Month: July 2009

Unemployment rates have risen to 9.5% as of the end of June 2009. As unemployment rates have worsened, so too have foreclosure rates.  A higher foreclosure rate is a natural consequence of people losing their jobs.  No job means no money to pay the mortgage. While some may be able to cover their mortgage payments for a short time after losing their jobs by using their savings, eventually these savings also dry up and families do look at the real possibility of foreclosure.
 
The Obama administration has already been promoting a program for the past few months to loan modify and loan refinance under its making home affordable program.  The result of this program, however, has not been as dramatic as hoped for.  Though many have already gained the benefit of loan modifications under said program, the numbers are not as many as had been hoped for. 

Under the Obama administrations’ making home affordable program, homeowners would be able to modify their loans so that the monthly mortgage payments would not exceed 31% of a homeowner’s gross income.  The main qualification for a homeowner to qualify for this loan modification program, however, is that the homeowner is currently employed or has a regular income. These existing programs do not help the jobless because they don’t have enough income to pay for the mortgage even at a reduced monthly payment. Hence, the situation of unemployed homeowners is making the job of loan modification even harder than it already is.

Per CNN report, the Obama administration is scheduled to meet with 25 service providers, who are struggling with a flood of troubled borrowers, in Washington, D.C. this week to discuss the program’s implementation and problems as too many homeowners are still struggling with monthly mortgage payments.

The mortgage crisis started with sub prime borrowers defaulting on their loans. It is now fueled by rising unemployment, which is causing borrowers with good credit to default on their mortgage loans.  Loan modification prevention efforts are still failing to stop the tide of foreclosures. That’s why there’s a proposal by some experts for the administration to do more.  The proposal by some advocates involves giving the jobless a housing voucher with their unemployment check to cover their housing costs.

Senator Jack Reed (D-R.I.) plans to introduce a bill that calls for providing mortgage assistance payments to the unemployed. 

Senator Jack Reed’s statement reads:  “Soon, I plan to introduce foreclosure prevention legislation that would provide mortgage assistance payments to homeowners……… This program, administered by state housing finance agencies and other entities, would be for homeowners who have lost income through no fault of their own and who have reasonable prospects of employment. Qualified homeowners will receive grants or loans to help make past due mortgage payments and to pay a limited number of future payments. Homeowners whose circumstances simply make keeping the home impossible would be eligible for relocation assistance.”    
   
It is still not clear if this bill, when introduced in Congress, will pass. Some lawmakers see this effort as a waste of taxpayer money since it has low success rates. This contrary view maintains that measures to help people avoid foreclosure will only prolong the agony of the homeowner by using taxpayer resources to continue paying for mortgages that are just not sustainable by the homeowner. This view advocates that the best way to help the unemployed is to not give handouts of financial assistance to homeowners but simply promote policies that will create jobs.

What do you think? Either way, you can have your voice heard by calling your representatives in Congress expressing your support for one or the other if and when the bill is introduced in Congress.

(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old.  Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com.)

We seem to be getting, not surprisingly, a lot of questions about foreclosures. A common query asked by clients recently is the question of whether a homeowner would still be liable on a Second loan after the primary lender has already foreclosed the home.

Whether you take a first or a second mortgage on your home, you are responsible for the repayment of those loans. The general rule is that a home is merely used as a security against your loan. The fact that the home was foreclosed and there was only enough money to pay the first loan merely cancels the security of the second loan but you will still remain liable on the second mortgage loan.

The important thing to understand is that the homeowner is liable for a loan. The property is only used as a collateral for that loan. When a first loan forecloses the property, it may wipe out the security interest of the second loan but it does not wipe out the second loan itself.  Hence, the second lender can still run after the homeowner in a collection action.  

Fortunately for some homeowners who live in California (and some other states), there may be exceptions where the second loan itself can be extinguished. This would be limited to cases where the second loan was for a “purchase money” loan (a loan that is used to buy a house as opposed to a refinance or a home equity line).  These loans refer to cases where the homeowner had incurred both the first and the second loan at the same time during the initial purchase of a home.  The theory is that both the first and second lender made the purchase of the home possible and should not have done so if they weren’t willing to accept the house as their only collateral.

The follow-up question that many clients often ask in conjunction with foreclosure is the question of taxation. Lenders usually issue IRS form 1099-C on the cancelled debts of these foreclosed properties. Homeowner Juan, for example, may have a first mortgage loan of $400,000 and a second mortgage loan of $100,000.  When homeowner Juan’s home was foreclosed, it was sold at auction for only $350,000, which was not able to satisfy both the first and second loan. Juan received an IRS form 1099-C from the first lender in the amount of $50,000 for the unpaid debt; and, another 1099-C from the second lender for remaining $100,000 unpaid debt also.  Is Juan liable for taxes on the $150,000 ($100,000 + $50,000) cancelled debts?

Under the Mortgage Relief Debt Relief Act of 2007 the US Congress allowed taxpayers to exclude income from the discharge of debts in their principal residence.  Hence, debt relief forgiven in connection with a foreclosure is not taxable. This law applies to foreclosures and debt relief for the calendar years 2007 to 2012.  It is also important to note that this law applies to a “primary” residence only and different rules apply to second homes or investment properties.

A little caveat for our readers is that there are 50 different states, so there would probably be 50 different answers to this question. Practicing in California, I have discussed this question based on California law. Though the law in California may be the same in many other states, it is suggested that readers seek proper legal advice for their individual situations. The discussions above may or may not be applicable to all situations.

(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old.  Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com.)