June 2009 Newsletter

December 22, 2009

1. Proposed Legislation Permitting First Mortgage Cram Downs Under § 1322(b)(2)

On Thursday, April 30 2009, the United States Senate voted against a controversial bill that would have empowered Chapter 13 Bankruptcy judges to reduce first mortgage principal balances on primary residences to better reflect their current values. The proposed legislation referred to as the mortgage “cram-down” law had previously passed the House of Representatives with a vote of 234-191. Although the bill seemed to be great news for people living in high foreclosure states like Florida where property values have plummeted, it is important to understand that not all debtors would have been presumptively eligible to modify home loans under the new law. What the bill proposed on its face was the removal of the anti-modification provision of 11 USC 1322(b)(2), which presently disallows modification of claims secured by the debtor’s primary residence.

However, the bill also set forth several requirements intended to prove that a debtor was unable to cure arrears and maintain monthly mortgage payments as they come due in the future. For example, the homeowners needed to show that they had tried to negotiate a voluntary loan modification with their lender. Another amendment required that the Bankruptcy Judges verify that a homeowner actually sought a modification before entering the bankruptcy process and the same Judges would haveto perform a balancing test involving a person’s income and their monthly mortgage payments before deciding whether an interest rate reduction was feasible. If after these guidelines were met leaving a debtor with the opportunity for a principal reduction, Bankruptcy Judges would then have to use Federally approved appraisal guidelines to determine a home’s current market value and there was a cap on the amount a mortgage could actually be reduced.

As such, although the proposed legislation seemed promising and would have likely helped many homeowners, it wasn’t necessarily going to provide relief for all those who turned to Bankruptcy in an effort to save their home. Now, as this has become a moot point, we will need to wait and see if and when the bill is going to be reworked for a comeback.

2. The Obama administration expanded its $50 billion mortgage aid program.

On Thursday, May15, 2009 the Obama administration expanded its $50 billion mortgage aid program, announcing new measures that would help homeowners avoid a foreclosure if they don’t qualify for other assistance. The initiatives announced Thursday are aimed at ineligible homeowners: borrowers who are unemployed or owe significantly more than their homes are worth.
Generally, there are two options for them to avoid foreclosure. The homeowner can sign the property title over to the lender in what is known as a deed in lieu of foreclosure. Or, with the lender’s permission, the homeowner can sell the property for less than the value of the loan through a short sale.

Short sales are often seen as preferable to foreclosure because they don’t harm a borrowers’ credit record as much as a foreclosure. The new program would install standards that would speed the process for buyers and sellers by making it more efficient. Under the plan, incentives would be provided for mortgage servicers and borrowers to pursue short sales. Financial incentives include $1,000 to servicers for a successful short sale, and borrowers may receive up to $1,500 to assist with relocation expenses.

So far, 14 companies have signed up and will be paid for each loan they modify. And to further entice mortgage companies to participate, the government is offering payments totaling up to $10 billion to compensate them for the risk of falling home prices.


May 2009 Newsletter

December 22, 2009

1. How does Loan Modification help the consumer?

Indeed many lenders are granting loan modification in order to help homeowner retain ownership. If you have a mortgage loan, you shall, in some ways, be able to modify. It is a great option to avoid foreclosure and maintain ownership of your property.
To many families the effect of foreclosure can be far reaching and even cause a complete disintegration of the family. The media have reported suicide cases linked to the effect of foreclosure. It is a reality that some lenders will reduce principal to facilitate a loan modification. Options Arms were originally designed to accommodate sophisticated borrowers and investors. The abuse of Options Arms by unscrupulous mortgage brokers and lenders catering to unrealistic borrowers created more chaos in the real-estate market.

For many homeowners, it is a win situation to have the possibility to re-amortize their loan to a longer 40 or 50 years having their owed obligation to the bank added to the principal so that their will retain ownership, afford their monthly payment, not disrupt their family dynamics and further aspire to salvage the American Dream of homeownership.

Many lenders, with the assistance of the stimulus plan, are awarding better and better loan modifications. We have assisted many of our clients in obtaining modification with terms as low as 1% interest payment for the term of the loan and reduction of principal owed.

It is now a proven truth that loan modification is already helping many families re-stabilize their finances , maintain ownership of their home , revitalize their credit rating and most of all help them weather the storm.

2. Brief Synopsis: F.S. 501.1377 violations involving homeowners during the course of Residential foreclosure proceedings

On October 1st, 2008 the State of Florida enacted a new law aimed at protecting homeowners who are in default on their mortgages, in foreclosure, or at risk of losing their homes due to nonpayment of taxes from fraud, deception, and unfair dealings with foreclosure rescue consultants or equity purchasers.

Some of the protections in the new law will prevent con-artists from rescuing homeowners by signing them into predatory loans, getting them to sign over their property unwittingly, or just pocketing a fee to negotiate with the lender and then disappearing.

The new law imposes two requirements on foreclosure rescue consultants, which the law defines as anyone who is offering to help stop, delay, or avoid foreclosure. The first requirement is that the consultant must provide a written agreement, give the homeowner a full day to review it before signing it, and then allow the homeowner three days to cancel after signing. The written agreement must fully describe all services to be provided and disclose the right to cancel the arrangement. The second requirement is that the foreclosure consultant cannot ask for or accept any fees for services until the consultant has provided all services listed in the agreement.
Anyone violating the provisions of the new law commits an “unfair and deceptive trade practice,” and could be sued by victims or by the state for those violations. Violators could be liable for damages, attorney’s fees, and civil penalties of up to $15,000 per violation.

3. Fannie Mae Pilot Program: Pre-approved Short Sales

The Wall Street Journal first reported in late 2008 that Fannie Mae would be pairing up with Countrywide Financial, now Bank of America, on a pilot program that would run from the end of December 2008-March 2009. Specifically, under this pilot program, Countrywide would determine the acceptable listing price for a given property, and then, the buyer would be sought using that “pre-approved” price. The pilot program was to be limited in scope, involving a few cities only, and the selected properties were exclusively Fannie Mae backed loans serviced by Countrywide.
Now, that the pilot has been completed, Fannie Mae is analyzing the program’s success to decide whether it will formulate a similar, nationwide, program Such program would streamline the short sale process, so that the parties to the transaction could close on a short sale in less than 30 days, rather than the typical 60-90 days from date of submission of the short sale offer and financial package. Fannie Mae can follow in Freddy Mac’s footsteps, in this regard, as they have been having considerable success with these streamlined short sales.

While this program sounds promising, real estate professionals have expressed skepticism in one regard. There is great concern that Fannie Mae’s pre-approved short sale prices will be over market value. It appears that Fannie Mae has gained a reputation for over-valuing homes. If this was to happen, the program would not be helpful to anyone. Hopefully, however, the mortgage giants received that memo, and will fairly price homes, so as to make this program one of the first truly promising solutions to this real estate market crisis.

March 2009 Newsletter

December 16, 2009

The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you free written information about our qualifications and experience. Outcome or results are not guaranteed.

1. Assignment of Mortgage.

2. What is the attorney-client privilege? Does a realtor really represent you? Why hire an attorney and not a mortgage broker?

3. Tax Consequences: Foreclosure v. Short Sale

1. Assignment of mortgage

Foreclosure is the process by which a financial institution (e.g., your bank/loan servicer) can reclaim your home and/or land if you fail to make timely mortgage payments. In a foreclosure action, the bank files a complaint with the state court to foreclosure the property. Oftentimes, banks do not have the right to bring such action due to lack of an assignment of mortgage. An assignment of mortgage is a written document which serves as proof of transfer of a loan obligation from the original borrower to a third party.

First and foremost, it is important for you to understand the legalities of foreclosure and your rights for mortgage foreclosure solutions. There are two basic documents involved in a bank loan transaction, the promissory note and the mortgage. The note is a contract that details the terms of a promise by you to pay a sum of money to the bank. The terms of a note typically include the principal amount, the interest rate if any, and the maturity date. It also may contain provisions concerning the bank’s rights in the event of default, which may include foreclosure of your property. The mortgage is a method of using property, real or personal, as security for the performance of an obligation, usually the payment of a debt. It gives the bank the right to take away your property if you do not pay as it is specified in the note.
Essentially, the mortgage is what gives the bank the right to foreclose.

The note, by itself, is considered to be an unsecured debt. On the other hand, the note accompanied with the mortgage comprises a secured debt. The difference between these two is that a secured debt allows the bank to force sale of the property, which in turn permits satisfaction of the loan in case of default by you, the borrower. However, without the mortgage, banks cannot force sale of the property to satisfy the debt.

In many cases, when a bank lends you money to purchase a home, it will subsequently sell the note along with the mortgage to investors in the secondary market. The secondary market manages mortgages that were originated in the primary market. It consists of investors, both public and private, who buy the mortgage notes. This allows the mortgage lenders to replenish the cash reserves, so that they can originate more mortgages to more consumers. In this way, the investors profit from the interests that the mortgages charge.

Furthermore, it should be noted that when a loan is sold in the secondary market, the bank is no longer the owner of the note and mortgage. However, the bank’s rights under the mortgage are not automatically assigned to the investors. In order to assign such rights, an assignment of mortgage is necessary. Generally, a title search of the property is conducted to determine whether an assignment of mortgage has been recorded. If an assignment does exist, then a defense is available to delay your case and/or prevent foreclosure of your property.

Once your situation is completely assessed, a mortgage foreclosure solution can be recommended. We are here to work on your behalf to come up with the best course of action to prevent foreclosure. Our team of attorneys specializes in helping clients who have fallen behind on their mortgages payments and who wish to avoid foreclosure.

2. What is the attorney-client privilege? Does a realtor really represent you? Why hire an attorney and not a mortgage broker?

The attorney-client privilege is the basis for which confidential communication must be protected when legal counsel is sought. The idea of the privilege is that it belongs to you, not the attorney, and hence only you may waive it. The confidential communication covered by this privilege may be written or oral, but it must occur under the existence of legal counsel. It also covers the initial consultation with a potential attorney, even if you later decide not to retain the attorney’s services. This important privilege extends beyond death and will only be waived under those circumstances in very rare cases.

There are limits to this privilege that may apply depending on the situation being adjudicated. For instance, confidential disclosure about a future crime is not protected as the attorney is required to reveal such information to enforcement officials. However, communications regarding past crime or fraud are within the attorney–client privilege and may not be disclosed without your consent. Thus, said privilege is the strongest where a client seeks counsel’s advice to determine the legality of conduct before taking action. If the attorney breaks the privilege without your consent or court order, you can seek to suppress the attorney’s testimony or seek to have the case dismissed. Moreover, you could sue the attorney for malpractice for invoking the privilege without court order or your consent.

It is important when hiring a realtor to decide how the realtor will be working for you and what duties they do or do not owe you. In Florida, realtors are presumed to be “Transaction Brokers,” unless a single agent or no brokerage relationship is established in writing. A transaction brokerage is a form of limited representation which does not create a fiduciary relationship. The transaction broker does not affirmatively represent you, and no fiduciary duties exist, except for the duty of accounting and the duty to use skill, care, and diligence. Thus, the transaction broker is not a fiduciary of any party.

In contrast, a fiduciary relationship does exist between you and your attorney. Remember that the attorney-client relationship is one of confidence meaning that an attorney cannot divulge any information obtained in the course of representing you, unless otherwise agreed. It allows you to be open and honest with your attorney in order for you to get the best and most competent legal advice and representation.

3. Tax Consequences: Foreclosure vs Short Sale

A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed. If you transfer title on your home, whether voluntarily through a warranty deed or grant deed, or involuntarily through foreclosure, you might be subject to taxes, even if you sold your home at a loss, either on a short sale or by foreclosure.

Too often, real estate practitioners are unaware of the tax liabilities arising from the cancellation of debt and fail to advise their clients accordingly. Whenever real estate is sold, whether in a standard transaction or foreclosure auction, there are potential tax consequences for the seller. The IRS considers any canceled mortgage debt ordinary income, which means that the amount forgiven is taxed at the same rate as the seller’s salaries. In addition, the IRS will require the lender to file a 1099-C form, thus, the seller will receive a copy of the same to use in filing income taxes.

For purposes of illustration, assume that the balance of the mortgage is $300K, the short sale accepted by the bank is $260K, and the property sold at the foreclosure auction for $260K. Keep in mind that the amount of the debt canceled or forgiven will differ between a foreclosure and a short sale. The short sale amount is the amount the lender has agreed to forgive you from the sale of your home prior to being foreclosed.

For instance, if you and the lender work out a short sale before the foreclosure and the bank accepts $260K when you owed $300K, then you would have income to show.

The difference between what you owe and what the bank accepts is counted by the IRS as forgiven debt and is taxable income. It is as if the lender gave you $40K, which was then used to pay down the mortgage. However, this is only if there is an agreement between you and the bank to proceed with a short sale. Otherwise, if such agreement does not exist, then you do not receive the forgiven debt.

In the case of a foreclosure, if you owe $300K and the house was purchased at the foreclosure auction for $260K, there is no tax due. In this situation, where the house is ordered to be sold to satisfy the mortgage debt, the bank probably had a judgment against you for the full $300K owed on the mortgage. Even though the house was sold for a loss at the foreclosure auction it does not mean that the bank forgave any of the debt. The house was only sold for less than what was owed. Therefore, no portion of the amount owed was forgiven and there is no taxable income. Thus, there is just a loss on the forced sale of the property. As a result, you will not be responsible for paying the difference between the $300K that was owed and the $260k that the property was sold for at the foreclosure auction.

Be aware that if the lender forgives you or writes off your debt it must send you and the IRS a Form 1099-C at the end of the year. While you may not receive this form from the creditor, the creditor may have submitted one to the IRS regardless. Thus, it is imperative for you to list the income on your tax return. If not, you could get a tax bill or, worse, an audit notice, which in turn could end up costing you more than just the original tax bill.

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