Short-Sale Pickle
Here is a glimpse behind the curtain of short-sales, and a very typical example of what is happening in the field.
Comment on what you think occured here:
REOs & Short Sales “Ripe With Fraud”
Most mortgage fraud takes place in the short sales and REO space, according to Rob Hagberg, associate director of fraud investigations at Freddie Mac. “This area is ripe with fraud,” he said during a webinar hosted by CoreLogic.
While servicers and others in the industry have adapted to some fraud schemes and put measures in place to detect and prevent fraud, schemes continue to evolve as fraudsters find new ways to manipulate sales.
For example, many fraudulent REO and short sale transactions involved the use of a straw buyer who temporarily purchased a home at an undervalued price and then sold it to a third party at a higher price.
These transactions would be immediately suspicious to anyone reviewing property records, which would show a home was sold for one price one day and then almost immediately resold at a higher price. Savvy perpetrators are now eliminating the second buyer. Property records will not reveal a middle buyer, but they will reflect a higher price than the servicer agreed to.
Another growing trend in short sale fraud is what Hagberg calls the “short sale and stay.” This occurs when an underwater homeowner wishes to keep his or her home but wants to lower his or her loan amount.
The homeowner will recruit someone—often a friend or family member—to purchase the home through a short sale, and the original owner will remain in the home.
Sometimes, a wife will use her maiden name to purchase the home from her husband, and the couple will stay in their home.
Both short sale and REO fraud often require fraudsters to convince servicers a home is worth less than it actually is.
To accomplish this, fraudsters have attempted to bribe REO brokers, manipulate MLS data to lower the prices of comparable properties, and have engaged in reverse staging to make a property appear in worse condition than it is.
In cases of reverse staging, Hagberg has seen cabinet doors removed from kitchen cabinets, garbage left lying around the home, and sometimes old fish hidden behind refrigerators to create pungent scents.
Sometimes BPOs include false property stigmas such as high crime rates, and in a few instances Hagberg has seen properties undervalued by as much as $40,000 under inaccurate statements that the home had been a meth lab and would need to be entirely gutted.
http://www.dsnews.com/articles/reo-short-sale-fraud-continue-to-evolve-2013-05-10
No State Relief Yet
A bill that would extend for one year state income tax relief provided to homeowners who receive mortgage relief from their lenders was temporarily put on hold in the Legislature on Monday.
If enacted, it would align state law with federal law, which has been extended to provide another year of tax relief.
Through “short sales,” lenders agree to let borrowers sell their homes at a price lower than the amount owed on their mortgage. They then forgive the difference between the sales price and the amount owed. Historically, such loan forgiveness has been treated as income for tax purposes.
The federal Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure or short sale of a primary residence up to $2 million, qualifies for the relief.
The state law providing more limited relief than the federal act. It excluded from taxable income up to $500,000 in debt forgiveness.
AB 42 by Assemblyman Henry Perea, D-Fresno, would extend the state law for a year. The Franchise Tax Board estimates its enactment would reduce state tax revenue by $50 million this year.
The bill was presented to the Assembly Committee on Revenue and Taxation on Monday. As it routinely does with measures that would significantly affect state revenue, the panel delayed taking action until the details of next year’s budget projections become clearer.
Read more: http://www.vcstar.com/news/2013/apr/01/bill-seeks-to-extend-state-tax-relief-for-debt/#ixzz2PGp6Rkhv – vcstar.com
Non-Distressed Retail Environment
For this being the last scheduled year for the debt-tax exemption, the distressed listings are sure dripping out slowly around here.
Here are the number of January short-sale and REO listings in NSDCC:
| Year | Short-sales | REOs | Percent of all new listings |
| 2010 | |||
| 2011 | |||
| 2012 | |||
| 2013 |
The 4% mark should be the point where we can say that this is a retail, non-distressed environment – what we used to call a seller’s market.
It means that sellers can probably expect 1% to 5% more than the last nearby comparable sale, and maybe more if everything goes right (better location, upgraded look, lack of other choices, and experienced listing agent).
Respect one thing – the buyers have the money.
Bank Incentives For Short Sales
There are all kinds of incentives available to short sale sellers throughout the United States. Those incentives range from a few thousand dollars all the way up to $35,000 (enough to pay for some of your kid’s college education).
Here’s a summary of the most common incentives available:
Bank of America Cooperative Program: In this program, qualified households that participate in this short sale program will receive $2500 at closing. Some folks may even get up to $30,000!
HAFA: In this program, qualified households who participate in this program (which has both short sale and deed-in-lieu of foreclosure options) receive $3000 at closing. (Fannie Mae and Freddie Mac also participate in HAFA.)
TAP: In this program, qualified California households that participate in a short sale or deed-in-lieu of foreclosure will receive up to $5000 at closing.
Wachovia: Wachovia Bank frequently sends borrowers letters asking them to participate in a short sale and offering an incentive in the letter. Sellers should read their mail and save the letter so that they can redeem the incentive at closing (usually between three and five thousand dollars).
Litton: Litton Loan Servicing frequently sends borrowers letters asking them to participate in a short sale and offering an incentive in the letter. Sellers should read their mail and save the letter so that they can redeem the incentive at closing (usually between three and five thousand dollars).
Citi and Chase Bank: Both of these mortgage lenders are now sending certain borrowers letters offering them the option of participating in a short sale for a significant incentive (often between 20,000 and 35,000 dollars). Read the fine print on the offer and follow all of the rules in order to receive this incentive at closing.
Now that the incentives are so big, short sale sellers who are getting these big checks are both excited and curious. Not only does the headache of the short sale go away when the deal finally closes, but the pleasure of the big check is exciting. Nevertheless, many short sale sellers are wondering whether the incentive is taxable. That is, does the short sale seller have to pay taxes on the amount of the incentive check just as if this check were income? Probably – check with an accountant!
Equity’s Big Comeback
Maggie Medved was stuck with her Phoenix house for two years after the market crash wiped out the equity in the property. Last year, as prices in the area rose by the most in the U.S., she and her partner were finally able to sell the 3-bedroom 1950’s style home and move to a larger place.
“We were counting the days for when we could move,” said Medved, 40, who trains employees for weight loss company Jenny Craig Inc. “We definitely knew it was a waiting game because it would’ve been financial suicide if we had sold earlier.”
Medved was among the 12 million borrowers in the U.S. who at the peak of the real-estate downturn owed more on their mortgages than their houses were worth, blocking them from moving or saving money by taking advantage of the lowest borrowing costs on record to refinance. As prices recovered, the number of underwater borrowers fell by almost 4 million last year to 7 million, according to JPMorgan Chase & Co. , and could drop to 4 million within 2 years.
The housing market is rebounding faster than anyone thought possible, according to Blackstone Group LP ’s global head of real estate Jonathan Gray, as the Federal Reserve buys mortgage bonds to keep rates near record lows and investors sop up a diminishing supply of properties for sale. Housing construction could boost U.S. gross domestic product by 0.4 percentage point and home price appreciation may add another 0.2 percentage point, Bank of America’s senior economist Michelle Meyer forecasts.
Click on “View Individual Post” link for full story >>>
Year of the Short Sale Again?
Hat tip to Mr. T for sending this along from sddt.com:
Underwater borrowers have one more year to swim to the surface and short sell their homes before facing income taxes on the forgiven debt.
The Mortgage Forgiveness Debt Relief Act (MFDRA), set to expire on Dec. 31, 2012, was extended to the end of 2013 as part of the “fiscal cliff” resolution.
“It is the only thing that I really cared about when it came to the ‘fiscal cliff’ because there was no sense in letting it expire,” said Shanna Welsh, attorney and real estate broker at Southern California Realty Law.
When someone short sells a home, the forgiven debt is considered income to the homeowner. With the MFDRA in place, that taxable income is forgiven.
“Say, for instance, the loan was $400,000 and the home resells for $300,000. The $100,000 bank loss would be taxed as ordinary income,” said Alan Nevin, principal at The London Group. “Worse, the loss would most probably push the homeowner into a higher tax bracket, thereby doubling the pain. For most homeowners that would result in the necessity to file a Chapter 7 since there is no way they would pay the taxes. Basically, their lives would be ruined.”
Welsh said she had several short sales in which the homeowners were desperate to close before the act’s expiration at the end of 2012, and none of those homeowners would have been able to close their short sales in time.
The extension was made on a federal level, Nevin said, and the state has yet to act on its extension. Senate Bill 30 (Calderon, D-Montebello) will extend the act in California for another year if it is passed, according to a release from the California Association of Realtors (CAR). The measure will be effective retroactive to Jan. 1, 2013 if passed.
“The MFDRA extension is of major importance, but it is only for one year. I strongly suspect that millions will take advantage of that ‘breather’ and place their homes on the market in 2013, not wanting to take a chance that the act will not be extended again,” Nevin said.
Nevin said he expects sales to increase as a result of more people able to take advantage of the declining prices resulting from the MFDRA.
“I believe this is necessary for the homeowners that are still in distress but want to avoid foreclosure, and a critical part of our housing recovery,” said Donna Sanfilippo, president of the San Diego Association of Realtors. “We are already seeing previous homeowners that experienced having a short sale two to five years ago reentering the housing market. Yes, I do believe it was a necessary component to our continued housing recovery in San Diego.”
NSDCC Short-Sale Counts
Attorney ‘Kingside’ concurred with sdbuyer that the California debt-tax exemption mirrors the federal-law deadline, and will expire tomorrow unless something changes:
The California act (SB 401) was designed to conform with existing federal law and both are scheduled to expire at the end of the year. sdbuyer’s link to the FTB site is accurate as far as I know.
I heard that the California legislature was willing to extend if the Feds were going to extend. With a democratic supermajority sounds like it would happen. But who knows with the Fed extension up in the air at this point.
Its the kind of thing that could still happen after the fact, January or February or even later.
Has there been a big rush of short-sales being completed leading up to tomorrow’s deadline? Furthermore, was 2012 the Year of the Short Sale, as predicted?
Here are the quarterly stats for detached-homes sales from Carlsbad to La Jolla (NSDCC):
| Quarter | #Shortsales | Avg. $/sf | #Non-Shortsales | Avg. $/sf | SS% of Total |
| 1Q11 | |||||
| 2Q11 | |||||
| 3Q11 | |||||
| 4Q11 | |||||
| 1Q12 | |||||
| 2Q12 | |||||
| 3Q12 | |||||
| 4Q12 |
There wasn’t a big rush around here as the deadline approached, and the pricing trend is disturbing. The banks have stopped the foreclosure machine – there were 21 REO listings closed in 4Q12, at an average of $345/sf. But banks should wonder if short-selling is the answer, when you compare the pricing.
With potential short-sellers faced with losing out on possible future appreciation, and having to pay high rents if they sell, it seems unlikely there will be much change in the SS count next year.
If the debt-tax exemption doesn’t get extended, then potential short-sellers will have another good reason to not sell. With the California Homeowner’s Bill of Rights taking effect on Jan. 1st, it would be a great time for them to just not pay, and wait.
Debt-Tax Relief on Cliff
California state law already provides debt-tax relief, so owner-occupants here are covered.
Homeowners and banks are accelerating sales of properties for less than the amount owed as a U.S. law that gives them a tax break expires at the end of the year.
The transactions, known as short sales, increased by 35 percent in the third quarter from a year earlier, while sales of bank-owned homes dropped 20 percent, according to a report today by mortgage data seller Renwood RealtyTrac LLC. Together, they accounted for 41.5 percent of home purchases in the quarter.
Short sales have accounted for as many as 1.1 million transactions since 2009, helping to reduce the inventory of homes owned by banks that can blight neighborhoods and flood the market. Barring a last-minute extension of the 2007 Mortgage Forgiveness Debt Relief Act, homeowners will be taxed on the forgiven principal. With Congress focused on the so-called fiscal cliff, federal spending cuts and tax-rate hikes set to kick in on Jan. 1, the law may not be extended, leading to a drop in short sales and a rise in foreclosures.
“If you’re struggling to pay your mortgage, it’s not likely you can afford an extra $25,000 or $35,000 tax bill to avoid foreclosure,” said Edward Mills, a financial policy analyst at FBR Capital Markets in Arlington, Virginia. “Mortgage forgiveness has become part of fiscal cliff politics.”
Short-Sales Slowing
Those paying attention are seeing realtors continuing to commit short-sale fraud, and about the only hope for it to end is for short sales themselves to run out of steam. If the debt-tax relief doesn’t get extended (unlikely but possible) and those underwater sense an appreciating-market, we could see short sales go away.
This was one failed attempt – the realtor initially priced this short-sale listing at $475,000, only to raise it to $627,000 once his phone lit up like a Christmas tree.
The mortgage industry has been slow to react, but this article (free w/registration) mentions one paragraph of hope too:
Another developing practice is to look for pricing patterns with realtors. One red flag is when certain Realtors are consistently involved in transactions for properties that sell well below market value. This can indicate that the realtor is providing below-market-value BPOs to influence the asking price.
Could we be done with short sales in the next year or so?
Jim Klinge
Klinge Realty Group
Broker-Associate, Compass
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