Month: November 2009

The U.S. Treasury department announced this week that it would be taking action against lenders, which aren’t doing enough to do loan modifications for financially troubled homeowners.

Banks that took federal aid are required to help homeowners, who are in danger of losing their homes, modify their home loans in order to help stop the epidemic of foreclosures.  The U.S. Treasury department says that lenders who fail do enough loan modifications will face consequences. The US Treasury department’s announcement was not specific but consequences are likely to include sanctions and monetary penalties for these lenders.

This is the administration’s latest attempt to push its $75 Billion loan modification plan, which had originally hoped to help save 4 million delinquent homeowners from foreclosure. Latest figures, however, show that only 650,000 homeowners have had their mortgage payments temporarily adjusted under a trial modification; and, eventually only a very small fraction of just about 1% of these trial modifications eventually received long-term modifications as reported to the Congressional Oversight Panel.

Under the Home Affordable Plan, delinquent homeowners who qualify under the program are put into a trial modification for a few months to make sure than can handle the new modified monthly mortgage payments. To qualify for this program, homeowners need to meet some basic criteria, including owing less than $729,750 on their mortgage, having an owner-occupied property as well as having monthly mortgage payments which exceed 31% of a homeowner’s gross income.  

Homeowners who apply for and qualify under this program are put into a “trial” period (usually 3 months) where homeowners must make timely payments of their mortgage.  Homeowners who comply with their mortgage obligations during the “trial” period are then given the opportunity to make these mortgage payments permanent, usually for a 5-year period.       

The Treasury Department releases monthly reports on how many trial loan modifications lenders have approved. The result has been very dismal for the program. The report shows, for example, that some major lenders such as Bank of America, has been lagging behind competitors in signing up homeowners for this program. JP Morgan Chase, for example, only has a little over half or 92,500 borrowers who have been able to make the 3 monthly payments during the “trial” period but only 26% of those have also submitted all the required documents to qualify for permanent modification.  CITIGROUP, on the other hand, has been able to convert only 1,800 borrowers into permanent modifications out of the 89,000 “trial” modifications it has.   

These are indeed very low figures and it is certainly a very far cry from the objective of helping 4 million homeowners under the program. Let us hope that with the US Treasury department’s announcement this week to push banks on helping homeowners receive permanent loan modifications will yield more success than the results of the past few months.

(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

The threat of losing our houses in foreclosure is always very stressful. It is not necessarily news to many homeowners nowadays that foreclosure rates are already at an all-time high. Properties are being foreclosed by lenders left and right. Homeowners are being preoccupied with the daily grind of paying off mortgages or catching up payments on delinquent accounts. With so many problems that homeowners are dealing with nowadays it is not necessarily pleasant news to know that if and when a homeowner’s efforts to save a house fail; and, their properties are finally foreclosed by lenders, they may still yet face a new problem of being liable for “income” taxes on the foreclosed property with the Internal Revenue Service (IRS).

This is a very common situation with homeowners who bought a house (or a townhouse or a condo) within the last few years. A homeowner, for example, may have bought his real estate property in 2005 and then suffered financial reverses when the property values declined in 2008. Unable to keep up with mortgage payments, many homeowners in this situation had their properties foreclosed in 2009.

For a specific example, let us assume that at the time of foreclosure in 2009, the mortgage balance still owed by the homeowner to the lender was $550,000. The house was foreclosed and sold at a foreclosure sale for only $350,000.  Fortunately for the homeowner, the unpaid balance of $200,000 was cancelled by the lender. Unfortunately for the homeowner, however, the lender issued an IRS form 1099 to the homeowner for the cancelled debt. How is this $200,000 cancelled debt treated by the IRS? Is this taxable?

If you borrow from a bank and the bank cancels or forgives your debt, the amount of debt that is cancelled is considered “income” for federal tax purposes.  This is considered “income’ because money was lent to you and you are no longer required to repay it. Hence, cancelled debts are generally taxable.

Fortunately for many homeowners, however, the Mortgage Forgiveness Debt Relief Act of 2007 grants some relief to homeowners.  This law gives tax relief to homeowners who would otherwise be taxed on the cancelled debts for qualified principal residences. It should be noted, however, that this debt relief act is limited by the following:

1. It only applies to a debtor’s primary home. It will not apply to second homes, vacation homes or investment properties.
2. The indebtedness that was forgiven was incurred for the purpose of acquiring, constructing or substantially improving the principal residence of the debtor. Hence, home equity debts which were incurred not to improve the home but are mortgage debts not related to the home such as educational, medical or consumer debts remains subject to income.
3. This law is only temporary and only applies to discharge of debts between the calendar years 2007 and 2012.
 
Homeowners losing their principal homes via foreclosure (though also applicable to short sales, or deeds in lieu) within the next 3 years will benefit greatly from the Mortgage Debt Relief Act.  However, homeowners who are not covered by this Act, may have to do some bit of tax planning in order to soften the impact of the “income” taxes due on their foreclosed properties.

(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

Millions of Americans are wishing for some form of financial relief through loan modification from lenders. Unfortunately, however, the reality is that only a small portion of loan modification applicants are benefiting from the loan modification program being encouraged by the government while millions are still hoping for relief.

A couple that was already in bankruptcy proceedings came to see me last week. The situation of this couple is not unlike the situation of many other American couples today.  Prior to the housing bust, this couple had previously owned 4 houses. The last few years, they had invested their life savings on the down payment of these real estate investments. As should already be obvious by now, the values declined and this couple last all their equity (hence, their life savings) on these investments turned bad.

Three of their real estate properties have already been foreclosed while only their primary home remains.  Though the spouses are already in their mid 60’s and already receiving retirement income, both are forced to continue employment as they need the additional income to pay for the mortgage on their primary home.  The situation, however, went from bad to worse when they also informed me that they were already 10 months delinquent on the mortgage payments of their primary home. In addition, the property value of their home is already way below the mortgage obligation.   

Prior to coming to see me, this very sweet couple had already been to various loan modification seminars sponsored by certain individuals. They found one whom they liked and proceeded to give their trust to these individuals who then promised that their loan modification would be approved. No approval came, hence, the foreclosures of their 3 properties. The only reason their primary home has not yet been foreclosed is because they are in a bankruptcy proceeding that has temporarily halted the foreclosure of their home.  Eventually, however, this Stay of foreclosure by the bankruptcy court will be lifted and the lender will be able to foreclosure on the home if they continue to remain delinquent.    

This very sweet couple has pleaded with me to help them save their home.  They do not have a place to go should their house be foreclosed. They want me to do everything possible to save their primary home. They have already exhausted their savings with their bad investments. They have also expended many more thousands of dollars the past year on loan modification services, which went nowhere. Now, they have practically exhausted all their financial reserves.

Just by looking at the income that they are currently receiving and comparing it with the mortgage payments (not to mention the real property taxes and insurance they have to pay on the home), it is clear that they do not have the financial capacity to continue with their mortgage payments. More than half of their monthly income needs to be allocated to mortgage payments just to be current, not to mention the 10 months of delinquent mortgage payments that they will need to update if they want to keep their house. The hardest thing for me to do was to make this couple realize, that with their financial situation, they could not afford to continue paying for their primary home. They had to realize that they would eventually loose their home. It’s not a question of “if” but a question of “when” that will happen.

In this particular case, it does make sense for this couple to stop paying the mortgage. Instead of paying the mortgage my advise to this couple is to just stop paying their monthly mortgage payments and save whatever monthly mortgage payment they are supposed to make.

They, however, do not need to abandon the house now. Instead of going out to rent an apartment, my advise to them is to stay put in the house. Why go rent an apartment when you can stay in the house (for now) rent-free. In California, for example, it would take around 4 months for a lender to extra-judicially foreclose a property from the time it gives a delinquent notice. Assuming the couple still does not leave the home even after foreclosure, an eviction action will have to be instituted which may take probably another 2 to 4 months. At the very least, therefore, the couple would be able to stay in the house a few more months rent-free even if they continue not to pay the mortgage now.  Thus, if they were paying mortgage of $3,500 a month and they save this mortgage for the next 8 months before they are forced to leave the house that would give them $28,000 at the end of 8 months. This is money that they can use as deposit and payment for their apartment plus whatever other personal expenses they may need. In this situation, though they may eventually loose their home, they will at least have some savings to tide them over the difficult times.

Homeowners who are struggling to make mortgage payments should be aware of what their financial end game is. Some homeowners keep on dipping from their savings or keep on borrowing money just to make the monthly mortgage payments on a house they can hardly afford to keep. Eventually when credit is exhausted or savings are gone, that house will go into foreclosure. Not only will the homeowner loose the house, the homeowner will also have lost all his savings too.  For some homeowners, it may just make more sense to accept the inevitable and accept loosing a house but retain whatever savings the homeowner still has. Homeowners who do not plan ahead may have no choice and end up loosing BOTH the house and whatever savings the homeowner may still have left.

It may be important for us homeowners to realize that in these difficult economic times, we may just need to return to the basics. After all, a house should just be a shelter for us.  There is no need to be emotionally attached to a particular house. Though the home we reside in now may be the house that gave us so many happy memories, we have to also realize that those happy memories reside in our hearts and minds; and, not in any physical abode.

(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