UPDATES AND TRENDS IN THE SHORT SALE WORLD (AND TAX ...€¦ · Tax Consequences of Short Sales and Foreclosures Foreclosure: Recourse vs. Nonrecourse An important consideration in

!

UPDATES AND TRENDS IN THE SHORT SALE WORLD

(AND TAX IMPLICATIONS)

September 7, 2011

BY LYNN ARENDS

Attorney & Managing Broker LYNN ARENDS LAW GROUP PLLC & LYNN ARENDS REALTY GROUP

2100 Westlake Ave. North, Suite 201 • Seattle, WA 98109 office: 206.282.4848 • fax: 206.350.5030

[email protected] • www.lynnarends.com

LYNN ARENDS received her B.A. from Hunter College, City University of New York (1987), her J.D. from Hofstra University School of Law (1989) and her M.B.A. from Hofstra University School of Business (1990). Lynn is both an Attorney and Managing Broker. Her practice is in the area of pre- and post-foreclosure workouts and frequently involves repayment/forbearance plans, loan modifications and (lots of) short sale transactions. She recently served on the Department of Licensing/Real Estate Commission Short Sale Task Force. Lynn is active in a number of legal and civic organizations, speaker at seminars, including the Washington State Bar Association, King County Bar Association, various real estate offices (Windermere, John L. Scott and Keller Williams), and as an Instructor with the Washington Association of Realtors, she offers Clock Hour classes to Realtors throughout the state. She is also a frequent guest on Real Estate Radio with Goebbel, Gray & Dori Z on 1150 AM KKNW. Lynn is passionate about doing what is best for the client (seller or buyer), by only doing short sales that make sense. As a Real Estate agent herself, she “gets” it—understanding the difficulties agents face in a short sale transaction. In addition to her volunteer activities, Lynn enjoys the theater, opera, symphony and cooking (mostly healthy). She is an avid New York Yankees fan and can be found walking around Green Lake with her dog Jack in the little spare time that remains. !!!!! !

! !LYNN ARENDS LAW GROUP PLLC & LYNN ARENDS REALTY GROUP Page 2 !

Table of Contents ! !

Updates and Trends in the Short Sale World (and Tax Implications) !!!

Foreclosure Fairness Act: A New Law to Help Washington Homeowners ................................ 3 Overview .................................................................................................................................. 3 Highlights of the FFA .............................................................................................................. 3

The “Meet and Confer” Provisions ....................................................................................... 3 Housing Counselor Provisions .............................................................................................. 4 Mediation Provisions ............................................................................................................ 4 Consumer Protection Act Violation ...................................................................................... 5

Possible Effects of the Fairness Foreclosure Act on Short Sales ............................................. 5 Conclusion ................................................................................................................................ 5

Tax Consequences of Short Sales and Foreclosures ................................................................... 6 Foreclosure: Recourse vs. Nonrecourse ................................................................................... 6 Tax Relief Enacted for Recourse Mortgage on Principal Residence Debt Forgiveness .......... 6 What Happens with a Short Sale? ............................................................................................ 7

Tax Gain on Short Sale ......................................................................................................... 7 Tax Loss on Short Sale ......................................................................................................... 8

What About Selling Expenses for a Recourse Mortgage? ....................................................... 8 Other Exceptions for Cancellation of Debt Income ................................................................. 8 Considerations for Rental Real Estate ...................................................................................... 9

And Don’t Forget Bononi! What Does a 1099 Really Mean? ................................................... 9 Additional Supplements: Short Sale Package Checklist Checklist for Listing and Selling Broker in Short Sale Transaction


Updates and Trends in the Short Sale World (and Tax Implications)

Foreclosure Fairness Act: A New Law to Help Washington Homeowners On Thursday, April 14, 2011, Gov. Chris Gregoire signed into law Second Substitute House Bill 1362, more commonly known as the Foreclosure Fairness Act (“FFA”), giving homeowners the statutory right to sit down with their lenders and discuss modifying their loan.

Overview

In an effort to protect WA homeowners from foreclosure, under the new WA Foreclosure Fairness Act, lenders must now send to homeowners in default a letter explaining their right to a sit-down to discuss alternatives to foreclosure. If that letter goes unanswered, the bank must make three attempts by phone, and then send a certified letter before proceeding with the foreclosure process. Lenders must conduct “a good faith review” of the homeowner’s financial situation and offer loan modifications, if possible. The new law allows a mediator to handle a negotiated agreement between the lender and homeowner. A resolution may include, but is not limited to, modification of the loan, an agreement to conduct a short sale, a deed in lieu of foreclosure transaction, or some other workout plan. The Washington State Foreclosure Fairness Act Mediation Program began Friday, July 22, 2011, although some parts of the law became effective immediately. The entire House Bill 1362, aka the Foreclosure Fairness Act can be found here: http://apps.leg.wa.gov/documents/billdocs/2011-12/Pdf/Bills/House%20Passed%20Legislature/1362-S2.PL.pdf

Highlights of the FFA

The FFA substantially modifies the Deed of Trust Statute, Chapter 61.24 RCW as follows:

The “Meet and Confer” Provisions Prior law required the lender on owner occupied property 30 days before commencing the non-judicial foreclosure via a Notice of Default to contact the borrower and advise the borrower of the various means available to avoid foreclosure. This provision only applied to loans entered into between January 1, 2003 and December 31, 2007, and was scheduled to sunset on December 31, 2012. The new revisions do not sunset and require that for ALL loans for owner occupied property, the lender must:


• Advise the borrower that it has 30 days to respond to the lender, and it should contact a

Housing Counselor or attorney, and that failure to do so may result in losing the opportunity to meet with the lender or mediate the matter before a neutral party. If the borrower fails to respond, the lender may proceed with the Notice of Default;

• If the borrower responds within the 30 day notice period, a Notice of Default cannot be issued in less than 90 days from the date of initial contact by the lender. If the borrower responds, and requests a meeting with the lender, a meeting shall occur with the lender before any Notice of Default can be issued, and the meeting shall cover the borrower’s ability to modify the loan or other options to avoid a foreclosure (e.g. a short sale or deed in lieu). The meeting must be in person, unless waived by the borrower, and the lender’s decision maker must be available, although it can be by phone. The parties shall attempt to meet no more than 90 days after the initial contact is made, and if not, the lender can issue the Notice of Default, but only if it can show that it used “due diligence” to schedule the meeting with the borrower and, if applicable, its representative.

• The provisions of paragraphs I (a) (1) and (2) do not apply if a borrower has voluntarily surrendered the property to the lender or its agent, or if the borrower has filed for bankruptcy, and the stay is in effect or the bankruptcy court has granted relief from the stay.

Housing Counselor Provisions A Housing Counselor is a counselor who has been approved by HUD or the Washington State Housing Finance Commission. If a Housing Counselor is selected by the borrower to assist in negotiations with the lender, the Housing Counselor has a good faith duty to negotiate with the borrower’s lender, and in the exercise of his duty of good faith, he is required to prepare the borrower for meetings with the lender; advise the borrower regarding documents the borrower must have in order to seek a modification or other remedy; inform the borrower regarding alternatives to foreclosure; and refer the borrower to mediation where appropriate.

Mediation Provisions Prior to the recording of a Notice of Trustee’s Sale, an attorney or Housing Counselor may refer the borrower to mediation with the lender through the Department of Commerce (“DOC”). The mediation proceeds as follows:

1. The DOC will appoint the mediator and advise the lender and trustee of the request within 10 days of receipt;

2. The mediation shall occur within 45 days after the appointment of the mediator; 3. The lender’s decision maker must attend the mediation or be available by phone;

4. The parties have to provide documentation, including on the borrower’s side, its current and future projected economic circumstances, and on the lender’s side, net


present value calculations (the “NPV” Test) to show whether the lender is better served by a foreclosure or modification;

5. The parties must negotiate in good faith, and if the mediator finds that the lender failed to negotiate in good faith, this is a defense to a non-judicial foreclosure action;

6. If the lender has previously denied a modification, it must explain its reasons for denial in the mediation, and it must provide its most recent BPO or appraisal;

7. Within 7 business days of the mediation, the mediator must advise the DOC and trustee of the results of the mediation and if the parties participated in good faith.

The mediation provisions do not apply to seller financed Deeds of Trust, Community Associations foreclosing Deeds of Trust (e.g. condo associations), or lenders with fewer than 250 trustee’s sales on owner occupied property during a preceding calendar year.

Consumer Protection Act Violation It is a violation of the Consumer Protection Act for the lender to fail to mediate in good faith or make the initial contact with the borrower as required under the statute.

Possible Effects of the Fairness Foreclosure Act on Short Sales

• If a junior lienholder is not foreclosing, it is not affected by these changes, and borrowers should be counseled to consider making the payments on their seconds to prohibit the referral of the file from loss mitigation to recovery.

• These changes will result in a pre-approved short sale if the parties reach an agreement on a short sale, including net to be received by lender either in the meeting with the lender or the mediation.

• The lender is required to provide the note and deed of trust to the borrower at the mediation and certify that it is the owner of the debt, which will assist in eliminating claims that the lender is not the owner of the debt.

• The duty to mediate in good faith may force lenders to agree to short sales without requiring the borrower to go through a fruitless attempt at a modification when it does not have enough income to qualify for a modification.

• Borrowers will now be able to challenge the lender’s appraisal or BPO in the mediation.

Conclusion

The mediation process will further lengthen the period that the borrower has to avoid foreclosure if the borrower exercises its right to a meeting or the borrower’s Housing Counselor or attorney


seeks a mediation. Thus, it is imperative that borrowers act early to take advantage of these remedies. The problem, as I see it, is that many homeowners will simply ignore these communications. After all, homeowners behind on their payments are already overwhelmed with harassing collection calls and letters and may simply view these as just another collection attempt by their lender and not their statutory right to mediate.

Tax Consequences of Short Sales and Foreclosures

Foreclosure: Recourse vs. Nonrecourse

An important consideration in the results of a foreclosure (or a deed in lieu of foreclosure) is whether the debt is "recourse" or "nonrecourse." If the debt is "recourse," the debtor is personally liable for the debt. If the debt is "nonrecourse," the debt is only secured by the property, and the debtor is not personally liable for the balance. When a nonrecourse mortgage is foreclosed, the property is treated as being sold for the balance of the mortgage. It is not a discharge of indebtedness, but rather a "sale" of the residence in satisfaction of the mortgage. For recourse debt, the debt is only satisfied up to the fair market value of the property. There is a sale up to that amount. If the lender forgives the balance of the mortgage, there is cancellation of debt income (“COD”), which is taxed as ordinary income. But, there are exceptions.

Tax Relief Enacted for Recourse Mortgage on Principal Residence Debt Forgiveness

The Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. Additionally, the Federal Bailout Legislation H.R. 1424, passed on October 3, 2008, extended this relief through December 31, 2012.

Under the new law, a discharge of "qualified principal residence indebtedness" (“QPRI”) is excluded from taxable income. "Qualified principal residence indebtedness" is acquisition indebtedness secured by the principal residence of a taxpayer as defined for the deduction of residential mortgage interest, but the limit is $2,000,000 for the exclusion ($1,000,000 for the mortgage interest deduction) and $1,000,000 for married persons filing a separate return ($500,000 for the mortgage interest deduction). Also, the exclusion only applies to a mortgage secured by the principal residence of the taxpayer and the forgiven debt must have been incurred to purchase, build, or make significant renovations to the principal residence (not a vacation home or rental). Proceeds from refinanced debt will qualify for exclusion from income only if those proceeds were used to make significant renovations or improvements to the taxpayer's


principal residence—not to make purchases or pay other bills. The election to exclude the income from discharge of principal residence indebtedness is made on Form 982.

When calculating the amount of the QPRI, it is important to note that there is an ordering rule and that disqualified debt is taxable first.

Example 1: John Doe’s residence was foreclosed in 2007. The fair market value of his home was $300,000. The balance of his mortgage was $375,000. John had used $50,000 from refinancing his home to pay down his credit card debt, not for home improvements. $50,000 of the debt discharge that is not qualified residence debt would be taxable, and the remaining $25,000 that is qualified residence debt would be excluded from taxable income. Example 2: Bill and Mary Smith’s residence was foreclosed in 2009. The fair market value of their home was $1,500,000. The balance of their mortgage, which was all acquisition indebtedness, was $2,250,000. Since the maximum qualified principal residence indebtedness is $2,000,000, $250,000 of the debt was not qualified principal residence indebtedness. The $250,000 non-qualified debt cancellation would be taxable income, and the remaining $500,000 that is qualified indebtedness would be excluded from taxable income.

There is one caveat: any reduction of indebtedness under the QPRI exception will reduce the basis in the property giving rise to a capital gain. However, amounts that are otherwise taxable in the above examples could qualify for exclusions under other exceptions, such as for insolvency or bankruptcy.

What Happens with a Short Sale?

Short sales are taxed under the same rules as foreclosures. Recourse debt cancellation is not satisfied with the surrender of the property, so any debt not satisfied with the sale proceeds would be taxable as cancellation of debt income, except for certain "qualified principal residence indebtedness." The seller (and buyer) might also have legal concerns about whether the lender would consent to the transaction and whether (for recourse debt) the lender would in fact forgive the debt.

!"#$%"&'$('$)*(+,$)"-.$

Example:

John Doe paid $200,000 years ago for his principal residence that he could now sell for a net sales price of $300,000. Unfortunately, he also has $350,000 of first and second mortgages against the property because he took out a big home equity loan a couple years ago at the top of the market, when the home was worth $500,000. John will have a $100,000 gain for tax purposes if he sells because the net sales price exceeds the tax basis


of the home: $300,000 sales price - $200,000 basis = $100,000 gain. (Generally, the tax basis equals purchase price for the property plus the cost of any improvements made over the years minus any past depreciation write-offs if the property was rented out or if part of it was used for deductible business purposes.)

!"#$/(00$('$)*(+,$)"-.$

Of course, you can also have a short sale where the net sales price is less than the tax basis in the property.

Example:

Bill and Mary Smith paid $415,000 for their principal residence that they can now sell for a net sales price of $300,000. They also have $350,000 of first and second mortgages against the property. For tax purposes, they will have a $115,000 loss if they sell because the sales price is lower than their tax basis in the home: $300,000 sales price - $415,000 basis = $115,000 loss. And the IRS will not allow a write-off for that loss because taxpayers can only claim a federal income tax loss on investment or business property. A loss on a personal residence is considered a nondeductible personal expense.

What About Selling Expenses for a Recourse Mortgage?

For a short sale, selling expenses reduce the sales proceeds available to reduce the loan.

Recourse mortgage balance $500,000 Pay off using net sale proceeds ($450,000 sales price - $50,000 selling expenses)

400,000

Cancellation of debt (ordinary income) $100,000

Other Exceptions for Cancellation of Debt Income

Some or all of the COD income may not taxable if the debtor is insolvent (debts in excess of assets) at the time the debt is cancelled. If the cancellation of debt income causes the borrower to become solvent, part of the COD will be taxable (to the extent it causes solvency). The rest will be tax-free. For example, if the debtor owns assets with a fair market value of $2,000,000 and has liabilities of $2,250,000, only $250,000 (the amount by which the debtor is insolvent) can be excluded if the liabilities are discharged.

Cancellation of debt income may not be taxable if the debtor is insolvent or if the debt is discharged as part of a bankruptcy proceeding.


To the extent DDI consists of unpaid mortgage interest that was added to the loan principal and then forgiven, the forgiven interest that could have been deducted (had it been paid) is tax-free.

If the DDI is from seller-financed mortgage debt owed to the previous owner of the property, it’s tax-free. However, the basis of the property must be reduced by the tax-free DDI amount.

Considerations for Rental Real Estate

Owners of rental properties often have accumulated suspended passive activity losses that can be applied against the income from a debt cancellation with respect to the rental. Losses from the sale of income-producing properties may be deductible as ordinary losses. The loss may offset cancellation of debt income. If the property isn’t income producing, the loss may be a capital loss, limited to capital gains plus $3,000.

There are also explanations about foreclosures and cancellation of debt in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, IRS Publications 523, Selling Your Home; 552, Taxable and Nontaxable Income; and 544, Sales and Other Dispositions of Assets at www.irs.gov. Also see the instructions for Form 982.

And Don’t Forget Bononi! What Does a 1099 Really Mean?

It is also be dangerous to think that the mere issuance of a 1099 to the borrower by the lender will preclude the right to seek a deficiency. A 1099 may indicate that the lender is not pursuing personal liability against the mortgage borrower, but the form 1099 is not a legal defense against a subsequent deficiency claim.

In Bononi v. Bayer Employees Fed. Credit Union, 407 B.R. 684. (Bankr. W.D. Pa. 2009), the debtor argued that the issuance of the cancellation of debt income forms meant that the creditor did not have a claim in the Chapter 7 bankruptcy. The court disagreed, writing that the issuance of the Form 1099 did not alter the creditor’s legal right to attempt to collect the debt and it did not act as an admission that the debt was no longer due. Bononi did order the creditor to amend the 1099 issued to the debtor, which was proper, since the creditor received a distribution from bankruptcy.

Thus, a 1099 is only an IRS reporting form indicating that the lender has written off a mortgage and is declaring a tax loss. If a lender forgives a borrower’s personal liability on a mortgage, the lender is supposed to issue a 1099. So while liability waiver always results in the issuance of a 1099, I do not believe that a form 1099 always results in a release of borrower liability. A lender can pursue a deficiency claim even after issuing the borrower and filing a 1099. A form 1099 is not a legal release of the borrower’s liability. After issuing a form 1099 the mortgage lender can still could sell the claim to a third-party or legally sue for a deficiency claim. The lender takes a tax loss when it issues a 1099 to the borrower. If the lender subsequently sues the borrower or sells the claim the lender would recognize taxable income in the amount of money it collects


from the borrower or the amount it receives from a third party when it sells the deficiency claim. Hence, a corrected 1099.

The moral of the story is: a short sale is nothing more than a voluntary agreement on the part of a lender to release a security interest in exchange for a partial payment on the note. Unless an express written term of the short sale approval is the waiver of any right to a deficiency, that lender, or the lender's assignee, will have the right to seek recovery of the deficiency, and may pursue an action up to the expiration of the statute of limitations for collection of a note. Any attorney advising a borrower otherwise is committing malpractice.

!!!!!!!!!!!!!!!!!!!!!!!"#$$!%&'$()! !

! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!%**+&$'#!,!-%$%./$.!0&+1'&! !!!

! !"##$%&'#()$!%*$+&,-.$.!!/$0$!"##$%&'#()$&'%!1"$+&,-.$

2344$*56789:5$%;5$#<=7>$)?@75$243A$)597785$*%$BC34B$$D$$E24FG$2C2HICIC$$D$$J5KL$JJJM8NOO9=5OP6MQ<R$

$

)><=7$)985$.9Q:9S5$/>5Q:8@67$

!"#$%#&'%(!)*$%+,-.!!/////////////////////////////////////////////////////////!

0(#1%(23!455(%,,.! !!/////////////////////////////////////////////////////////!

! ! ! !!/////////////////////////////////////////////////////////!

!466!#7!28%!5#9:$%'2*2;#'!'%%5%5!2#!,2*(2!*!,8#(2!,*6%!;,!9#$$#'63!9*66%5!*!<=8#(2!=*6%!0*9>*?%<@!!!!A8%!1*9>*?%!:,:*663!;'96:5%,!28%!7#66#&;'?!;2%$,.!!!

! A8;(5!0*(23!B%6%*,%!4:28#(;C*2;#',!,;?'%5!D3!"#$%#&'%(!! E#13!#7!8#$%#&'%(F,!$#(2?*?%!,2*2%$%'2,!! )#2;9%!#7!A(:,2%%F,!=*6%!

!! G#(>#:2!0*9>*?%!7(#$!"#$%#&'%(.!

o H!3%*(,!2*I!(%2:(',!J!GKHF,!o E:((%'2!0(#7;2!J!L#,,!+;7!,%67K%$16#3%5-!o H!$#'28F,!1*3!,2:D,!!o H!$#'28,!D*'>!,2*2%$%'2,!+*66!1*?%,-!M!*66!*99#:'2,!o =%66%(F,!N;'*'9;*6!=2*2%$%'2!6;,2;'?!*66!*,,%2,!J!6;*D;6;2;%,!o "*(5,8;1!L%22%(!o O;P#(9%!O%9(%%!+;7!*116;9*D6%-!

!! N(#$!28%!L;,2;'?!Q(#>%(.!

o L;,2!#7!1(#1%(23!5%7;9;%'9;%,R;'96:5%!1;92:(%,!*'5!D;5,!7#(!(%1*;(!o S,2;$*2%5!"TOKU!=%226%$%'2!=2*2%$%'2!+S,9(#&!2#!1(#P;5%-!o N:663!%I%9:2%5!0:(98*,%!J!=*6%!4?(%%$%'2!+&;28!*66!455%'5*-!o 0(%K*11(#P*6!6%22%(!7(#$!'%&!D:3%(!+#(!1(##7!#7!7:'5,-!o V*(>%2!8;,2#(3!#7!1(#1%(23!,8#&;'?!1(;9%!(%5:92;#',!+;7!*116;9*D6%-!o E#$1*(*D6%!,*6%,!7#(!28%!1(#1%(23!!o =;?'%5!L;,2;'?!4?(%%$%'2!

!

!

1 Lynn Arends/Short Sale Checklist

To: Brokers From: Lynn Arends Attorney & Managing Broker LYNN ARENDS LAW GROUP, PLLC 2100 Westlake Avenue North, Suite 201 | Seattle, WA 98109 Office: 206.282.4848 | Fax: 206.350.5030 Direct: 206.769.LYNN (5966) Email: [email protected] Website: www.lynnarends.com Date: September 5, 2011 Re: Checklist for Listing and Selling Broker in Short Sale Transaction (Checklist in collaboration with Galvin Realty Law Group)

1. LISTING BROKER CHECKLIST

A. Obtain preliminary title report to determine exact nature and number of liens against property;

B. Obtain payoffs for all liens. Be aware to include prepayment penalties; C. Refer client to attorney, and/or accountant, mortgage professional or HUD

certified counselor to assure that a short sale is best decision for client. Client must understand legal, credit and tax ramifications of short sale. (A deed-in-lieu, bankruptcy, modification, or foreclosure may be better for the client). Provide client with a copy of the Short Sale Seller Advisory, published by DFI and DOL, and have client acknowledge receipt of it before taking the listing.

D. Who will negotiate the short sale with the lender(s), how will they be paid, and who will pay them? Buyer, Seller or Broker(s)? Will the negotiator be the listing broker or independent short sale negotiator? Is the short sale negotiator licensed to negotiate short sales according to DOL, DFI and MARS?

a. The Department of Licensing (“DOL”) and the Department of Financial Institutions (“DFI”) require that a person have either a mortgage loan originator license, a real estate license, or be an attorney licensed to practice law in Washington, to negotiate short sales.

b. DOL and DFI state that real estate brokers may only negotiate short sales in transactions where the Broker is providing real estate brokerage services to the seller. Thus, Brokers may not offer to negotiate short sales as a separate service, but may only negotiate short sales in conjunction with performing traditional


real estate brokerage services (e.g. listing a property for sale). Brokers may not charge any fee for providing short sale negotiation services in addition to the normal and customary real estate commission.

c. Are they compliant with the new Federal Trade Commission (“FTC”) Mortgage Assistance Relief Services (“MARS”) Rules? Additionally, Real Estate Brokers may violate MARS not only by providing non-compliant negotiation services but also by referring a non-compliant negotiator to a consumer.

E. Especially in the case of a second lien where lender is likely to have a large deficiency, is the client willing to execute a note or otherwise acknowledge the deficiency if required by the lender in approving the short sale? If not, should you take the listing? Also, it is important to keep the second lien in Loss Mitigation and not allow it to go to the Recovery Department which is often more difficult to negotiate with. Is the Seller prepared to make payments to the second during the short sale?

F. Once you have decided to take the listing, immediately work with the client to put together the short sale package that will be uploaded to the lender(s). Most lenders have this package available on their website; if not, our office can provide you with a copy of the items in a typical short sale package. Your short sale package should include a property condition report and your Broker’s Price Opinion (“BPO”).

G. Advise the Seller that this is a long process, namely, that once an offer is received, it will be uploaded to the lender(s), who may not even receive it into their system for 30 days; explain that the lender(s) will then conduct their own evaluation of the value of the property (e.g. a BPO or appraisal), and in approximately 60 days, the negotiator for the lender may be in a position to negotiate the terms of the short sale. The Seller should be advised that 90-150 days to close a short sale is not unreasonable.

H. Be aware of a pending Trustee’s sale. If within 30 days of potential listing, you may want to refuse to take the listing because the lender may refuse to discontinue the trustee’s sale. Talk to your negotiator, or if you are the negotiator, contact the trustee and lender as soon as possible to determine if they will extend.

I. In negotiating form 22-SS, consider the following: a. Paragraph 2, allow at least 90 days for lender’s consent. Keep in

mind, once the period for lender’s consent has passed, the deal is DEAD.

b. Paragraphs 3 and 4. If Buyer is insisting the Seller may not submit other offers, then Buyer should agree not to withdraw its offer during period of time Seller obtaining lender’s consent set forth in paragraph 1.

c. Paragraph 5, computation of time. Unless the box is specifically checked, none of the time frames commence, except for obtaining lender’s consent, as mutual acceptance is delayed until receipt of lender’s consent. This is problematic for Seller as


once lender’s consent is received, if Buyer thereafter seeks a reduction in price associated with an inspection undertaken after lender’s consent, this may not be approved by lender, and if approved, may take several weeks for lender’s consent. Also, Seller wants to have Buyer be pre-approved on its financing, so that Buyer does not refuse to close after lender’s consent has been obtained. Finally, should the Buyer be allowed to wait until lender’s consent is received before depositing earnest money?

J. Following lender’s consent, the lender typically requires closing be within 30 days of lender’s consent; thus, insert such a provision in the sale agreement.

K. If the broker is not the negotiator, neither broker nor client should contact the lender directly. This will result in a loss of leverage by the negotiator. Let the negotiator do its job!

L. Be aware of the rules regarding commission “cram-downs”. In a Fannie Mae loan, the commission may not be reduced below 6%; however, many transactions may involve a Fannie Mae loan in first position, but a non-Fannie Mae loan in second position. Will the second position lender attempt to cram down the commission? If a non-Fannie Mae transaction, be aware of NWMLS Rule 101 (g) which states that if seller’s creditor requires the total commission or the SOC be reduced, the listing office and selling office commission shall be reduced by an equal amount.

M. Don’t participate in any schemes, such as the double short sale, where a first sale at a low price is followed immediately thereafter by a second sale at a much higher price. Lenders are now disapproving short sales in which there is a contemplated second sale within 90 days. The negotiator in such a transaction, if also the Buyer in the first sale may be a distressed home consultant, and is placing his interests ahead of those of your client. A similar scheme is the option, where the optionee enters into an option with your Seller, but does not exercise the option until he finds a Buyer at a higher price than the option price offered your client.

N. Who will pay delinquent utility charges and past due HOA dues? (Note: Even if deed of trust was recorded before assessments became delinquent, HOA still has priority as to the amount of common area expenses that would have become due (based on budget) during the 6 months preceding foreclosure under the WA Condominium Act, except where the HOA forecloses non-judicially) Typically seller’s lender will not pay, thus indicate in sale agreement whether Buyer or Seller agrees to pay; if Seller, may need to occur prior to closing and outside of escrow with addenda so indicating.

O. Is there mortgage insurance (MI)? If so: 1. Will the mortgage insurer require the Seller to pay all or a

portion of the deficiency? 2. Is the MI company “fully delegated”? 3. Is the price agreed to between Buyer and Seller less than

the lender would receive if it proceeded to foreclosure and


received mortgage insurance? If so, lender may reject short sale and proceed to foreclosure.

P. In a cash sale have buyer provide proof of funds. Q. If you perceive buyer’s offer is low, ask buyer’s broker to justify with a

CMA. R. Be there when lender’s agent does the inspection for purposes of

providing the BPO to lender. Can you provide the agent with information which would be helpful to support the offer your client accepted on the property?

S. Does your client have a FHA-insured mortgage? If so, does he qualify for HUD’s Pre-Foreclosure Sales program, which may allow him to avoid foreclosure and any deficiency obligation on the FHA-insured mortgage?

T. If the Buyer intends to finance its loan through FHA, Rural Development (RD) or VA program, can it close that loan within 30 days of the seller obtaining seller’s lender consent, a typical requirement of the seller’s lender?

U. Are you dealing with a seller’s lender which won’t waive a deficiency on the first even though it knows that deficiency will be eliminated in a non-judicial foreclosure; if so, is your client better off allowing the property to go to foreclosure?

V. Is/was this your client’s primary residence, with a 1st loan originated prior to 1/01/2009 and current loan balance less than $729,750? Is the mortgage delinquent (or default is foreseeable), and does the borrower’s total monthly mortgage payments (including taxes and insurance) exceed 31% of the borrower’s gross income (effective 2/01/11, Fannie & Freddie HAFA requirement only)? If so, does he qualify for the Home Affordable Foreclosure Alternatives Program (HAFA), which may allow him to avoid foreclosure and any deficiency obligation? Note: There are three HAFA programs in place: Treasury HAFA (for non-GSE loans), Fannie Mac HAFA and Freddie Mac HAFA. Check for participating loan servicer and investor. Also, be aware of upcoming HB 1362, the Foreclosure Fairness Act, and Seller’s right to request mediation.

2. SELLING BROKER CHECKLIST

A. Know your Buyer. Is the Buyer prepared to wait up to 120 days to close? If not, a short sale is not for him. Is the Buyer prepared to pay a portion of the short sale negotiator fee, if the negotiator is someone other than the listing broker? Is your Buyer qualified to purchase the property and prepared to do its inspection during the period that Seller is obtaining lender’s consent? Explain to the Buyer that his sales costs may be higher in a short sale if he has to pay part of the negotiator’s fee or pay you a portion of the commission, but that he is getting the benefit of a much lower price.

B. Do you have a Buyer Brokerage Agreement with the Buyer, so that if the commission is crammed down, you can be compensated for the difference


from the Buyer? (Some Buyer’s agents are advising their Buyers not to proceed with a sale because the SOC is being reduced and Buyer’s broker believes it can get a higher commission from another purchase. Buyer’s broker could have protected itself with a Buyer Brokerage Agreement).

C. When negotiating 22-SS, if you want your offer to be the only offer to be considered by Seller, consider giving Seller adequate time to get lender’s consent, and agree not to withdraw your offer during that time. (See 1 (I) above).

D. When negotiating an offer, find out from listing broker if the Seller is willing to accept a deficiency, especially if a second. Get a copy of title from listing broker or check with your title co. to see what the liens are. If the Seller refuses to give you a copy of title, insert 22T, title contingency, in your offer, so that you can review the title, and if you see a second, and/or other encumbrances, consider whether you want to continue with the transaction if Seller won’t agree to be bound by a deficiency. Keep in mind; some sellers are actually putting a provision in their sales agreements providing that if lender’s consent is conditioned upon Seller agreeing to a deficiency, that Seller can opt out.

E. Make sure your client’s financing is in order so that it can close within 30 days of lender consent.

F. Find out who is going to negotiate the short sale. Is it the listing broker; if not, and a third party, find out exactly what the fee is and who is going to pay it. Many Buyers are blind-sided by a last minute request from the short sale negotiator that they pay the negotiator’s fee and transactions end up being restructured so that the Buyer (or its agent) pays the fee because the lender won’t and the Seller can’t. If the negotiator is the listing broker, ask them about their experience in negotiating short sales.

G. Be suspicious of schemes such as the double short sale and option (See 1 (M) above), as well as a representation by the listing broker that it already has short sale approval, unless a HUD approved pre-foreclosure on FHA insured mortgages. Some listing brokers have submitted dummy short sale offers and preliminary settlement statements to lenders to get lender approval before actually getting a valid offer. Ask the listing broker if it says it has short sale approval, how it got it before your offer was submitted to the lender. There may be cases where a prior legitimate offer was accepted by the lender, and did not close because the Buyer failed to perform, but even in that situation, your offer will have to be submitted to the lender for approval, and considered on its own merits.

H. Carefully consider whether to make an offer within 30 days of a pending trustee’s sale. May be difficult to continue the trustee’s sale to get your sale closed.

I. See paragraph 1 (N) regarding payment past due HOA dues and utility delinquencies.

J. See paragraph 1 (T) regarding buyer financing via FHA, RD or VA loans. K. See paragraph 1 (C) regarding whether the Seller was provided with a

copy of the Short Sale Seller Advisory published by DFI and DOL.

Documents

UPDATES AND TRENDS IN THE SHORT SALE WORLD (AND TAX ...€¦ · Tax Consequences of Short Sales and Foreclosures Foreclosure: Recourse vs. Nonrecourse An important consideration in