before and after attorny

[mwr]

That quoted Realty Trac article is also wrong about California's SB 931. SB 931 applies to purchase-money mortgage deficiencies after short sales, not foreclosures. California already had a law that stops personal liability on purchase-money mortgage deficiencies after foreclosures.

[tobee43]

That quoted Realty Trac article is also wrong about California's SB 931. SB 931 applies to purchase-money mortgage deficiencies after short sales, not foreclosures. California already had a law that stops personal liability on purchase-money mortgage deficiencies after foreclosures.

right, that's the way i understand it as well. but i don't read it as incorrect...since california can either go judicial or non judicial.



actually, i don't know how updated this list really is, however, these are the states, after the bill was signed that were or maybe still are all the mortgage walkaway trustee sale states, meaning they are non-judicial foreclosure states.

in those states, generally, when they foreclose on you, they cannot pursue you for their financial losses.

"many, such as California, do in theory allow a lender to choose judicial foreclosure but in those cases the lenders only do so if a borrower has significant other assets. this is the "one action" rule that lets the lender either pursue non-judicial foreclosure, at lower cost and less time, or judicial foreclosure that costs more money and takes more time but lets them go after you for their financial losses."

here's the list:

Alaska
Arizona
Arkansas
California
Colorado
District of Columbia (Washington DC)
Georgia
Hawaii
Idaho
Mississippi
Missouri
Montana (as long as non-judicial foreclosure is used)
Nevada - note that the lender CAN get a deficiency judgment
New Hampshire
Oregon
Tennessee
Texas (but even in a non-judicial foreclosure, the lender can pursue a deficiency judgment)
Virginia
Washington
West Virginia

these are states that also allow non-judicial foreclosure, and/or where non-judicial foreclosure is more common and deficiency judgments can be obtained more easily:
Michigan
Minnesota
North Carolina
Rhode Island
South Dakota
Utah
Wyoming

and i just want to add the following:

"For tax purposes there is cancellation of debt income unless:
1. you are insolvent (your liabilities are greater than your assets), or
2. this is your principal residence, or
3. it's a non-recourse loan

Most people in this situation owe so much that their liabilities are greater than their assets, so they are "technically insolvent" and therefore have no federal tax liability for cancellation of debt income."

[tobee43]

oh...and mwr..i looked at that...and you're right that is very clear with the respect of the short sale in california.

SB 931 Short Sale Deficiency Protection Bill Effective January 1, 2011

SB 931 Short Sale Deficiency Protection Bill

Effective January 1, 2011

"SB 931 prohibits a deficiency judgment under a note secured by a first deed of trust or first mortgage for a dwelling of not more than 4 units in any case in which the (owner) sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. The bill would provide that written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage. "

Many banks have been unrelenting in their short sale approval letter verbiage on refinances, saying they will follow state laws to pursue a deficiency judgment. California lawyers sometimes argue that even if the loan was purchase money and exempt from a deficiency, such language in the short sale approval letter allowed the bank to pursue sellers after closing a short sale because the approval letter changed the status of the loan. California short sale sellers with a first mortgage will no longer have to worry about a deficiency judgment after a short sale.

This law pertains to first Trust Deed loans secured by 1-4 residential properties and does not have to be owner occupied. This law will also apply not only just for purchase money mortgages, but, for "hard money loans" which are first mortgage loans not used to originally purchase the home, such as a refinance.

SB 931 would further provide that if the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first mortgage or deed of trust, the above prohibition shall not limit the ability of the holder of the first deed of trust or mortgage to seek damages and use existing rights and remedies as specified.

This law will not change existing law relating to second mortgages in a short sale, so it still remains very important for sellers to obtain written relief from future deficiency judgments from second mortgage lenders in a short sale. Many attorneys still believe, however, that if a second mortgage was also a purchase money mortgage used to initially purchase the home, that the second loan would also still be non-recourse after a short sale, but there has not been definitive case law confirming this.

Our thoughts and comments on this subject: SB 931 was passed in the CA State Senate on 8-23-2010 and signed by the Governor on 9-30-2010. It went into effect on 1-1-2011. Much was made of the bill when it was passed, but it seems that it has become somewhat of a forgotten item since some time has passed until it took effect. Make no mistake about it, THIS NEW LAW IS A GAME CHANGER. Did you realize that this new law extends anti deficiency protection, that is the lender cannot pursue the short sale seller for collection of the shortage amount, to ALL FIRST TRUST DEED LOANS, EVEN REFINANCE LOANS. Did you realize that this law extends anti deficiency protection to ALL SHORT SALE SELLERS, EVEN ON THEIR INVESTMENT PROPERTIES. This is huge. This opens the door for many homeowners who are thinking about short sales as an option. Sellers who previously thought they could not avoid their lender pursuing them for their shortage can now short sale without recourse from the first Trust Deed lender. Please note that this protection does NOT apply to second Trust Deed lenders. The attached is a short legislative summary of the Bill. It is full of important points. I would encourage you to read it and get the information out to any and all of your clients who it may affect. I also have a shorts sale package that is full of other tax information, tips, and insights on short sales that I am certain you would find extremely helpful."

[debee]

I think Realty Trac has item number 1 wrong.
Here's a link to the actual bill and it deals with the tax issues associated with a foreclosure. Nowhere could I see that it prohibits a lender from seeking a deficiency judgment should state law allow it.

http://www.govtrack.us/congress/bill...bill=h110-3648

Agree!

They do have it wrong. Insolvency only protects the borrower from having to count "forgiven debt" as income. Deficiency judgments aren't forgiven. In fact, they're the exact opposite!

If a lender forecloses judicially and gets a deficiency judgment it means they can pursue the borrower for that debt according to the collection laws of the state - so they can garnish, levy bank accounts, places liens on other property, etc. - but thankfully, the debt associated with deficiency can be discharged in bankruptcy.

[debee]

That quoted Realty Trac article is also wrong about California's SB 931. SB 931 applies to purchase-money mortgage deficiencies after short sales, not foreclosures. California already had a law that stops personal liability on purchase-money mortgage deficiencies after foreclosures.

Agree! I don't know who writes their articles but it's obviously someone who doesn't know what they're talking about.

(Note to self: never rely on realtytrac for accurate information.)

[tobee43]

a show of hands please for all of you that had to pay on a deficiency, whether it be applicable to a short sale or a foreclosure!!

would really like to know one just one person that has been sued for the deficiency and had to pay. not saying it's impossible, but the act does protect you regardless until 2012. however, the proofs are not in the words of the bill itself, it's actually in what happens in real life.

i know at least ....just off hand 4 people that never had to pay a dime in nj and they just walked away from their homes, there were substantial deficiencies, and no one pursued them. but, then again that was nj.

[LostItAll2]

Tobee, thank you so much for all that informative information. That must have been so much work and it appreciated by many I hope.

[FairyPoor]

I have always found Realty Trac quite accurate in many cases. It is difficult to know if any source is really correct. I personally would rather speak to someone who has experienced the situation as Tobee has pointed out.

[FairyPoor]

Oh, also Tobee thank you, I just clicked on your blogs, the one about the Mortgage Forgivness Act.

I'm going to try and put the link in, I hope I do this correctly. Oh, I can't post it, but I see you have an entire blog on the subject matter.

[LostItAll2]

http://www.bkforum.com/entry.php?818-The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation

I think I found it? Why can't you post it? Tobee that's a great reference.

[tobee43]

thank you, i hope it is as updated and correct as possible. i really do appreciate that you looked!!

[debee]

I agree!

tobee does all the forum readers a service by posting information about the Mortgage Debt Forgiveness Act in her blog. I just skimmed that information and I believe it is correct. The IRS link takes you to the "authorized" facts which repeat what others have said on this thread: deficiency judgments are not "forgiven".

However, it's important that forum readers & especially OP understand that the realtytrac article is wrong. It's important that forum readers and OP are clear on this one point:

A deficiency judgment is NOT forgiven as part of the Mortgage Debt Forgiveness Act, and is enforceable whether the debtor is insolvent or not.

Once OP has the correct information, he can make the best decision for his circumstance.

ETA: link to news article I just posted which may help readers understand how deficiency judgments work: depending on state collection law, they can come after you ten years after you get the judgment! twenty years later! Here's the article: http://www.bkforum.com/showthread.ph...amp-Unpaid-HOA

[tobee43]

I agree!

tobee does all the forum readers a service by posting information about the Mortgage Debt Forgiveness Act in her blog. I just skimmed that information and I believe it is correct. The IRS link takes you to the "authorized" facts which repeat what others have said on this thread: deficiency judgments are not "forgiven".

However, it's important that forum readers & especially OP understand that the realtytrac article is wrong. It's important that forum readers and OP are clear on this one point:

A deficiency judgment is NOT forgiven as part of the Mortgage Debt Forgiveness Act, and is enforceable whether the debtor is insolvent or not.

Once OP has the correct information, he can make the best decision for his circumstance.

ETA: link to news article I just posted which may help readers understand how deficiency judgments work: depending on state collection law, they can come after you ten years after you get the judgment! twenty years later! Here's the article: http://www.bkforum.com/showthread.ph...amp-Unpaid-HOA

good one debee, and they are very different, i hear you the the realytrac, i believe they are like i believe zillow on their pricing or values of home. neither are the greatest of "good" source information. but, i took it because it covered "other" areas that were applicable. (or so i thought).

also what's your thoughts on if the owner had PMI on the mortgage??? wouldn't that cover any deficiency???

i get confused....here's from one of my more reliable sources...from Alper...that's referencing florida mostly.


NEW ASSET PROTECTION TOOLS - Mortgage Foreclosure Deficiency

"Many Florida real estate investors are concerned about personal liability from mortgage foreclosure deficiency judgments. Although they accept loss of equity, if any, in property which is foreclosed by their mortgage lender, people are afraid of a deficiency judgment. A deficiency judgment refers to a mortgage lender’s judgment against the borrower for the difference between the outstanding balance of the mortgage note, plus costs and attorneys fees, and the value of the property foreclosed. The property value is determined on the date of the foreclosure sale. Personal liability from mortgage debt is today a principal reason for asset protection planning.

In Florida, a mortgage foreclosure does not automatically result in a deficiency judgment. Just because you lose a property at foreclosure does not mean you will remain personally liable for money owed to the lender . To obtain a deficiency judgment against the borrower the foreclosure sale the mortgage lender has to file a motion for a deficiency after the foreclosure sale, and the court must hold a separate evidentially hearing on the lender’s request for deficiency liability. At the evidentially hearing the mortgage lender has to show the court evidence that the property’s value on the sale date was less than the note balance. The borrower can get his own appraisal or can use the government's tax assessed value as evidence of value. If the property was worth more than note balance on sale date the court will not give the mortgage lender a deficiency judgment against the borrower. The borrower may present evidence of value in the form of a formal appraisal or other less formal opinions of value such as the local government's tax assessed value.

During the recent real estate boom deficiency judgments were uncommon because increasing real estate values brought home values above note balances of defaulting mortgages. Additionally, lenders could take back "upside down" properties and hold them until the rising market made them whole. Deficiency liability is a problem in a declining market. Up to this point in the real estate crash few of the national mortgage service companies with conventional first mortgages have been pursuing deficient judgments, especially mortgages on owner occupied homes.There has been an increase in deficiency actions by smaller regional lenders. Many attorneys and other experts speculate that first mortgage deficiency lawsuits will increase in the future as lenders resolve foreclosure backlogs and as they sell their deficiency rights to third party investors and collection firms. Smaller regional mortgage lenders are pursing deficiency judgments more often than before. Florida law gives mortgage lenders five years to pursue a mortgage deficiency claim.

Second mortgage lenders and private lenders are more likely than first mortgage holders to go after the borrowers by suing for default on the underlying promissory note. There has been a significant increase in second mortgage lawsuits since the beginning of 2009. Banks that made commercial loans to developers or builders almost always file a lawsuit against the individual borrower to enforceand collect upon the promissory note or personal guarantee of a business loan.

If a mortgage lender pursues a deficiency judgment you should hire an attorney to defend the deficiency. In many cases, an attorney can use procedural defenses and substantive lending law to defeat a deficiency claim, and the attorney can negotiate an acceptable settlement for much less than the total deficiency liability in most cases.

One way to avoid deficiency liability, or to modify your mortgage to avoid foreclosure, is court ordered mediation with your mortgage lender through a new mediation program in Chapter 13 bankruptcy cases. If you file a Chapter 13 bankruptcy in the Orlando division the the federal bankruptcy court will very soon after filing issue an order requiring the lender to participate in good faith mediation to discuss mortgage modification. The HAMP mortgage program was modified this year to eliminate bankruptcy as an obstacle to mortgage relief.


Another problem with mortgage foreclosure is possible income tax consequences. The general rule is that when a lender forgives or cancels a debt the borrower can incur income tax on the amount of debt forgiveness. When you arrange a discount in your mortgage in order to sell house (a so-called "short sale") the mortgage lender will cancel part of your mortgage debt and you will receive a tax form 1099 telling the IRS that you have imputed income for the amount of debt reduction. You will also incur income tax liability for a deed in lieu of foreclosure. The taxable income will be the difference between the property value and the balance of the mortgage loan on the date you surrender the property to the bank.

A foreclosure may result in cancellation of debt income depending on whether the bank pursues a deficiency judgment. If the mortgage lender gets a deficiency judgment for the difference between the property value on foreclosure sale date and the mortgage balance the lender is not forgiving any part of the loan. If the bank chooses not to pursue a deficiency judgment, or pursues the judgment unsuccessfully, the borrower may incur income tax liability for debt foregiveness.

In December, 2007, Congress acted to protect many debtors from income tax liability associated with foreclosure avoidance. The Mortgage Forgiveness Debt Relief Act of 2007 states that homeowners will not be subject to income tax from release from mortgage liability if and to the extent the mortgage proceeds were used to buy or improve their primary residence. There is no income tax shelter from foregiveness of mortgage debts for investment property, vacation homes, or mortgages used for businesses or to pay off credit card balances. You should speak with an attorney or CPA familiar with the new law to see if you qualify for income tax protection.

For those borrowers who do not qualify for protection of the new Act there is an insolvency exception to imputed income from the cancellation of mortgage debt. If a borrower is financially insolvent when he surrenders the mortgaged property to the lender voluntarily or through foreclosure there will be no imputed income. A borrower who files bankruptcy is presumed to be insolvent, so that a bankruptcy debtor cannot suffer imputed income tax liability because the bankruptcy discharges personal liability under a mortgage note. More information is available from IRS Publication 908 and IRS tax form 982. Both forms can be found at irs.gov.

The tax law permits many real estate investors to offset imputed debt foregiveness income with corresponding tax losses. For example, if a lender forecloses on a parcel of income producing rental property the taxpayer may be able to report an operating loss to offset all imputed income from debt foregiveness in the same year that the the mortgage lender issues the Form 1099. When a foreclosed property was not income producing, but was held solely for future appreciation (example: vacant land), the deduction from ordinary income of capital losses in excess of capital gain may be limited to $3,000 per year so that the total loss will have to be deducted over future tax years. You should consult your CPA to determine the tax impact of a mortgage foreclosure on your tax situation. The tax impact of foreclosure is not a legal issue."

[debee]

Alper has some good articles at his site. Someone on the forum hired him and apparently he's pretty interesting in person too.

I don't know about PMI. You couldn't get a deficiency judgment on a PMI-insured loan where I live (first mortgages aren't recourse in CA) so I've never had motive to research that issue. If I was living in a recourse state and the only thing standing between me and possible bankruptcy was a PMI-insured first loan, I would definitely be looking into it.

[keepmine]

If I was living in a recourse state and the only thing standing between me and possible bankruptcy was a PMI-insured first loan, I would definitely be looking into it.

To muddy the water a bit more-would the debtors PMI carrier have recourse against them?
Might not hurt to include your PMI carrier in your creditors matrix.