Massachusetts Short Sales

Senate Passes Mortgage Debt Relief Act Extension

by Andrew Coppo on December 17, 2014

As reported today by National Mortgage News:

The Senate approved a bill late Tuesday that would retroactively extend over 50 expiring tax provisions for one year, including the Mortgage Debt Relief Act,  a 2007 law that shields distressed homeowners from paying taxes on any mortgage debt forgiven in a short sale.

The Senate approved the bill 76 to 16, which extends the provisions until Dec. 30 of 2014 (the one-year extension is retroactive). The House passed the bill 387 to 46 on Dec. 3. While the one-year extension provides thousands of homeowners who completed a short sale in 2014 with tax relief, many homeowners may miss out on the tax benefits as this appears to be the last extension.

At one point, House and Senate lawmakers were close to a deal on a two-year extension. But the White House objected because key business tax provisions were given permanent status while others affecting low- and moderate-income households would still have had to be extended each year. The one-year retroactive extension could be a set-back for the real estate recovery as lenders still have a large inventory of delinquent accounts.

The bill ensures underwater borrowers that sold their homes in a short sale in 2014 will not be penalized. The bill falls short, however, in that the extension is only good through the end of 2014.

In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act so that distressed borrowers would not be penalized for doing a short sale. Congress extended this tax relief in 2009 and 2012, but failed to pass a tax extender bill at the end of 2013.

Short sales have been declining over the past few years due to an improving economy, lower foreclosures and the uncertainty over the tax consequences of a short sale or deed in lieu transaction, where the homeowner simply signs over the deed to the house to the bank and vacates the property.

Mortgage Debt Relief In 2015

What is important to note, however, is in a recourse jurisdiction, such as Massachusetts, the homeowner still gets taxed on the forgiven debt in a deed in lieu of foreclosure transaction. In a foreclosure, the homeowner won’t incur tax liability, however, they will likely end up owing the lender the difference between what was owed on the loan and the net amount the lender receives following foreclosure, referred to as the deficiency amount, as the result of a post foreclosure lawsuit filed by the lender.

Absent the Debt Relief Act, distressed homeowners will have to qualify for one of the recognized exemptions, such as insolvency, in order to avoid paying taxes following a short sale or deed in lieu of foreclosure.

Insolvency Exception

Under the current US Tax Code, a homeowner can avoid tax liability following a short sale on their primary residence if they are “insolvent.” The IRS defines insolvent as “a taxpayer’s total liabilities exceeding his or her total assets.”  The homeowner is allowed to use the total amount owed on the mortgage at the time of sale for purposes of calculating their total indebtedness. Consequently, most homeowners pursing a short sale qualify as insolvent because the amount of debt being forgiven by the lender usually exceeds the amount of their total assets.

All Short Sales Result in Tax Liability

Under the current US tax code, all short sales result in tax liability. The burden of proof lies with the taxpayer to show the IRS that he or she is exempt from paying taxes on the “cancellation of debt income.” In other words, the amount forgiven by the lender will automatically be taxed as ordinary income unless the taxpayer qualifies for one of the recognized tax exemptions.

The tax issues surrounding short sales are vital to the real estate recovery because 1 in 5 homeowners with a mortgage in the United States is “underwater.” It is important, therefore, to remind distressed homeowners and real estate professionals that all short sales result in tax liability regardless of the Mortgage Debt Relief Act Extension.  The onus is always on the taxpayer to prove that they qualify for a tax exemption following a short sale.

What to do if you receive a 1099C following a short sale

Following a short sale, the homeowner will receive a Form 1099C from their lender releasing them from their obligation to repay their mortgage loan. Upon receipt of the Form 1099, the homeowner automatically incurs tax liability unless they file an IRS Form 982 with their subsequent tax returns.

The information provided in this article is for informational purposes only and is not intended, and should not be construed, as tax advice. All homeowners are encouraged to consult with a licensed tax professional prior to agreeing to a short sale.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.

Related Articles:

Fannie Mae Short Sale Guidelines

How To Qualify For A Short Sale: The Involuntary Hardship

Five Listing Agent Tips To Ensure Short Sale Approval

About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

 

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Freddie Mac Short Sale Guidelines

by Andrew Coppo on November 9, 2013

The Freddie Mac Standard Short Sale

Massachusetts Short Sales

Freddie Mac recently announced uniform short sale servicing guidelines with the introduction of the “Freddie Mac Standard Short Sale.”  The Freddie Mac Standard Short Sale is the government’s latest attempt to make the short sale process more efficient for loan servicers, buyers, sellers and real estate professionals. The Standard Short Sale means faster approvals, requires the lenders to waive their deficiency rights against the homeowner and, most important, provides uniform guidelines regarding cash contributions, promissory notes and relocation assistance incentives. In short (no pun intended), the Freddie Mac Standard Short Sale effectively takes the guesswork out of all Freddie Mac short sales and clears the way for more distressed homeowners to avoid foreclosure.

The Federal Housing Finance Agency, who acts as Fannie Mae and Freddie Mac’s conservator, issued identical Fannie Mae short sale guidelines in an effort to standardize the short sale approval process for all loans owned or backed by the government sponsored enterprises. Fannie Mae and Freddie Mac own or guarantee a majority of the outstanding mortgages in the United States.

The Fannie Mae and Freddie Mac short sale servicing guidelines remove obstacles on all government backed loans by streamlining the short sale approval process so more homeowners can avoid foreclosure. The short sale servicing guidelines, which went into effect November 1, 2012, are intended to provide lenders and loan servicers with uniform short sale procedures making the short sale transaction faster, easier and more transparent.

Faster Approvals

The Freddie Mac short sale guidelines implement consistent borrower response timeframes to help facilitate faster short sale approvals. Servicers must acknowledge receipt of a purchase offer within three business days. Servicers must also notify the borrower within five business days from receipt of the purchase offer if any additional items are needed to evaluate the offer.

Lenders and loan servicers have 30 days to make a final decision from the time they receive a complete short sale application.  The loan servicer automatically receives an additional 30 day extension if they need to negotiate the approval with third parties, such as mortgage insurance companies. A final decision, however, is required in the first 60 days.

As someone who exclusively negotiates short sales, my experience is mostly positive since the Freddie Mac short sale guidelines went into effect last November . I have found, however, that many servicers are unaware of the new guidelines and fail to abide by the required response timeframes. For the most part, however, written short sale approval letters are obtained much faster and a good short sale professional should be able to get a Freddie Mac short sale approved 60-75 days from the date of submission.

Delegated Authority 

The Freddie Mac short sale guidelines provide lenders and loan servicers with delegated authority to approve short sales for both current or delinquent homeowners. A loan servicer has absolute delegated authority to approve a short sale for homeowners who are 31 days or more delinquent on the mortgage payments. In contrast, the servicer has delegated authority for homeowners who are 31 days or less late on their mortgage payments as long as the homeowner has a qualified hardshipQualified hardships under the Freddie Mac Standard Short Sale program include the following:

  • Divorce or separation;
  • Death of borrower or primary wage earner;
  • Borrower or dependent family member has long term disability;
  • Distant employment transfer or relocation;
  • Permanent Change of Station Orders for members of the military

Non-Delegated Loans

For homeowners who are current on their mortgage (31 days or less delinquent) and don’t have one of the aforementioned qualified hardships, they may still be eligible for the Standard Short Sale. In these situations, the servicer does not have delegated authority to approve the loan and, therefore, must submit the file to Freddie Mac for approval. Borrowers who do not have an eligible hardship may qualify for a short sale if there is a risk of property ownership to Freddie Mac, such as pending litigation or deteriorating property condition that could jeopardize a successful foreclosure sale. Basically, all types of borrowers can qualify for the Freddie Mac Standard Short Sale as long as one can make the argument the a short sale would be in the best interest of all parties. Consequently, the Freddie Mac short sale servicing guidelines make the short sale process easier for all types of loans because loan servicers have delegated approval authority on qualified short sale offers as well as the ability to obtain approval from Freddie Mac for any homeowner who doesn’t have one of the qualified hardships.

More Transparency

The Freddie Mac short sale guidelines provide more transparency to the short sale transaction by providing standardized cash contribution requirements, making uniform subordinate lien payoff amounts, creating short sale incentives and requiring the underlying investors to waive their deficiency rights against the homeowner following a short sale.

Borrowers who are current or less than 31 days delinquent must make a cash contribution at closing in accordance with the financial means test. The Financial means test measures the homeowner’s expense to income ratio. Servicers must comply with the financial means test to determine whether borrowers who are more than 31 days delinquent are subject to making a cash contribution or signing a promissory note at closing. Borrowers are not required to make a cash contribution at closing if they are 90 days or  more delinquent with a credit score of 620 at the time of the short sale submission.

Subordinate lien holders will be required to accept an aggregate payment of $6,000 in exchange for releasing each subordinate lien, extinguishing the underlying debts, and waiving their rights to pursue a deficiency judgment against the homeowner.  Perhaps most important, the Freddie Mac servicing guidelines explicitly state that the Servicer, for itself and on behalf of Freddie Mac, must waive all rights to pursue payment of the remaining deficiency balance owed by the borrower on the underlying Freddie Mac-owned mortgage. If, however, the borrower agrees to a promissory note as part of the settlement and fails to meet their obligation, Freddie Mac reserves the right to pursue collections for the balance of the promissory note.

Freddie Mac will provide servicers with $2200 upon the completion of a short sale. Servicers also receive credit from the government under the terms of the $8.5 Billion mortgage settlement agreement for completing a short sale and, thus, modifying a homeowner’s mortgage. Eligible borrowers can receive up to $3,000 in relocation assistance at closing. Servicers may, at their discretion, offer the borrower additional financial incentives from their own funds to complete the short sale, but servicers cannot deduct this payment from the short sale proceeds.

Escalation procedures

Freddie Mac requires all servicers to establish an escalation process and to communicate it to borrowers in writing. This includes a dedicated toll free 800 number. Most servicers already include a single point of contact on monthly mortgage statements or foreclosure notices. Fannie Mae similarly has a short sale escalation tool designed for issues such as valuation disputes, servicer delays, or uncooperative subordinate lien holders.  Agents can also use the process to get a recommended list price before putting a property on the market. In practice, one  may still find it difficult to escalate a Freddie Mac short sale because all contact remains with the servicer on behalf of Freddie Mac. It is very common for the servicer to present take it or leave it offers from Freddie Mac as well as unreasonably high property valuations. For this reason, the use of an experienced short sale negotiator or real estate professional is imperative to obtaining short sale approval on Freddie Mac backed loans.

The Freddie Mac Standard Short Sale 

The Freddie Mac Standard Short Sale means faster approvals, requires the lenders to waive their deficiency rights against the homeowner and provides uniform guidelines regarding borrower eligibility, cash contributions, promissory notes and relocation assistance incentives. In effect, the Freddie Mac short sale servicing guidelines have taken the guesswork out short sale transactions for all Freddie Mac backed loans. Similarly, the Fannie Mae Short Sale Guidelines provide transparency for all loans backed by Fannie Mae. Consequently, short sale approvals are much easier to obtain on all government backed loans.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.

Related Articles:

Fannie Mae Short Sale Guidelines

How To Qualify For A Short Sale: The Involuntary Hardship

Five Listing Agent Tips To Ensure Short Sale Approval

About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

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This past March, Money Magazine claimed that the real estate industry was back. Home Prices had increased in 92 of the country’s largest 100 metropolitan areas, interest rates were in the 3′s and the number of homes for sale was at the lowest level in a decade.

While interest rates have risen more than a point since March, many markets still expect price increases to last well into 2014. As prices increase, the negative equity numbers decrease. More and more people are looking to take advantage of the favorable market conditions and either “trade up” or sell a home they were unable to sell just last year.

In addition, many homeowners who were previously unable to qualify for a mortgage are looking to purchase once again. If you are in the real estate industry, it is time to familiarize yourself below with the term “boomerang buyer” and how soon one can purchase a home following a short sale or foreclosure.


If you didn’t click on the above article, or you simple need a summary, below is a breakdown of the waiting periods for boomerang buyers who are looking to purchase following a short sale or foreclosure:

FORECLOSURE:
-Seven Years for Fannie Mae or Freddie Mac with less than 10% down payment;
-Three Years for a Federal Housing (FHA) loan; and
-One to Two Years for an FHA loan if there were extenuating circumstances (such as illness or death of a wage earner)

SHORT SALE:
-Seven Years for Fannie Mae or Freddie Mac loan with less than 10% down payment;
-Four Years for Fannie Mae or Freddie Mac loan with 10% down payment
-Two Years for Fannie Mae or Freddie Mac loan with 20% down payment;and
-Three Years for an FHA loan.

DEED IN LIEU OF FORECLOSURE:
-Seven Years for Fannie Mae or Freddie Mac with less than 10% down payment;
-Four Years for Fannie Mae or Freddie Mac loan with 10% down payment;
-Two Years for Fannie Mae or Freddie Mac loan with 20% down payment;and
-One to Two Years for an FHA loan if there were extenuating circumstances

Source:Fannie Mae Department of Housing and Urban Development

Conclusion:

Homeowners can now purchase a home following a short sale or foreclosure in as little as 12 months. The majority of these boomerang buyers, however, won’t qualify for financing for two to four years depending on your credit score and down payment amount. The important take away from the new financing requirements is that Boomerang buyers are going to account for a large portion of buyers in the near future. So prevalent, that real estate professionals cannot afford to ignore this segment of the market.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo at 617-264-0376 to schedule a free short sale consultation.

About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

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Massachusetts ‘Witness Only’ Real Estate Closings May Lead To Board of Bar Overseers Complaint

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Fannie Mae Short Sale Guidelines

February 16, 2013

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Mortgage Debt Relief Act Extended Through 2013

January 8, 2013

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What Are The Tax Consequences of a Massachusetts Short Sale?

February 7, 2012

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Massachusetts Short Sales: Five Tips For Buyer’s Agents To Ensure Short Sale Approval

November 12, 2011

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Massachusetts Short Sales: Five Tips For Listing Agents To Ensure Short Sale Approval

September 17, 2011

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FTC MARS Exemption:Good Or Bad For Short Sale Agents?

July 28, 2011

Tweet FTC Issues Stay On Enforcement Of Certain MARS Provisions The Federal Trade Commission (FTC) recently issued a statement that it would no longer enforce several provisions of the widely scrutinized Mortgage Assistance Relief Services (MARS) Rule. The MARS Rule required all real estate agents working on short sales to make certain disclosures to homeowners [...]

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