reductions then this is going to be a very slow recovery.  If we do see principal reductions we are liable to experience ?non-qualified? borrower revolt and a new era of lending and doing business a very different way.

In the meantime, principal reductions remain the elusive holy grail of those seeking loan modification relief.

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Copyright 2012 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader. Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com Website www.Florida-Counsel.com.

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

The clock is ticking until the expiration of the 2007 Mortgage Debt Forgiveness Act expires on the last day of December this year.  Previously set to expire earlier, Congress extended the expiration date to end in effective January 1, 2013.  Will it be extended again?  Is it necessary?

The extension should be extended again ? but that is up to Congress.  The effect of the Act is to allow the income that is created when a mortgage is reduced in principal to be exempted from ordinary income.  That saves significant amounts of money for the borrower.

As an example, if a mortgage obligation is reduced because of any number of examples exist ? such as (1) a deed in lieu of foreclosure where the difference between the value of the home and the larger amount of the mortgage is forgiven; or (2) the house is sold in a short sale, where the lender agrees to accept an amount less than the amount that is owed to it by the borrower, forgiving that difference; or (3) a mortgage that is greater than the value of the home is reduced in the amount of principal (that's an elusive event!), with that amount being ?forgiven?.  In each of these examples the ?forgiven? amount of the debt is ordinary income, just like salary or wages, and you normally have to include that in your tax return and pay income tax upon all of your income.  Under the rules of the 2007 Mortgage Debt Forgiveness Act, by filing a form with your tax return the ?forgiven? income included in your gross income then got removed from gross income, resulting in no tax on the ?forgiven? income.  The income or the report of the income is commonly called the 1099C income.  The ?C? stands for cancelled debt.

So let's make it simple.  If the short seller (or DIL seller) is in the 25% tax bracket and has $100,000 of debt forgiven by the lender, the seller has to pay income tax of $25,000.  With the Act still in effect, that tax is zero.

A detailed explanation of the Act - including who is eligible - is provided in my previous articles on ActiveRain: MORTGAGE RELIEF ACT - CHRISTMAS PRESENT TO PRIMARY HOMEOWNERS;   Mortgage Forgiveness Debt Relief Act of 2007- Another Look;   FORM RELEASED BY IRS FOR DEBT RELIEF ACT FILING;   SHORT SELLER STILL MUST DECLARE INCOME ON SALE!

The Act should be extended because from the discussions associated with the reasons for the creation of the Act in the first place, no one understood (or admitted they knew) the duration of the foreclosure issue, nor the extent of the recession and financial distress of the population.  Adding huge tax liability to already distressed homeowners would only encourage more bankruptcy filings (a bankruptcy can eliminate the forgiven debt aspect of a short sale or other disposition of a loan where there is otherwise forgiveness and thus income, because by judicially eliminating the personal obligation on the promissory note, there can be no forgiveness by the creditor, but timing is important).

On the other hand, many parts of the county are not as critically hit as Nevada, California and Florida and extending the Act?s expiration may not be as critical to those other states.  This is a ?wait and see? until it happens.

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Copyright 2012 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader. Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com  - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com  Website www.Florida-Counsel.com.  

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

Here it is! The 2012 version of the much despised short sale addendum from Freddie Mac!  As reported in several preceding articles, thanks to the American Land Title Association and others, the "sting" of being liable for any other party's misdeeds in a short sale transaction has been more or less alleviated.

Strangely, it is still called an addendum, not an affidavit, and refers to an affidavit, which in fact is the addendum. Go figure......

The new form has a new paragraph 14 along with other subtle changes, but the end effect is that it is clear that you know what you know and what you don't know won't come back to haunt you.  There is a provisio - turning a deaf ear or a blind eye to information you would have otherwise known is false or fraudulent will not be an excuse - that is still negilence on the part of the signor.

Interestingly, this form has grown in just 6 months from 12 paragraphs to 14 paragraphs, one paragraph at a time.  Will we see 15 paragraphs anytime soon?

Here is the new form and it can be compared to the previous form by going to my previous article: Freddie Mac Short Sale Addendum - Item #13 - I DON'T THINK SO!!

Copyright 2012 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader. Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com  - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com  Website www.Florida-Counsel.com.  

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

January 1, 2012 has come and gone and yet Freddie Mac servicers are still using the obsolete and highly objectionable Short Sale Affidavit.  I have been keeping Active Rain readers up to date on developments regarding the infamous Short Sale Affidavit ? see SHORT SALE ARMS LENGTH AFFIDAVIT MAJOR REVISION NEGOTIATED TODAY, and STAND-OFF WITH FREDDIE MAC OVER SHORT SALE ADDENDUM - ALTA GETS INVOLVED, and Freddie Mac Short Sale Addendum - Item #13 - I DON'T THINK SO!!

Today I received an email from Bank of America demanding that the attached documents be signed WITHOUT ANY CHANGES.  The problem is that the Freddie Mac Short Sale Affidavit that was attached was without the required changes for short sales approved beginning January 1, 2012.  The significant problem with the Freddie Mac Short Sale Affidavit was that it required all of the persons signing the affidavit to indemnify Freddie Mac for any false statements made by any of the other parties.  Title agents, real estate agents and real estate brokers, and short sale facilitators (whatever that means) were all on the hook, along with the buyer and seller.  Since there was really no exchange of knowledge between many of the parties, this indemnification to the lender by potentially everyone did not sit well with anyone who bothered to read the document and think about the financial exposure signing it would bring.

The changes are expressed in Freddie Mac Bulletin 2011-23 where it says on page 3:

We are updating Chapter B65 to provide additional guidance with respect to Freddie Mac?s short payoff requirements. Specifically, we are:

? Providing that short sale negotiation fees must not be deducted from the proceeds of the sale or charged to the Borrower

? Clarifying that all amounts paid to any party in connection with the short payoff transaction, including payments made to holders of other liens on the Mortgaged Premises, must be accurately reflected on the HUD-1 Settlement Statement and the amount and recipient of the payments must be clearly identified

? Allowing a Borrower to receive a payment upon the sale of the Mortgaged Premises only if the payment is offered by the Servicer, approved by Freddie Mac, and reflected on the HUD-1 Settlement Statement

? Revising our short sale affidavit requirements to clarify that statements made in the affidavit are made to the best of each signatory?s knowledge and belief and that each signatory is liable for his or her negligent or intentional misrepresentations, but not those of other signatories to the affidavit.

We are also providing other additional guidance with respect to the short sale affidavit, including the information that must be included in the affidavit.

The above changes are effective for short payoffs approved pursuant to Chapter B65 on and after January 1, 2012. However, Servicers are encouraged to incorporate these changes immediately.

The new form must contain the new language that the statements are ?made to the best of each signatory?s knowledge and belief,? and that each signatory is only liable for its own negligence or lies ? but not those of the other (potential rascals) signing the affidavit.  Ok, it does not say just that ? but that is what it means.

Can you imagine that in the past you may have been guaranteeing the truth of people you did not ever meet or speak to?  Incredible but true!

Before signing any Freddie Mac Short Sale Affidavit ? or for that matter since most lenders or servicers have adopted the same guidelines and created their own similar affidavit ? be sure the mandated changes are incorporated into the document.  Apparently the lenders / servicers don?t care about holding you liable ? after all, THEY are not signing the form!

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Copyright 2012 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader. Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com Website www.Florida-Counsel.com .

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

The right of a condominium association or homeowners association or property association to charge and collect maintenance and other assessment fees is pretty typical in all states.  The obligation to pay the assessment is attached to the ownership of a particular parcel of real estate.  Unlike real estate taxes which are ONLY a lien on the real estate, an association assessment can be both a lien on the real estate and a personal obligation of the owner to pay the assessments.

Now taking this to real life - You live in or lived in a home with association expenses you did not pay.  You filed for bankruptcy protection and the bankruptcy court granted the discharge of your debts. You still own the property.  Now you are wondering why the association is foreclosing on your home ? or you are trying to do a short sale and the association is saying you owe them thousands you thought was forgiven or discharged in the bankruptcy - or you are still living in the home and getting nasty letters from the association attorney.

The result apparently is surprising a lot of those that went through a bankruptcy and thought those assessments were gone forever!

In a bankruptcy, all listed creditors have the account associated with the debtor compromised to a lesser amount (in Chapater 13), or even zero (in Chapter 7).  This reduction of the debt obligation of the debtor applies to the debt.  So for a promissory note, the debtor no longer is personally obligated on the NOTE (the debt instrument) itself.  But that does not mean that the debt is no longer in existence, and that is because the debt is still secured by the mortgage, which still exists.  That is why the lender still forecloses on the property if it does not get paid.  For Association fees, pursuant to Bankruptcy Code  11 USC Section 523, the obligation to personally pay the assessments for the use of the services of the common areas and other services for an association is different.  Once the court says that the debtor is discharged from that debt, it means that ONLY the PRIOR existing obligations that accrued are discharged.  But that does not change two important facts.

        1.     The lien entitlement of the association still exists for the entire amount ? even the amount discharged by the bankruptcy court, much like the mortgage example above.

        2.     The assessments after the discharge by the bankruptcy court are NEW personal obligations that occurred AFTER the discharge and are not affected by the bankruptcy court?s discharge.

Therefore, it is very important that the TIMING of the bankruptcy filing can be critical when there may be remaining time of ownership of property that is subject to association assessments. If you file too early, there will still be the possibility of foreclosure by the association and continuing and new personal obligations for which bankruptcy protection will no longer be available.

[For related information - see ASSOCIATION ASSESSMENTS AND HOW THEY CAN SURVIVE A FORECLOSURE SALE]

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Copyright 2011 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader. Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com  - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com  Website www.Florida-Counsel.com .

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES