by: attorney steven a. sokol halling + sokol llp 310-277-2080 / 818-222-4994 [email protected]...
Post on 21-Dec-2015
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By: Attorney Steven A. SokolHalling + Sokol LLP
310-277-2080 / [email protected]
Real Estate in Troubled Times: Short Sales, Foreclosures,
Bankruptcy, Tax Effects
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INTRODUCTION
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Loans in TroubleThe Basics
Loans
Securing by “pledge” of property
Debtor protection
Rules to limit how creditor takes or sells pledged property
Loans
Securing by “pledge” of property
Debtor protection
Rules to limit how creditor takes or sells pledged property
Ancient conceptAncient concept
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Often damaged, in need of repair
Vacant, not lived in for some time
May be unmarketable in present condition
Often damaged, in need of repair
Vacant, not lived in for some time
May be unmarketable in present condition
Condition of PropertiesCondition of Properties
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Owner can sell to anyone at any time, up and until actual date of foreclosure sale
Home Equity Sales Contract rules may also apply (see below)
Owner can sell to anyone at any time, up and until actual date of foreclosure sale
Home Equity Sales Contract rules may also apply (see below)
Sale During ForeclosureSale During Foreclosure
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Homeowner in Default
Slow economy – decrease Fed funds rate
Sound and profitable economy – inflation-threatened, raise Fed funds rate
Mortgage rates – increase/decrease in advance of actual adjustment by the Fed
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Employment and personal income thrive between two extremes Mortgage interest rates higher
Home prices and rate of appreciation stabilize
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Steady employment and increasing income Promote new home ownership for many Continued home ownership for most Ability to pay mortgage
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Cyclic transitions affect personal households Fed steps in to assist improving economy Mortgage interest rates begin dropping
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Loss of Household Income
Slow economy may result in reduced personal income “Two-income family” nation Loss of partial income difficulties Job loss devastating
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Financial Mismanagement
Debt ratio affects ability to pay more than allowable minimum monthly payments
Home highly leveraged with little available equity
Poor payment discipline, even with ability to pay
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History of Deeds-of-Trusts as California’s Preferred
Security Instrument
Loans secured by mortgage, not trust deeds Mortgages subject to California debtor
protection laws Trust deeds were not California lenders switched to using trust
deeds
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California Supreme Court held: Debtor protection applied equally to
mortgages and trust deeds Trust deeds being used by then Lenders continued doing so
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Types of Security Instruments
Trust deedMortgageInstallment land contract or contract of
sale Each must be recorded in county where
property located
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Trust deed – most common California debt instrument Borrower or “Trustor” Lender or “Beneficiary” “Trustee” receives “bare legal title”
Power of sale to reconvey and foreclose
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Mortgage – seldom used in California Lender or “Mortgagee” Borrower or “Mortgagor” New form gives trustee additional powers
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Installment land contract or contract of sale Seller retains fee title until buyer performs
contractual obligations Buyer-vendee receives equitable title Recorded to protect against fraud or
bankruptcy Vendor recourse a “quiet title” action
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RESTRUCTURING LOANS
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Lender’s Desireto Avoid Foreclosure
Mortgagelender
Mortgagelender
Defaultingborrower
Defaultingborrower
Working to avoid
foreclosure and loss
possibility
Working to avoid
foreclosure and loss
possibility
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Lender’s Evaluation Process to Assist the Borrower in Default
Cause or contribution to delinquency Reasonably beyond control of borrower Likelihood of resolution within reasonable time
period Access to additional funds Sufficient equity to pay off loan if sold Short-pay acceptable
Questionnaire and financial statement
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Assistance Options Offered by the Lender
Temporary relief: Special forbearance Permanent modification of existing mortgage Combination of both options
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Normal monthly payments over period of time
Past due amounts added to loan balance New and higher payments repaid over
remaining life of loan Due date extended until paid in full
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Balloon payments of past due amounts Monthly payment same Monthly payment reduced for period of time
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Interest only payment
Payment plan on arrears
Partial mortgage payments
Payment on moratorium
Interest only payment
Payment plan on arrears
Partial mortgage payments
Payment on moratorium
ForbearanceForbearance
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Reduce interest rate
Change mortgage product type
Extend term of mortgage
Reduce interest rate
Change mortgage product type
Extend term of mortgage
Loan ModificationLoan Modification
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MGIC Investment Corporation
Private Mortgage Insurance
Only Lender can make a claim
MGIC Investment Corporation
Private Mortgage Insurance
Only Lender can make a claim
Additional Player-Mortgage InsuranceAdditional Player-
Mortgage Insurance
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Reported as “deed-in-lieu-foreclosure”
Less derogatory item on credit report
Reported as “deed-in-lieu-foreclosure”
Less derogatory item on credit report
Homeowner BenefitsHomeowner Benefits
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Move sooner than if in foreclosure
Negative impact on credit report
Tax consequence
Move sooner than if in foreclosure
Negative impact on credit report
Tax consequence
Homeowner RisksHomeowner Risks
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Save costs and time of foreclosure
Obtain property earlier to expedite resale
Save costs and time of foreclosure
Obtain property earlier to expedite resale
Lender BenefitsLender Benefits
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Assume liability if secondary financing in place
Clouded title
Assume liability if secondary financing in place
Clouded title
Lender RisksLender Risks
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SHORT PAYS
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“Short-sale” – lender accepts less than full amount due from sale Homeowner already delinquent Comparison of short-pay loss to anticipated
foreclosure loss
Lender Agrees to AcceptLess than Amount Owed
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Approaching a Short-Pay
Review/research borrower documents: Income documents Bank statements Financial statement or Fannie Mae 1003 loan
application form Recent credit report for all borrowers on loan Explanation letter and reason for request
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Review/research lender documents: Competitive market analysis, or BPO Copy of listing agreement, Multiple Listing
Service “print-out” Purchase contract and escrow instructions, if
already sold Estimated settlement statement from escrow Current preliminary title report
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Lender’s Decision-Making Process
Circumstances beyond homeowner controlSufficient financial reserves for short-sale
deficiencyReduction of fees chargedReduce or eliminate buyer concessionsBuyer sale price in relation to competitive
market analysis or BPO
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Risks of a Short-Payto the Homeowner
Adversely affects credit reportTax consequencesRecorded junior loans cause difficulties
with senior lender
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HOME EQUITY SALES CONTRACTS
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Owner-occupied 1-4 residential property
Special requirements:
Name, business address, telephone number of purchaser
Address of residence in foreclosure
Owner-occupied 1-4 residential property
Special requirements:
Name, business address, telephone number of purchaser
Address of residence in foreclosure
Home Equity Sales ContractsHome Equity Sales Contracts
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Total consideration given by purchaser
Complete description of terms of payment or other consideration
Time of possession
Terms of rental agreement
Total consideration given by purchaser
Complete description of terms of payment or other consideration
Time of possession
Terms of rental agreement
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“NOTICE REQUIRED BY CALIFORNIA LAW UNTIL YOUR RIGHT TO CANCEL THIS CONTRACT HAS ENDED.
(NAME) OR ANYONE WORKING FOR (NAME) CANNOT ASK YOU TO SIGN OR HAVE YOU SIGN ANY DEED OR ANY OTHER DOCUMENT”
“NOTICE REQUIRED BY CALIFORNIA LAW UNTIL YOUR RIGHT TO CANCEL THIS CONTRACT HAS ENDED.
(NAME) OR ANYONE WORKING FOR (NAME) CANNOT ASK YOU TO SIGN OR HAVE YOU SIGN ANY DEED OR ANY OTHER DOCUMENT”
Notices required on contractsNotices required on contracts
Immediately above “cancellation notice”
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“YOU MAY CANCEL THIS CONTRACT FOR THE SALE OF YOUR HOUSE WITHOUT ANY PENALTY OR OBLIGATION AT ANY TIME BEFORE (DATE AND TIME OF DAY). SEE THE ATTACHED NOTICE OF CANCELLATION FORM FOR AN EXPLANATION OF THIS RIGHT.”
“YOU MAY CANCEL THIS CONTRACT FOR THE SALE OF YOUR HOUSE WITHOUT ANY PENALTY OR OBLIGATION AT ANY TIME BEFORE (DATE AND TIME OF DAY). SEE THE ATTACHED NOTICE OF CANCELLATION FORM FOR AN EXPLANATION OF THIS RIGHT.”
Immediate proximity to space for seller’s signature
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Rescission timeline:
Midnight of the 5th business day following day on which seller signs contract, or
8:00 a.m. on day scheduled for sale of property under power of sale in Deed of trust,
whichever occurs first
Rescission timeline:
Midnight of the 5th business day following day on which seller signs contract, or
8:00 a.m. on day scheduled for sale of property under power of sale in Deed of trust,
whichever occurs first
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“TO CANCEL THIS TRANSACTION, PERSONALLY DELIVER A SIGNED AND DATED COPY OF THIS CANCELLATION NOTICE, OR SEND A TELEGRAM TO (NAME OF PURCHASER), AT (STREET ADDRESS OF PURCHASER’S PLACE OF BUSINESS) NOT LATER THAN (ENTER DATE AND TIME OF DAY). “I HEREBY CANCEL THIS TRANSACTION (DATE). (SELLER’S SIGNATURE)”
“TO CANCEL THIS TRANSACTION, PERSONALLY DELIVER A SIGNED AND DATED COPY OF THIS CANCELLATION NOTICE, OR SEND A TELEGRAM TO (NAME OF PURCHASER), AT (STREET ADDRESS OF PURCHASER’S PLACE OF BUSINESS) NOT LATER THAN (ENTER DATE AND TIME OF DAY). “I HEREBY CANCEL THIS TRANSACTION (DATE). (SELLER’S SIGNATURE)”
Attached to contract in duplicate, easily detachable
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Seller may rescind up to 2 years after deed to buyer is recorded IF Seller was taken “unconscionable advantage” of by Buyer
If court action to enforce rescission right, prevailing party is entitled to costs of suit/reasonable attorneys’ fees
Seller may rescind up to 2 years after deed to buyer is recorded IF Seller was taken “unconscionable advantage” of by Buyer
If court action to enforce rescission right, prevailing party is entitled to costs of suit/reasonable attorneys’ fees
Two Year Right to CancelTwo Year Right to Cancel
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Purchased for personal residence
Seller gives buyer deed in lieu of foreclosure of voluntary lien or encumbrance of record
Trustee transfer acting under power of sale in deed of trust or mortgage at foreclosure sale
Purchased for personal residence
Seller gives buyer deed in lieu of foreclosure of voluntary lien or encumbrance of record
Trustee transfer acting under power of sale in deed of trust or mortgage at foreclosure sale
ExceptionsExceptions
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Sale is authorized by statute
Sale is by order or judgment of court
Sale is from/to spouse, blood relative, blood relative of spouse
Property other than 1-4 family residential
Not seller-occupied
Sale is authorized by statute
Sale is by order or judgment of court
Sale is from/to spouse, blood relative, blood relative of spouse
Property other than 1-4 family residential
Not seller-occupied
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Broker’s Position“Purchaser representative” requirements as of
January 1, 1991 Must provide
Written proof of valid current California Real Estate Sales License and bond
Written statement of valid California Real Estate Sales License and bond, compliance with above
Failure to comply can render contract void and purchaser liable to seller for damages
Civil Code §1695-1695.17, 1691
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Purchaser’s “Representative” -
“A person who in any manner solicits, induces, or causes a property owner to transfer title or solicits any member of the property owner’s family or household to induce or cause any property owner to transfer title to the residence in foreclosure to the equity purchaser.”
Civil Code §1695.15(b)
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Finding information about foreclosure properties County Recorder’s Office Research services Local newspapers Classified ads
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Home Equity Explanation and Agency Agreement (HEAA) 4/05
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Notice of Default Purchase Agreement (NODPA) 1/06
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Notice of Cancellationof Notice of
DefaultPurchase Agreement (HENC)
1/06
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DEEDS-IN-LIEU-OF-FORECLOSURE
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Deeds-in-Lieu-of-Foreclosure
Voluntary deed of from borrower to lender
No completed foreclosure by lender
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FORECLOSURE PROCESS
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The Borrower’s Default
Promise to perform required by trust deed is broken Monetary – failure to pay loan payment or
balance when due Non-monetary –
Failure to pay homeowner’s insurance or property taxes
Failure to maintain property Failure to pay senior lien holder
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Notice of Delinquency
Loan delinquent for at least four monthsSent within 15 days after end of 4th
delinquent monthLoan secured by 1-4 unit residential
propertyCurrent Request for Notice of DelinquencyFirst-class mail or in person
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Notice of Balloon Payment
If 1-4 family residential property, written notice 90-150 days before due date
Applies to both seller- and non-seller-carried financing
Notice of payment due required
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Notice of Default
Occurs day after loan payment missed unless note contains grace period
Most lenders choose not to file until 2 or 3 payments missed
Options: Judicial foreclosure process through Superior
Court Action under power of sale provision of deed
of trust
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Lender notifies Trustee to prepare and record NOD
Trustee prepares and records NOD Within 10 days of recording NOD, Trustee
mails copy to Trustor and persons who have recorded “Request for NOD”)
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Within 30 days of recording NOD, Trustee mails copy to junior lien/interest holders having recorded interests in property
NOD must be mailed to each person Certified or registered mail, and Regular first class mail
Trustor can reinstate loan up to 5 days before Trustee’s sale
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The Trustee’s Sale
Notice of Sale published within 3 months (89-92 days) following NOD recordation
Publication once a week for 3 weeks First publication at least 20 days before
Trustee’s Sale Trustee’s Sale 21+ days after Notice of Sale
published
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Trustee’s right to reinstate loan up until 5 business days prior to sale date
25 days before Trustee’s Sale date, Trustee sends copy of NOS to IRS
25 days before Trustee’s Sale date, Trustee sends copy of NOS to State Controller
20 days before Trustee’s Sale date, Trustee posts copy of NOS on property
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20 days before Trustee’s Sale date, Trustee posts copy of NOS in public place in city or county where property located
14 days prior to sale date, Trustee records NOS
5 business days prior to Trustee’s Sale, Trustor’s right to reinstate expires
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Bidding opens
Type of funds required specified
Beneficiary lender makes 1st bid
Lender money deposit not required unless making overbid
Overbid of lender permitted
Bidding opens
Type of funds required specified
Beneficiary lender makes 1st bid
Lender money deposit not required unless making overbid
Overbid of lender permitted
Trustee’s Sale DateTrustee’s Sale Date
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Property sold to highest bidder
IRS has 120 days after Trustee’s Sale to redeem property if lien recorded
Property sold to highest bidder
IRS has 120 days after Trustee’s Sale to redeem property if lien recorded
Trustee’s Sale DateTrustee’s Sale Date
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90-150 days before balloon payment due Mail Notice of Balloon Payment, if required
starts 3 month [89-92] day period Record Notice of Default (NOD)
10 days or sooner after recording Mail NOD to Trustor and persons who recorded Request for Notice
30 days or sooner after recording Mail NOD to recorded junior lienholders, lessees, etc., who did not record Request
for Notice
25 days or more before Trustee’s Sale Mail Notice of Sale (NOS) to IRS and CA State Controller, if required
STARTTiming Requirement
Typical Trustee’s Sale Foreclosure TimelineTypical Trustee’s Sale Foreclosure Timeline
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14 days or more before Trustee’s Sale Record NOS
5 business days before Trustee’s Sale Right to Reinstate Ends
Date in NOS or postponed date Trustee’s Sale is held
Varies Trustee’s Deed is delivered/recorded
120 days after Trustee’s SaleIRS redemption period ends (Trustor, junior
lienholders, lessees, etc., do not have redemption right after Trustee’s Sale
FINISH
1. Publish in newspaper of general circulation2. Post on property3. Post in public place in city/county4. Mail to Trustor and interested persons
21 days or more before Trustee’s Sale Publish, Post, and Mail NOS
Timing Requirement
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Judicial Foreclosure
Lender’s Choice whether to use Trustee’s Sale or Judicial Foreclosure
Pursue collection of deficiency California law prohibits certain deficiency judgments Property sold at judicial foreclosure subject to Right of
Redemption
Defective Documents
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Deficiency Judgment
Lender prohibited from pursuing: 1-4 unit family residence, borrower
occupied as residence Note and deed of trust seller financing California’s “One Form of Action” rule
Special environmental contamination exception
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Guarantors and Deficiency Judgments
Not protected by anti-deficiency judgment laws
Can be sued for personal liability or deficiency judgment
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Maximum Deficiency Judgment Allowed
Equal to amount by which total indebtedness owed to lender exceeds FMV of property on sale date
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Borrower’s Right of Redemption(only Judicial Foreclosure)
Only exists for judicial foreclosure No post-foreclosure redemption if lender used
Trustee’s Sale OR if lender is prohibited from obtaining deficiency judgment against Borrower
If judicial foreclosure is used, redemption period: 3 months after sale if proceeds are sufficient to satisfy
indebtedness 1 year after sale if proceeds not sufficient to satisfy
indebtedness and lender obtains deficiency judgment (personal liability)
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Justice Department Report on Scams
Fractional interest transfer scam.Serial filings by related debtorsVoluntary dismissals of Chapter 13 casesInvoluntary petition scamsPhony alias amendments to petitions
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TAX EFFECTS
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Tax Effect of Short Loan PayoffsFacts:
Mortgage balance = $900,000 FMV = $645,000 Selling costs = $45,000 Proceeds from sale = $600,000 Adjusted basis of property = $450,000
Tax effect: No gain if client insolvent at time of sale Tax disaster if client solvent at time of sale
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Calculation of Gain from SaleSales price $ 645,000 Adjusted basis (450,000)Selling Costs (45,000)Capital Gain $ 150,000
Calculation of 1099 from MortgageBalance of Mortgage $ 900,000 Payoff:Sales Price 645,000 Selling Expense (45,000)Net Sales Price 600,000 1099 from Mortgage $ 300,000
Amount of TaxCapital gain $ 150,000 Maximum tax rate 15%Amount of tax $ 29,400 Ordinary income $ 300,000 Estimated tax rate 30%Estimated tax $ 90,000
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Method of Conveyance Foreclosure VoluntaryType of Loan Recourse Non-Recourse Recourse Non-Recourse
Loan Balance
Proceeds
Sale Price
Basis
Gain or (Loss)
Amount Due Lender
Total Income
Sale Price =
$ 900,000
600,000
600,000
450,000
150,000
300,000
$ 450,000
FMV
$ 900,000
600,000
900,000
450,000
450,000
0
$ 450,000
>Debt or FMV
$ 900,000
600,000
600,000
450,000
150,000
300,000
$ 450,000
<Debt or FMV
$ 900,000
600,000
900,000
450,000
450,000
0
$ 450,000
Debt
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BANKRUPTCY
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Chapter 7 Chapter 11 Chapter 13 Automatic Stay Relief from Automatic Stay
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CONCLUSION
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By: Attorney Steven A. SokolHalling + Sokol LLP
310-277-2080 / [email protected]
Real Estate in Troubled Times: Short Sales, Foreclosures,
Bankruptcy, Tax Effects