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Foreclosures are looming in the future of over 2 million home owners across the country.
The total number of delinquent loans has reached a new high at 11.2% of all loans. Pay option ARM loans are now showing a delinquency rate of 30%. Over 2 million loans across the country are now seriously delinquent. The numbers of delinquent homes are rising faster than numbers of loans being modified.
If foreclosure is looming in your future, either due to a job loss, cut back on income, increased mortgage payment, or whatever other variable that has created this issue, what are some of the things you need to consider and what are some of your options?
The consequences of a foreclosure can go way beyond losing your house and watching your credit score tank. The actions a lender can take after a foreclosure varies from state to state, but here are some of the things you need to consider if you find yourself in trouble:
1. What assets do you have? Are any of these assets subject to lender seizure or holds?
- • Bank accounts
- • 401K, IRA – retirement accounts are exempt from bank seizure
- • Investment properties
- • Personal investment accounts not connected to retirement
2. What source(s) of income do you have? Is any of this income subject to garnishment?
- • W-2 earnings
- • Disability income
- • SS income – cannot be garnished
- • Freelance or contract income
- • Rental income
3. Should you be considering a short sale? What are the consequences? What actions can a lender take if you do a short sale?
- • Deficiency judgment (this is where the lender files a judgment against you for the amount of the loss it has sustained
- • Tax consequences (If the lender forgives your debt, will your lender’s loss be considered taxable income to you?)
4. Should you offer your bank a deed in lieu of foreclosure rather than waiting for the foreclosure to happen?
5. Can you file bankruptcy to get out from under the debt, and if so, will this protect you from other potential consequences?
6. How long can you stay in your house if you are facing a foreclosure?
7. Should you hide everything you own in your mattress prior to becoming delinquent?
Because foreclosure and short sale laws differ from state to state, the first thing you should do before you become delinquent, and certainly before you lose your home, is seek assistance, either from a foreclosure counseling agency (such as Neighborhood Housing Services, Legal Aid, or LifeSpan) or an attorney. Most attorneys will see you at least once free, for a consultation. During this consultation, you should have all the above questions written down and expect answers about the laws in your state.
Talk to your lender about a "forbearance" of your mortgage payments for a period of time. The FDIC is working with lenders who have received TARP funds to get them to allow forbearance of payments for up to six months, for those who have become unemployed, or have had work hours cut back.
Deficiency judgments: Deficiency judgments are expensive for lenders, but we are hearing that many lenders are filing anyway, even if they have no expectation to ever collect. This judgment will follow you for the rest of your life. It does not go away, and will accrue interest penalties until paid or settled. If you are considering a short sale, your realtor should be negotiating on your behalf, prior to a short sale being accepted by your lender(s) to ensure that a deficiency judgment will not be filed against you.
In the case of a foreclosure, if you have both a 1st and 2nd mortgage, it is likely that the 1st mortgage holder will be the one to file the NOD (notice of default). This causes the 2nd mortgage holder to be left with no property to secure the debt, and it is usually the 2nd mortgage holder that files a deficiency judgment.
Tax consequences: Lenders that sustain a loss in the sale of the property are supposed to file a 1099C with the IRS to report the amount of debt forgiven as income to you. The good news is that Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 which 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, qualify for this relief. NOTE: You must file a FORM 982 with your tax return in order to have the debt forgiven.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
Second mortgage holders may or may not be subject to the Mortgage Forgiveness Debt Relief Act. It is very important for you to consult with an attorney, prior to a foreclosure, to find out what laws apply in your state and your unique situation. In general, if the second mortgage was part of your purchase transaction, the amount of that loan is subject to the exemption from taxes. But if the second mortgage is a refinance transaction, (which resulted in cash to you for any reason, with the possible exception of home improvements), you may be subject to tax on the amount that exceeded the original loan amount.
It is always advisable to consult with an attorney if you are facing a foreclosure or some other recourse regarding disposition of a property you can no longer afford. You may find that there are options available to you that are “counter-intuitive.” (do not seem to make sense).
Of course, when a home owner is facing foreclosure, there are many who feel they cannot afford legal counsel at this very critical time of their financial lives, but it is perhaps one f those times when it is most crucial to get legal advice. Most attorneys who cousel people facing foreclosure or bankruptcy do offer a free consultation, and you should definitely avail yourself of this assistance as you walk down this road. What you don't know can have very long term consequences for your and your family.
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