Short Sale Sellers In 2014 Would Get Key Tax Break
A bill that would extend a key tax break to tens of thousands of short sale sellers who sold their homes in 2014 for less than they owed on their mortgages passed the U.S. House on Wednesday and is headed to the Senate for consideration.
A one-year extension of the Mortgage Debt Forgiveness Act, which expired Dec. 31, 2013, was included in the Tax Increase Prevention Act of 2014 and passed the House on Wednesday on a 378-46 vote. Short sale advocates and real estate groups have been lobbying hard all year to help homeowners sold their home through a short sale avoid a devastating tax bill which they likely could not afford.
Traditionally, if a lender allows a homeowner to sell a property for less than the amount owed on the mortgage, the homeowner has to report that forgiven debt as taxable income to the Internal Revenue Service. The Mortgage Debt Forgiveness Act of 2007, which had been extended multiple times, allowed taxpayers to exclude that forgiven debt from their annual income calculations.
The tax break lapsed in 2013, forcing homeowners to either gamble that it would be revived and proceed with a short sale or remain in homes that they either couldn’t afford or couldn’t sell because the mortgages were underwater.
If the bill does not pass, all is not lost. According to some experts, there are other ways under the IRS Code for insolvency to exclude a short sale tax forgiveness from income. Consult a qualified tax attorney or CPA for guidance.
An analysis earlier this year by the Urban Institute concluded that uncertainty over whether the tax break would be renewed could affect up to 2 million seriously underwater borrowers, including some who would eventually fall into foreclosure.
Congress Fails To Extend Mortgage Forgiveness Debt Relief Act for 2014
The ringing of the New Year may not be a welcome sound to distressed homeowners who were not able to complete short sales by the close of 2013. Unfortunately, Congress failed to extend the December 31, 2013 expiration of the Mortgage Forgiveness Debt Relief Act, the federal law which makes short sale debt forgiveness non-taxable.
If there’s no extension, the short sale market will be decimated. I just closed a $600,000 short sale yesterday, just under the deadline. But if that same deal closed tomorrow, it would have resulted in an over $30,000 tax bill for a distressed homeowner who could in no way afford to pay that.
Last year, Congress rushed to extend the law during negotiations about the fiscal cliff but only through the end of 2013. Lawmakers and housing advocates argue that the rule hurts those who are already financially strapped. Since 2009, more than 220,000 homeowners have sold their houses for less than they were worth through a short sale with help from a government program. There are more than 6 million homes still underwater across the country, according to a third-quarter report from research company CoreLogic.
At the federal level, there are three bills — two in the House and one in the Senate — that call for the law’s extension. One of the House bills enjoys strong bipartisan support, with 29 Democrats and 23 Republicans on board. The Senate bill — which would extend relief through 2015 — is sponsored by Senators Debbie Stabenow, Democrat of Michigan, and Dean Heller, Republican of Nevada. Stabenow sponsored the extension last year.
Don’t be surprised if short sales slow down considerably and go into a holding pattern while folks wait to see if Congress will extend the law. Let’s hope Congress acts on this important matter.
If you have any questions about short sales, please contact me at [email protected].
Yesterday my firm sponsored a very informative breakfast seminar with veteran real estate journalist Scott Van Voorhis of Banker & Tradesman and Boston.com who offered his predictions on the 2013 Massachusetts real estate market. The presentation included a lively question and answer session with the 40+ Realtors attending from all over the Greater Boston area. Here are some take-aways from the seminar (in no particular order):
“Bright and sunny early, but with a chance of severe job cuts later.” According to Mr. Van Voorhis, the Fiscal Cliff and upcoming Debt Reduction negotiations may be the biggest obstacle remaining in the path of a sustained real estate recovery. At stake are anywhere from 50,000 – 70,000 jobs in Massachusetts if the current slate of proposed budget cuts pass — to defense (i.e., Raytheon), health care, hospitals, and medical research, and tech sectors. If Massachusetts sees severe spending cuts by the federal government, the Route 128 corridor will be most impacted. The current impact is of “wait and see” with defense contractors and tech companies waiting to see how the federal budget battle with be resolved. They are putting new hires on hold and bracing for possible cuts. The fact that Congress will likely wait until the last minute to resolve these important issues doesn’t help the market any!
We’re back…. Median sale prices in many suburbs are now back to 2005 levels. Natick’s median price is $418,500, just off from its ’05 high. Needham has surpassed its ’05 record with a median price of $670,000. Burlington has broken its ’05 record at $407,000 median price. A major driver of the real estate recovery is the tech-sector, with Route 128 lab space expanding by 50%, or 3.5 million square feet of space, since 2007, enough to fill three Prudential Towers of space. Shire in Lexington and Genzyme in Framingham have led with way.
Tear-Downs On The Rise. Builders are doing tear-downs instead of large scale subdivisions, where financial risk is minimal. Early data indicates increasing market activity in tear-downs in Lexington, Newton and Needham, for example.
Low Inventory of Move-In-Ready Homes. The attending Realtors lamented about the dearth of move-in-ready homes in the sought after towns. As we know, there is hardly any buildable land in Massachusetts, and builders have not been doing subdivisions for several years. The agents say bidding wars are back in a big way for these properties, which creates problems with potentially low bank appraisals as the “comps” must catch up with new sales data. The low inventory also affects potential home sellers, especially the empty nesters who are “paralyzed” as one agent described, waiting on the best time to sell.
Buyers’ Lack of Vision. We discussed that the current generation of buyers would rather pay a premium for a move-in-ready home with the requisite gourmet kitchen with granite and stainless steel appliances, rather than pay less for a fixer-upper. Some Realtors have enlisted trusted contractors to scope out fixer-uppers along with buyers, so they can envision the potential of a lower priced home.
Condos Remain Strong Sector. Condominiums remain the new starter home for many buyers, especially singles. Inventory is strong and pricing remains affordable in many communities. With interest rates still at historic lows and the mortgage interest tax deduction still in place, purchasing a condo is much cheaper than renting. The consensus is that condos will remain a strong sector through 2013.
Short Sales Strong & Less Time Consuming. As noted by veteran short sale negotiator Andrew Coppo of Greater Boston Short Sales LLC, short sales are now becoming far less time consuming with the new Fannie Mae short sale guidelines in place since the summer. Mr. Coppo reports that short sales are taking merely 60 days to get approval, and Bank of America finally “getting it” by implementing its computerized Equator streamlined short sale system. Also, the Mortgage Debt Relief Act was extended through 2013, giving short sale sellers tax forgiveness for discharged debt. There are still lots of underwater and struggling homeowners, so 2013 will remain another strong year for short sales.
What are your predictions and thoughts for the 2013 Massachusetts real estate market? We would love to hear from you!
It’s a Done Deal: Tax Forgiveness for Short Sales, Loan Modifications Remains In Effect Through End of 2013
Well, that didn’t take very long. Within 24 hours of the Senate’s late-night New Year’s Eve passing of the “Fiscal Cliff” bill, House Republicans caved, and passed the Senate version of the Fiscal Cliff bill, which extends the Mortgage Debt Relief Act of 2007 through the balance of 2013.
As originally reported by the National Association of Realtors, short sale agents and sellers should breath a sigh of relief due to the extension. This will extend mortgage debt forgiveness relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, typically in a short sale, loan modification or deed in lieu transaction. Without the extension, any debt forgiven would have been taxable. For distressed households this would have added insult to injury and resulted in a large tax bill.
Fate of Tax Forgiveness for Short Sales, Loan Modifications Remains In Limbo
As reported by the National Association of Realtors, short sale agents and sellers should breath a sigh of relief, but keep their fingers crossed with respect to the fate of the Mortgage Debt Relief Act of 2007, which was set to expire as part of the pending Fiscal Cliff. The “American Taxpayer Relief Act of 2012’’ (Fiscal Cliff bill), passed by the Senate in the wee hours of December 31, 2012, extends the Mortgage Debt Relief Act through the balance of 2013. This will extend mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, typically in a short sale, loan modification or deed in lieu transaction. Without the extension, any debt forgiven would be taxable. For distressed households this would “add insult to injury” and result in a large tax bill.
Also included in the Senate Fiscal Cliff bill is the extension of exclusion from taxes for gains on the sale of a principal residence of up to $500,000 ($250,000 for individuals). Thus, only home sellers whose income is $450,000 or above and the gain on the sale of their house is above $500,000 would pay taxes on the excess capital gains at the higher rate (with corresponding numbers for individual filers). For the vast majority of home sellers, there is no change.
The Senate Fiscal Bill has moved over to the House of Representatives where its fate rests in the hands of Speaker Boehner and his fellow Republicans. The House has until noon on Thursday to pass the bill or start over with the start of a new legislative session with newly elected members.
The term Fiscal Cliff should be as ubiquitous as “Merry Christmas” and “Happy Holidays” through the year-end, especially if President Obama and Congress cannot work out a deal to resolve the more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after Jan. 1, 2013. If there is no deal, and the country goes over the fiscal cliff, the consensus is that it will have quite a negative effect on the economy and the real estate market in particular. (I debated using the word “disastrous” because there is a segment of commentators who say the housing market may survive a fall off the cliff).
There are four particular aspects of the Fiscal Cliff which could impact the real estate market.
1. Expiration of Unemployment Benefits. Emergency jobless benefits for about 2.1 million people out of work will cease Dec. 29, and 1 million more will lose them over the next three months if Congress doesn’t extend the assistance again. Unemployed, even those receiving assistance, cannot and do not purchases homes. Democrats and President Obama want the unemployment benefits extended, but the Republicans are attempting to use this as leverage for their own fiscal cliff agenda. The real estate market will surely suffer if benefits aren’t extended.
2. Mortgage Forgiveness Debt Relief Act. The Mortgage Forgiveness Act is set to expire December 31. This tax break is critical for short sales, relieving homeowners from being taxed on any mortgage debt that was forgiven through a short sale, foreclosure or loan modification. If distressed homeowners are subject to tax on millions in debt forgiveness, short sales will likely decrease dramatically.
3. Mortgage Interest Tax Deduction. Once the sacred cow tax break for millions of middle and upper class homeowners, the mortgage interest deduction is reportedly on the chopping block. The National Association of Realtors and real estate groups have been apoplectic in urging no change to this important benefit to homeowners. Eliminating the mortgage deduction would raise taxes on all homeowners, and could dissuade renters from becoming homeowners.
4. FHA/Fannie Mae Bailout. The Federal Housing Administration, the lender of choice for first-time homebuyers, is nearly insolvent and it could require a taxpayer bailout next year, according Edward J. Pinto, a fellow at the American Enterprise Institute. Pinto claims the 78-year-old agency is $34.5 billion short of its legal capital requirement. “If it were a private company, it would be shut down,” argues Pinto. These aren’t the only issues threatening the real estate market. Since Fannie Mae and Freddie Mac were taken over by the government in 2008, taxpayers have plowed $180 billion into them to keep them operational. This mess needs to be fixed next year.
Well, if your stomach isn’t in knots, mine is. Luckily, we have some medicine for you!
On January 8, 2013, we are sponsoring a breakfast seminar with veteran real estate journalist Scott Van Voorhis, who will offer his predictions on what 2013 will bring. Please email me to sign up. The Facebook Event invitation is here. The venue is Avita in Needham, 880 Greendale Ave., Needham, MA.
Richard D. Vetstein is an experienced Massachusetts real estate attorney who hopes the White House and Congress can get their acts together and pass a compromise bill to avoid the Fiscal Cliff.
Well, someone in government has been listening to the chorus of complaints about lenders taking too long to make short sale decisions. In a *rare* move of federal government housing competence, the Federal Housing Finance Agency has instructed Fannie Mae and Freddie Mac to impose new guidelines which should accelerate short sale decisions. The new rules require that short sale lenders make a decision on a short sale within 30 days of a complete application, and if more time is needed, they must give weekly status updates. This will make short sale agents, sellers and buyers much happier. The new requirements go into effect June 15.
However, how much of an impact this will have on national short sales remains to be seen. Freddie Mac has jurisdiction over a small percentage of short sales, mostly HAFA short sales as well as a limited number of traditional short sales, totaling about 45,000 last year. (Bank of America did over 150,000 short sales last year, by comparison). This is certainly a step in the right direction, and hopefully will lead to more regulatory pressure on the big banks to speed up short sales.
It is no secret that both lenders and loan servicers have made continued efforts during recent months to vastly improve their short sale approval time-frames. As someone who exclusively negotiates short sales, I think it is important to note that the new Freddie Mac regulations don’t include any penalties or sanctions for loan servicers or lenders who fail to comply. What’s more, the new rules appear to only require short sale lenders to “make a decision on a short sale within 30 days of a complete application, otherwise they need to send weekly updates.” Most lenders will simply comply with the new requirements by sending out a weekly letter stating that the file is incomplete and request more short sale documents from the homeowner (most lenders already do this). Lenders could also comply with the new rules by simply making an unreasonably high counter-offer. What most people fail to realize is that most lenders, such as Bank of America, Chase, Wells Fargo, and GMAC all utilize an automated short sale processing software, known as Equator, that enables them to approve a short sale in as little as 30 days. The majority of short sales that take more than 60 days to get approved do so because the person submitting the paperwork fails to submit a complete package or the lender “loses” a portion of the submitted paperwork. While the new guidelines are a step in the right direction, without any sanctions or penalties I don’t see them having much of an effect on the time in which the lenders and loan servicers process short sale requests.
In an effort to make the short sale process more transparent, Freddie Mac (OTC: FMCC) is updating its timelines and also requiring servicers to provide weekly updates when decisions take more than 30 days after the receipt of a complete application for a short sale under the Obama Administration’s Home Affordable Foreclosure Alternative (HAFA) initiative or Freddie Mac’s traditional requirements. All decisions must be made within 60-days. Today’s announcement marks the newest part of the Servicing Alignment Initiative (SAI) Freddie Mac and Fannie Mae launched in 2011 at the direction of their regulator, the Federal Housing Finance Agency, to set consistent servicing and delinquency management requirements. Last year Freddie Mac completed 45,623 short sales, a 140 percent increase since the housing crisis began.
News Facts
Freddie Mac’s new short sale timelines require servicers to make a decision within 30 days of receiving either 1) an offer on a property under Freddie Mac’s traditional short sale program or 2) a completed Borrower Response Package (BRP) requesting consideration for a short sale under HAFA or Freddie Mac’s traditional short sale program. (BRPs are standardized assistance applications developed as part of the Servicing Alignment Initiative.)
If more than 30 days are needed, borrowers must receive weekly status updates and a decision no later than 60 days from the date the complete BRP is received. This will help servicers who may need more time to obtain a broker price opinion or a private mortgage insurer’s approval on a BRP or property offer.
In the event a servicer makes a counteroffer, the borrower is expected to respond within five business days. The servicer must then respond within 10 business days of receiving the borrower’s response.
Freddie Mac will use the new timelines to evaluate servicer compliance with the SAI and its own servicing requirements.
Freddie Mac completed 45,623 short sales in 2011, a 140 percent increase since 2009. Overall, Freddie Mac has also helped more than 615,000 distressed borrowers avoid foreclosure since the housing crisis began.
Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at info@vetsteinlawgroup or 508-620-5352.
Short Sales Remain A Good Bargain For Educated Buyers
I was shocked to see this headline today in Banker and Tradesman: Buyers’ Agents Caution: Stay Away From Short Sales, If You Can. Behind this sensationalist headline is the Massachusetts Association of Buyer’s Agents (MABA) which is “warning buyers to say away from short sales.” Say what?!
Sam Schneiderman, the President of MABA states in the article that:
“But even though short sales are taking up a greater share of the market, many buyers aren’t fully aware of the trials and tribulations involved in the transactions. Buyers are thinking short sales are great deals – but it hangs you up for two months, three months, six months,” he said. “Whatever your timetable is, it’s bound to not co-operate. . . Even though banks have made efforts to speed up shorts in recent months, Schneiderman says such problems are endemic to the short sale process, with the buyer almost always left hanging while the bank frets and bickers with the seller and any second or third lien holders. “
Perhaps the MABA’s press release got “lost in translation” and Banker & Tradesman ran with a provocative headline, as Mr. Schneiderman suggests in his comment below. The article certainly spawned a fair amount of negative commentary.
The one thing we can all agree on is that potential short sale buyers must be educated on all of the risks and possible delays inherent with a short sale. The same is true for buyers’ agents who are likewise inexperienced with short sales. Short sales are growing segment of the Massachusetts market, and are predicted to be even hotter in 2012 with lenders trying to unload a stagnant inventory of distressed real estate. Scaring potential buyers (and inexperienced agents) with short sale war stories isn’t going to help anyone.
“As somebody who exclusively negotiates Massachusetts short sales, this article is precisely the reason why agents need to be educated further if they plan on taking short sale listings or showing a short sale listing to a potential buyer. If not, they are doing their client a disservice. Short sales require much more work than a traditional sale, but commissions are typically the same, and in some cases less, therefore not all agents are willing to invest the extra time and effort needed to obtain short sale approval. A majority of agents undertake these transactions before fully understanding the lenders’ specific requirements and procedures. The problem is not short sales, but rather the number of inexperienced agents attempting to handle these types of transactions.
As someone with an extremely high short sale success rate, I do my homework upfront to make certain that the seller first qualifies for the short sale. I also make certain to give both the buyer and seller a reasonable time frame in which to expect to receive short sale approval. That way, everyone is on the same page and you avoid having the buyer walk away prior to giving the lender a reasonable opportunity to receive all necessary approvals from underlying investors. My company has helped hundreds of real estate agents get their short sales closed. Depending on the lender, and the amount of lien holders, we can typically get a short sale approved in the first sixty (60) days. If the buyer is not willing to remain a party to the transaction for the requisite sixty days, they are not the “highest and best offer” and their offer should never be presented to the lender.”
Andrew is spot on. By definition, short sales are a unique type of transaction and riskier than normal transactions. That is why the purchase price is usually discounted. Sometimes, short sales are not approved. But most often they are. Agents have to educate buyers about the time process inherent with a short sale. You are not going to close a short sale in 30 days. There could be, and often are, some delays.
I recently authored a post on how to properly write up sales contracts for short sales which was re-published by Banker and Tradesman. The risks can be properly managed. I, and the experienced short sale agents with whom I work, have successfully closed hundreds of short sales, with minimal delay.
I hope the next press release issued by MABA on short sales is more positive.
__________________________________________
Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at info@vetsteinlawgroup or 508-620-5352.
The Offer to Purchase Has Become Much More Important
With a glut of distressed property still on the market and lenders realizing foreclosures aren’t very cost-effective, analysts are predicting a healthy spike in short sales for 2012. Short sales are quite unique in terms of deal dynamics, and should be handled differently than the typical transaction.
Massachusetts real estate attorneys and Realtors, however, are set in their ways when it comes to real estate contracts. For decades, we’ve been using the standard form Offer to Purchase and Purchase and Sale Agreement from the Greater Boston Real Estate Board or some variation thereof. We have also developed a predictable process in which the parties sign the Offer, conduct property inspections, sign the Purchase and Sale Agreement, obtain financing, order title, and get to closing.
With the recent proliferation of short sales, we have had to … yes, that dreaded word, CHANGE, the way we do things. Some agents and attorneys still do things the “old way” for short sale transactions, but they are doing themselves and their clients a disservice by doing so.
In this post, I will outline — and explain — the “newer and better” way of handling the legal contracts in a Massachusetts short sale transaction.
The Offer to Purchase: Now The Operative Contract Document
We are seeing a shift to making the offer the operative contract in a Massachusetts short sale transaction. And for good reason. A short sale, by definition, is subject to a critical contingency: obtaining short sale approval from the seller’s lender(s). No short sale approval, no deal. Experienced short sale attorneys and real estate agents (and their clients) don’t want to spend the time and incur the expense of drafting a comprehensive (and contingent) purchase and sale contract when there is no guaranty of getting short sale approval. Furthermore, short sale lenders will accept a signed offer from the buyer during the approval process.
When we were first doing short sales, there were several instances where we drafted up purchase and sale agreements and then the short sale approval fell through. We had to charge the client for the drafting work or eat the cost. No one was happy.
The better way has proven to be the following:
Build all contingencies into the Offer to Purchase, namely, Short Sale Approval and Financing (we’ll talk about home inspections later)
Use a standard rider with short sale contingency language, with a deficiency waiver
Seller to use best efforts in obtaining short sale approval
Buyer agrees to be bound for set approval period (60-90 days) in exchange for seller taking property off the market and not accepting back up offers. Negotiate deposit amount, usually 1% of purchase price. Buyer will obtain his financing and loan commitment during this approval period.
Negotiate extension rights, with corresponding protection for Buyer’s financing/rate lock
Upon short sale approval, purchase and sale agreement is signed within 5-7 days and full 5% deposit made
Closing within 30 days of short sale approval. (Most short sale approvals are only good for 30 days)
Waiver of home inspection or inspection prior to offer acceptance. Sellers should never agree to allow a home inspection contingency giving the Buyer a right to terminate. If the buyer doesn’t want to pay for an inspection up front, he is not a serious short sale buyer.
Change Is Hard…
I recognize that this is a departure from the “normal” way we document residential real estate contracts, but trust me, it’s a better way, and will actually decrease the time it will take to obtain short sale approval, because the parties are not waiting around for the P&S to be negotiated and signed and the buyer (and his attorney) don’t have to do unnecessary work.
Another important piece here is that the Buyer must get his financing in order, ready to go by the time short sale approval comes through. Lenders must recognize the unique short sale process and work with borrowers to get a firm loan commitment issued timely. Also, there’s no need for a lender to insist that the borrower have a signed purchase and sale agreement for underwriting approval. Under the process that I’ve outlined and under established Massachusetts case-law (McCarthy v. Tobin), the Offer is a legal and binding contract for the sale of the subject property and is sufficient for underwriting purposes. If it’s ok for the short sale lender, it should be ok for the buyer’s lender.
Help Is An Email Away
If you are a Realtor and need some guidance on the new Short Sale Offer, email me here and I will send you the form Rider. Also, if you need a referral for an excellent short sale negotiator, I highly recommend Andrew Coppo at Greater Boston Short Sales LLC.
Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at info@vetsteinlawgroup or 508-620-5352.
Tireless Determination The Key To Massachusetts Short Sale Success
What Is A Short Sale?
A short sale is special type of real estate transaction between a homeowner, his mortgage holder(s), and a third party buyer where the property owner’s mortgage balance exceeds the market value of the property — known as being “under water.” In a short sale, the homeowner’s mortgage lender agrees to accept less than what is owed on the outstanding mortgage, thereby being left “short.” Ideally, the lender will agree to release out the entire debt including any deficiency between the sales price and mortgage balance. This is called a deficiency waiver and most skilled short sale negotiators will insist on this.
The entire process can be extremely time consuming and typically requires a lengthy negotiation with the lender by a skilled Massachusetts short sale attorney or lawyer. Banks and loan servicers now realize that short sales are a preferred method to dispose of distressed properties as they are far less expensive than foreclosure. Short sales are generally reserved for homeowners who do not qualify for a loan modification.
Do I Qualify For A Short Sale?
Homeowners can qualify for short sale approval by proving a recognized involuntary financial hardship. An involuntary financial hardship is some event, beyond the homeowner’s control, that caused the mortgage payments to become unaffordable, even if only temporarily. Acceptable hardships typically include:
Loss of a employment
Curtailment of income
Increased mortgage payment or liabilities
Loss of tenant(s)
Divorce or Separation
Catastrophic medical event
Job relocation
Military service; or
Death in the family
Most lenders distinguish between someone who lost their job and someone who voluntarily quit their job. Thus, unless you are able to prove that you were forced to leave your job, or asked by your employer to take a significant pay cut, a change of employment status may not automatically qualify you for a short sale. Furthermore, many homeowners have suffered multiple hardships, and it can be difficult deciding which hardship you should present to your lender when requesting a short sale.
The Hardship Letter
As a part of the short sale application process, a skilled Massachusetts short sale lawyer will draft a hardship letter detailing why you are no longer able to make mortgage payments on your home and why you qualify for a short sale. The hardship letter can be one of the most important aspects of the short sale process and should be as detailed as possible, telling a compelling story about the applicant’s individual circumstances.
As part of the short sale hardship package, the short sale applicant will also submit the following:
Third party authorization (allowing your lawyer and/or realtor to communicate with your lender)
Financial worksheet (breakdown of monthly expenses and income)
Hardship letter (why you could pay your mortgage before and why you cannot now)
Recent pay-stubs
Recent Bank statements
Offer to Purchase
MLS listing showing the market history of your property
Last 2 Years Federal Tax Returns
How Long Does Short Sale Approval Take?
Depending on who your lender is and how many loans you have, short sale approve can take on average between 60 – 120 days, depending on the particular lender and complexity of the case. If the lender makes a counter offer on the purchase price or if there are multiple mortgages and liens against the property, the process will take longer. One of the keys is to submit requested documentation as fast as possible, and to stay on the lender, with frequent requests for status updates. That’s what separates a skilled short sale attorney from the run-of-the-mill negotiators who’ll let your file languish.
Credit and Legal Ramifications
A short sale is far less damaging to your credit and ability to secure a mortgage down the road than a foreclosure or bankruptcy, although it does have some impact.
Foreclosure
Short Sale
Credit Score
Same impact as a bankruptcy, 200 – 300 negative points on a credit score. Score affected minimum of 3 years and will report for 7 – 10 years.
Any late/missed mortgage payments will show on credit score. Once the short sale is completed, it will be reported as settled for less than full amount due (or similar verbiage). Impact can be as little as 50 points, lasting apprx. 12 to 18 months.
Credit History
On credit history for 7 to 10 years.
Only the late payments will be reported on your credit. The short sale will appear the same as a charge off on a credit card and will be reported as settled for less than full amount due (or similar verbiage).
Future Home Purchase (Primary Residence)
Ineligible for Fannie Mae backed mortgage for 5 years.
Ineligible for Fannie Mae mortgage for 2 years. (Can use local bank or private lender).
New Mortgage
Must disclose foreclosure on 1003 loan application which may affect future rates after the 5-7 waiting period.
There currently are not any questions related to a short sale on the loan application.
Deficiency Rights
In Mass., lender retains right to collect any deficiency judgment after foreclosure. It is rare however.
We are typically successful in negotiating full and complete deficiency waiver in a short sale approval.
Do I Need A Short Sale Attorney?
Only if you want to maximize your chances of getting short sale approved, obtain approval in the fastest manner possible, and protect your legal rights and future credit history at the same time! There are real estate agents and short sale firms advertising themselves as short sale negotiators — and some are really good — however, they are not licensed to provide legal or tax advice, and you must seek that advice elsewhere at additional cost. With an experienced Massachusetts short sale attorney, the applicant can “kill two birds with one stone,” by having the attorney take over the entire short sale approval process. While negotiating with your lender, the short sale attorney can simultaneously perform all necessary short sale legal work, including reviewing and drafting the offer to purchase, short sale approval letter and purchase and sale agreement with short sale addendum/riders. The cost is relatively the same across the board, and some of the fees may be paid by the lender, depending on who it is.
We highly recommend Andrew Coppo at Greater Boston Short Sales LLC, an experienced and successful short sale negotiator. Andrew writes all about Massachusetts short sales on his fantastic blog, The Closing Table.
Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at info@vetsteinlawgroup or 508-620-5352.
It’s that time again for our annual review of hot topics and top posts for the last year, 2010.
#5. The Great Flood of 2010. Ah, who can forget the flooding in the spring of 2010. I sure remember bailing out my flooded basement every 30 minutes through the night, into exhaustion. Good times… FEMA declared a “major disaster” and the IRS granted taxpayers in 7 counties an extension to file their taxes.
#4. The Obama HAFA Short Sale Program. The Obama short sale program, announced at the end of 2009, was aimed to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program (HAFA) provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed. By all accounts, however, the HAFA program has been a dismal failure.
#2. Our popular primers on the Massachusetts Offer to Purchase and the standard form Purchase and Sale Agreement, checked in with over 16,000 reads. Great to see posts about buying a new home ranking so highly. An indicator of the recovery of the Massachusetts real estate market perhaps?
#1–Fannie Mae & FHA Condominium Regulations: Our series on the Fannie Mae and FHA strict new condominium lending rules were incredibly popular, combining for over 25,000 reads during 2010. The new guidelines had condominium developers and associations, buyers and sellers in a tizzy, as Fannie and FHA imposed much tougher pre-sale requirements, condominium financial guidelines and the imposition of unit owner HO-6 insurance policies, among other requirements.
Early 2011 should bring the final word from the Mass. Supreme Judicial Court on the very controversial foreclosure case of U.S. Bank v. Ibanez which invalidated foreclosures across the state for sloppy paperwork. Thousands of property owners and their ownership rights to their homes hang in the balance. Click Here For Our Entire Series Of Post On the Ibanez Case.
We are pleased to have yet another guest blogger: Debra McPhee, CIC, CPCU, Owner of Suburban Insurance Agency of Holbrook, MA, and a very qualified Massachusetts Flood Insurance Agent. Debbie is here to write about flood insurance, a timely topic given the recent March floods.
A flood can devastate your home and your financial security. Any flood—even a small one—can cause thousands of dollars in damages. Even homeowners in low to moderate-risk zones are at risk. Up to 25% of all flood claims come from people living outside high-risk zones.
Flooding happens anywhere including right here in Massachusetts. Just recently, floods hit nearby towns. People discovered the hard way that when it comes to floods, no one is safe. You don’t have to live near a major waterway to be flooded. Sudden severe storms can cause flooding. Just because it has never flooded in your area, doesn’t mean it won’t.
You might think that your Homeowners insurance covers flooding, but it doesn’t. It covers all kinds of things, but not flooding. Flood insurance gives your home that crucial layer of protection your Homeowners insurance doesn’t provide.
What Is The Definition A “Flood”?
In simple terms, a flood is an excess of water on land that is normally dry. Anywhere it rains, it can flood. A flood is a general and temporary condition where two or more acres of normally dry land or two or more properties are inundated by water or mudflow. Many conditions can result in a flood: hurricanes, broken levees, outdated or clogged drainage systems and rapid accumulation of rainfall.
Myth: Flood Insurance Costs Too Much
You might be surprised how inexpensive it is. The average flood insurance policy costs less than $570 per year. Most homeowners live in a moderate-to-low risk area and are eligible for coverage at a preferred rate with building and contents coverage for one low price. In fact, building and contents coverage starts at just $119 per year. If you live in a high-risk area, a standard rated policy is the only option for you. It offers separate building and contents coverage. If your home is in a high-risk flood area and you have obtained a mortgage through a federally regulated or insured lender, you are required to purchase a flood insurance policy.
How to Purchase Flood Insurance
Flood Insurance is written through the National Flood Insurance Program (NFIP), a federal program authorized by FEMA. Flood insurance is available to homeowners, renters, condo owners/renters, and commercial owners/renters. You need to contact a Massachusetts Flood Insurance Agent for a quote and/or application (all policies written by the NFIP are written through insurance agents).
Typically, there’s a 30-day waiting period—from the date you purchase the flood insurance—before the policy goes into effect. The waiting period, however, does not apply to a new home purchase or refinancing of a mortgage if the mortgagee requires flood insurance.
What is Covered by Flood Insurance – and What’s Not
The following is a summary of items covered and not covered by flood insurance. For specific details as to what is covered, you have to refer to the actual policy.
What’s covered under Building?
The insured building and its foundation.
The electrical and plumbing systems.
Central air conditioning equipment, furnaces, and water heaters.
Refrigerators, cooking stoves, and built-in appliances such as dishwashers.
Permanently installed carpeting over an unfinished floor.
Permanently installed paneling, wallboard, bookcases, and cabinets.
Window blinds.
Detached garages for up to 10% of the building limit; other detached buildings require a separate Flood policy
What’s covered under Personal Property?
Personal belongings such as clothing, furniture, and electronics
Curtains.
Portable and window air conditioners.
Portable microwave ovens and portable dishwashers.
Carpets not included in building coverage
Clothes washers and dryers.
Food freezers and the food in them.
What’s never covered by flood insurance?
Damage caused by moisture, mildew, or mold that could have been avoided by the property owner.
Currency, precious metals, and valuable papers such as stock certificates.
Property and belongings outside of a building such as trees, plants, wells, septic systems, walks, decks, patios, fences, seawalls, hot tubs, and swimming pools.
Living expenses such as temporary housing.
Self-propelled vehicles such as cars, including their parts.
Debra McPhee, CIC, CPCU
Limitations to coverage in a basement
Coverage in a basement is very limited. It includes cleanup expense and items such as furnaces, water heaters, washers and dryers, air conditioners, freezers, utility connections, and pumps.
There is no coverage for the contents of a finished basement and improvements, such as finished walls, floors, and ceilings.
Personal property located in a basement is not covered.
Please call me, Debra McPhee, CIC, CPCU at Suburban Insurance Agent at 781-767-3300 and let’s talk about your flood insurance needs. Don’t let a flood wash away your financial future.
The Obama Administration’s Home Affordable Foreclosure Alternative program, known as HAFA just kicked off on April 5th. The HAFA program promises to streamline short sale transactions. However, read the fine print, and there are a lot of unanswered questions about the program and how it will affect short sale transactions in the “trenches.”
Is the new program really going to streamline the process or create more headaches for the industry?
To begin, it’s important to clarify that the HAFA program is part of the federal Home Affordable Modification Program (HAMP). HAFA guidelines will only apply to short sale or deed in lieu of foreclosure requests made by borrowers who have applied for a HAMP loan modification. That means borrowers will have had to go through all the time, hassle and endless forms under the HAMP modification program before even being eligible for a HAFA streamlined short sale approval. This requirement will likely substantially reduce the number of HAFA-required short sales. HAFA also requires participating lenders to forgive a borrower’s loan deficiency if the lender accepts a short sale. This is a significant deviation from many lenders’ policies. There is even some debate about which lenders actually fall within the mandate of HAFA. For all of these reasons, it is far too early to speculate regarding the impact of HAFA on the current backlog of short-sale requests. It is very unlikely, however, that HAFA is going to quickly streamline the short sale process.
What are the benefits of the HAFA program?
HAFA does create the opportunity for standardization of short sale and deed in lieu of foreclosure forms. Given the wide range of agreements currently in use, standardization will help borrowers to better understand the terms of any negotiation. HAFA also requires lenders to standardize their criteria for the approval of a short sale or deed in lieu. Again, that kind of practice will enable borrowers to better anticipate the likelihood that a particular offer will be accepted and what the acceptance means.
Short sales seem to be picking up right now. But, in the end, will the already in place REO system be a better way to alleviate these troubled loans?
Short sales and REO sales are complementary processes. Both alternatives are necessary to systematically deal with property subject to defaulted loans. All available statistics indicate that when a mortgage loan is in default, the mortgaged property begins to fall in value. It’s easy to understand why. Even the most honorable borrower faced with a loan in default is unlikely to continue necessary maintenance much less improvement. Short sales allow these properties to be sold much more quickly than would occur if a full foreclosure and sale after redemption was required. As such, less reduction in property value results from the short sale alternative.
Not every parcel, however, is going to qualify for short sale treatment. In these cases, lenders will be forced to institute a foreclosure. Accordingly, an effective REO disposition process must be maintained by mortgage lenders. Whether short sales or foreclosure and REO resale becomes the norm for troubled properties remains to be seen. In any event, everyone benefits from a timely process which retains as much value as possible in our homes.
Here in Massachusetts, short sale transactions appear to be on the rise. However, there are plenty of stories of buyers waiting many many months to close. If you are considering buying a short sale property, read our post on short sale transactions, and be prepared to wait it out, which may well be worth it given the reduced price you’ve likely negotiated.
In the spirit of the New Year, let’s look back at the top legal issues of the past year and peer into the crystal ball for a glimpse at 2010.
Top 5 Posts For 2009
#1. The Catch-22 Impact of New Fannie Mae Condominium Regulations. In January, Fannie Mae was the first government agency to drop a big bucket of cold water on condominium lending underwriting practices which some say contributed to the condominium market meltdown. FHA and others would follow later in the year. The new guidelines had condominium developers and associations, buyers and sellers in a tizzy, as Fannie Mae imposed much tougher pre-sale requirements, condominium financial guidelines and the imposition of unit owner HO-6 insurance policies, among other requirements.
#2. New FHA Condominium Lending Guidelines Sure To Slow Financing and Chill Sales. The Federal Housing Administration (FHA) followed Fannie’s lead in tightening condominium lending requirements. Originally proposed over the summer, FHA delayed implementation of the new guidelines until earlier in the month and watered down some of the most stringent requirements, after major lenders and community association groups complained.
#3. There’s Nothing Standard About The Massachusetts Standard Purchase and Sale Agreement. Great to see a post about buying a new home ranking so highly. An indicator of the recovery of the Massachusetts real estate market perhaps? Check out this post for the ins and outs of the very seller friendly standard form P&S and how to level the playing field if you are a buyer.
#4. Massachusetts Land Court Reaffirms Controversial Ibanez Decision Invalidating Thousands of Foreclosures. If you were following the foreclosure mess, you couldn’t have missed this judicial bomb dropped by Massachusetts Land Court Judge Keith Long. The so-called Ibanez ruling invalidated thousands of foreclosures across the state because the lenders did not record their paperwork up to date at the registries of deeds. Lenders have appealed the ruling, but hundreds of foreclosure titles remain unmarketable in the wake of this controversial decision. More to come in 2010.
#5. Short Sales Get Boost From New Obama Treasury Guidelines. On December 1, the Obama administration set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed.
All signs are pointing to a real estate rebound for the Bay State in 2010, with home and condominium sales surging over 50% from last year in November. I have definitely seen an uptick in new purchases on my end and we are preparing for a busy 2010. Along with good news from the real estate market, however, comes higher interest rates as the bond market reacts to positive news. My friend mortgage consultant Brian Cavanaugh at SmarterBorrowing.com does a good weekly mortgage market update and is presently advising borrowers to lock into current rates as he predicts rates will rise in 2010 to close to 6% for a 30 year fixed. Of course, when rates go up, buying power goes down, thereby cooling the market a bit.
Regulatory
Hopefully we’ve seen the end of increased regulation of the condominium market from the government giants. Let’s toast that they can let the market take its course with the new guidelines in effect.
Stimulus/Home Buyer Credit
As the economy continues to recover, you can probably bet that the Obama administration is going to let up on the stimulus/credit throttle for 2010. So take advantage of all the credits available now, because this is probably the last you will see of them for awhile.
Lastly, technology, the internet and social media will play an even bigger role in how realtors, lenders and real estate attorneys do business. The National Association of Realtors says that 87% of home buyers use the Internet to search for homes. I tell all my Realtor friends they must have a strong Internet presence and to take advantage of blogging, social media and Active Rain to boost their online presence.
For attorneys, in 2009 we saw the tip of the iceberg for electronic recordings and closings as well as online transaction management. Our office just set up an online transaction management system where buyers, sellers, loan officers and realtors can view the status of the loan whenever they want through a secure online portal. It’s a fantastic tool. While electronic closings are a way’s away from gaining the necessary critical mass of lender acceptance, many Massachusetts registries of deeds are now e-recording, and that will continue to rise. The next decade will certainly bring electronic closings and paperless transactions into the norm.
Well, let’s clink our glasses to a very happy, healthy and fruitful New Year!
Divorce, unfortunately, often plays a major role in real estate transactions and decisions. The tough economy has added insult to injury for those unfortunate souls facing divorce in Massachusetts.
Quincy, Massachusetts Divorce and Family Law Attorney Gabriel Cheong offers great advice on his blog, the Massachusetts Divorce Lawyer Blog, about what to do if you are getting a divorce and the marital home is “underwater.” That is, when the balance on the mortgage is more than the fair market value of the house:
You’re divorcing and you need to sell your house that you own jointly with your spouse but with the recession, your house is now worth less than the mortgage that you have on it. You’re under water. You’re upside down on your mortgage. Whatever you call it, you’re stuck and don’t know what to do.
Well, here are your choices:
You stay in the house with your divorced spouse until either one of you can afford to move out or refinance. You might be thinking to yourself that that is ridiculous. Who would ever live with their divorced spouse AFTER the divorce?! More and more people are doing so in this new economy because there is simply not enough money to go around. It’s a sucky situation but it’s a reality.
You and your spouse continue to co-own the house together until someone can refinance the property. Either you live in the house or your spouse lives in the house. You could have a situation where only the person who’s living in the house pays for everything or everything is split 50/50. Either way, you two will still own a house together.
You refinance. If you try to refinance, know that you will have to put up the money to make up the difference between what you owe and what your house is worth. That would be tens of thousands of dollars if not more. Some people have that kind of money but most do not.
You do a short sale. A short sale is when you get the permission of your mortgage lender to sell the house for less than what you owe on the mortgage and hopefully, you negotiate that you won’t have to make up the difference. Know that most lenders will not extend the option for a short sale unless if you’re behind on your mortgage payments by several months. At that point, your credit would’ve taken a hit already.
You let the home go into foreclosure. This is not an ideal situation and it’s not generally recommended.
You try to negotiate a modification or an assumption of the current mortgage. This is very difficult and very lender specific. Some will let you modify the loan or do an assumption whereby you don’t have to refinance the house and yet be allowed to remove a spouse’s name off the mortgage. It’s worth a try.
Those are all your options. The important thing to remember is this: do not ever sign over a deed to the house over to your spouse’s sole name without also being off [released from] the mortgage. If you do so, you will have no equity interest in the property yet be liable for the mortgage (debt interest).
As Attorney Cheong outlines, it’s a tough pill to swallow for those in the unfortunate predicament of divorcing in this recessionary economy. I’ve heard stories of divorcing spouses creating separate living quarters in a house, akin to an in-law suite with separate entrances, etc.
From a real estate perspective, preserving the value of the property is paramount and in the best financial interests of both spouses (and the children). With the enactment of the new Obama short sale regulations, a short sale may be a good option for divorcing couples who are “under water.” The new regulations require that the lender agree to waive the outstanding loan balance on an approved short sale, so both spouses can wipe their credits clean of the mortgage obligations and move on with their lives.
If you are in the middle of a divorce, feel free to contact me, Richard D. Vetstein, and I can work with your divorce attorney to ensure that you’ll be protected in any refinance, short sale, loan modification, or foreclosure situation.
The Obama administration on Monday set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program (HAFA) provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed. The announcement can be found here. A complete set of the guidelines can be found here.
The new federal guidelines address barriers that have often sidelined short sales by setting limits on the time it takes a bank to approve an offer, freeing borrowers from debt and capping claims of subordinate lenders. New financial incentives for completing short sales or similar “deed-in-lieu” transactions — in which the deed is simply transferred to the lender — include a $1,000 payment to servicers, and a maximum of $1,000 to go to investors who sign off on payments to subordinate lien holders, the Treasury said. Borrowers would also receive $1,500 in relocation expenses.
While a short sale may be preferable to a foreclosure, they have been frustrating for borrowers, buyers and realtors, because they are often hung up by lengthy negotiations with multiple lien holders and mortgage insurance companies. Realtors have complained that sales fall through as lenders bicker over the sales price, what they should receive from the proceeds, and whether the borrower will be held accountable for the debt in the future.
Under the new rules, mortgage servicers have 10 days to approve or disapprove a request for short sale, and when done the transaction must fully release the borrower from the debt. The rules also prohibits mortgage servicing companies from reducing real estate commissions on the sale, a practice that has dissuaded many agents from taking short sale listings.
This may help, but by how much remains to be seen.
A short sale is special type of real estate transaction between a homeowner, his mortgage holder, and a third party buyer. In a short sale, the homeowner’s mortgage company agrees to take less than what is owed on the outstanding mortgage, thereby being left “short.” In some but not all cases, the lender will agree to wipe out the entire debt. Many people believe that short sales offer bargain basement prices, but lenders will do their best to get as close to fair market value as possible so as to minimize their loss.
Short sales are a unique type of transaction and far different from the typical transaction between parties of equal bargaining power. Likewise, the legal aspects of a short sale are unique.
Short Sale Approval Required
The most important legal issue in a Massachusetts short sale is to recognize that the deal doesn’t go through unless the seller’s lender(s) approve the short sale. Thus, the offer and purchase and sale agreement must reflect that the buyer’s and seller’s obligation to close is contingent upon the lender’s approval of the short sale.
Sometimes, sellers need to obtain short sale approval from not one, but two, lenders with mortgages on the property. Buyers and their agents should research the title ahead of time because a second lienholder can often muck up an otherwise promising short sale.
The Waiting Game
Another significant issue is timing. The typical time-line on a short sale can vary greatly from 45 days to 6 months or more from accepted offer to closing. The approval of a short sale and the negotiation for the reduction in the mortgage balance can be a time-consuming process. There is a long, but manageable, list of documents that must be submitted by the seller/homeowner before a lender will approve a short sale.
Inspections and Financing
Short sale transactions don’t follow the typical process of the “normal” transaction, especially with financing and inspection contingencies. Due to the often lengthy wait for short sale approval, most buyers are reluctant to lock in mortgage financing and otherwise spend to secure a firm loan commitment. The same is true for home inspections. Buyers argue why should I pay for a home inspection if the deal may not even happen? Sellers and their agents often feel that buyers should put a little “skin in the game” and do a home inspection early on. These issues will be negotiated from deal to deal.
When I represent buyers of short sales, I insist that the the closing, inspection, and mortgage contingency deadlines dates in the offer and purchase and sale agreement start “x” days from the short sale approval. There should also be a end date for obtaining short sale approval and protection for the buyer’s rate lock so the agreement is not left completely open-ended and delays won’t adversely affect the buyer’s financing.
Short Sale Addendum/Rider
The deal agreements must be tailored quite specifically to a short sale transaction. Experienced Massachusetts short sale attorneys (like us!) always use a customized short sale addendum/rider. A form, however, is no substitute for an experienced short sale attorney and guidance through the complicated short sale process.
Buyers Bring Your Tools
Also, cash strapped sellers are usually unwilling to do any repairs in a short sale situation. Inspections may be performed and “outs” may be negotiated for significant repairs, but most buyers must ultimately accept the property “as is.”
Given the unique nature of the Massachusetts short sale transaction, the sage advice is to work with ethical Realtors and short sale attorneys who have significant experience with short sale transactions.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
Short Sale Sellers In 2014 Would Get Key Tax Break
