By Roberta M. Gubbins
Legal News
In the good old days of rising property values both parties in a divorce wanted a piece of the marital home, now, neither party wants it.
“The problem is a property that is ‘upside down’ or has decreased in value to the point that it is worth less than the outstanding loan balance,” said Robin Omer, speaking to the ICBA Family Law Section at a luncheon on March 23 held at Cooley Law School.
The first step in that situation is to determine how much the property is worth.
“You can have an appraisal done—hire a local appraiser and get a written report—typical cost is about $500. If your clients don’t have a lot of money, you can use two times the state equalized value (SEV). Other methods include having a realtor compile a comparative market analysis. This is not as reliable as a formal appraisal. If you don’t need evidence of value in court, you can use Zillow.com or Trulia.com. It works for mediation.”
“Next, determine how much is owed on the property.
“First, find the lender or servicing agent. Next, is there a second or third mortgage on the property? Last, obtain a current loan statement or payoff amount. That may not be too reliable, either.
The preference is to obtain a loan payoff statement, which tells the principal balance, the unpaid interest, and includes property taxes or insurance paid by the lender. Those expenses would be added into the payoff amount.”
What can you do when you are faced with a foreclosure situation?
The new foreclosure laws provide for a 90 day pre-foreclosure notice during which time the homeowner meets with a foreclosure specialist to try to avoid foreclosure.
The federal government has created a loan modification program with a target debt to income ratio of 38 percent.
To reach that ratio there can be a reduction of the interest rate, an extension of the loan term, reduction or elimination of late fees or reduction of the principal mortgage balance or deferral of payments in default until maturity.”
“The penalty to the lender if it does not accept the modification where the borrower is eligible is to use judicial foreclosure, a time consuming process. If the borrower is not eligible, then the lender can proceed with foreclosure by advertisement.
Usually by the time the case comes to you, you will find the 14 day notice period to contact the lender and work to modify loan has passed.”
“Don’t let that stop you,” he said. “The mortgage lenders don’t want these properties. No matter when you get the case, contact the lender to modify the loan.”
“If that doesn’t work, the most obvious other option is to sell the property for a loss—the seller must pay the deficiency at closing. That is difficult since most borrowers are unable to come up with the money.”
“Another method is to use the short sale process, which is simply to sell the property for less than the loan amount.
The lender must agree to waive the deficiency.
If you have an offer, it must be conditioned on the seller gaining approval for a short sale.
The language must be included in the buy-sell agreement. The problem is the process takes a long time and a lot of buyers don’t want to wait. It helps to provide the lender with as much information about the seller’s predicament as possible so a hardship letter is a good way to do that.”
“The lender should agree to the deficiency and to not send the seller a 1099-C for the debt forgiven, which must be reported as ordinary income on the seller’s tax return.”
“Fortunately the government has stepped in with the Mortgage Forgiveness Debt Relief Act, which allows the homeowner to exclude up to $2 million of debt forgiven on the principal residence between 2007-2012.
To qualify, the debt must have been used to buy, build or substantially improve the principal residence. Proceeds can not have been used to buy a new car or payoff credit cards. That portion of the debt must be included as ordinary income and tax paid.”
“If your seller has a second loan on the property—in the case of foreclosure, the second lender is cut off by that process. But this is a sale, so the lender often agrees to a percentage in cash. Some lenders are requiring sellers to sign an unsecured loan for the unpaid balance.”
“Your ace in the hole is that the lender doesn’t want the property.”
“If there is no sale, what can you do?”
A reverse mortgage, where the lender buys the property and pays you, can be a solution. “It sounds good,” Omer said, “but when you put it into effect, you don’t get much for your house—for example, a home with about $160,000 equity, a reverse mortgage might only pay about $20,000. That might work if that is the last place you are ever going to be.”
“Letting the house go to foreclosure by advertisement or judicial foreclosure may be the answer. If all else fails, tell your client to stop paying and wait to foreclose.”
A comment from the group described the situation where the husband and the children were in the house, the wife had left.
He stopped paying the mortgage, meaning he would be there for at least a year, rent free.
The court ordered that because there was no mortgage payment, the wife, who was paying child support, which was based in part on the assumption of a mortgage payment, would be cut by 75 percent.
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