Time Running Out for Tax Relief on Forgiven Mortgage Debt

As it stands now, this will be the last year that many financially distressed homeowners will be able to do a short sale or foreclosure and not get a tax bill for the forgiven debt. In the past, if someone had any debt forgiven, it was treated as income on their taxes. In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act, which waived the tax liability on forgiven mortgage debt under certain circumstances. This was renewed once, but is set to expire at the end of 2012.

Considering that many homeowners are under water $10s of thousands or more, this tax liability could really add up for anyone who waits too long. See the video below for an example.

What does this mean for homeowners? As mentioned by Alex Charfen at the Distressed Property Institute, if someone is considering a short sale, they need to take action now. Short sales can take a number of months to get approved and there will be a huge rush at the end of the year. For anyone who’s uncertain about their options, it’s a good idea to talk with a real estate agent who’s knowledgable about short sales, as well as an attorney and CPA.


As a disclaimer, this is for informational purposes and not intended to be legal or financial advice.

Bank of America Allows Select Few to Stay in Homes And Lease Back

Bank of America recently announced a program to allow some struggling homeowners to sign their deed over to Bank of America (similar to a deed-in-lieu) and then rent the home back for up to three years. This pilot program, called “Mortgage to Lease,” will initially be tested in only Arizona, Nevada, and New York and will be offered to less than 1,000 of their customers. Bank of America will hand select the participants and reach out to them. Unfortunately, there is no way to apply for the program as indicated on Bank of America’s press release, “there will not be any opportunity for customers to volunteer or apply for consideration.”

According to Bank of America, those who successfully complete the program will be forgiven of their mortgage debt. They will then be expected to rent their home back at market value, which would presumably have to be less than their current mortgage payment for their participation to make sense.

It’s a very narrow scope of who would qualify for this program. The loan must be delinquent for more than 60 days, the home must be owner-occupied, foreclosure seems inevitable, no second liens, you have to be able to afford the market rent payment, and the loan has to be owned by Bank of America (even if you currently make your mortgage payments to BofA, they may not technically own the loan).

My assumption is that we’ll likely not see this in Flagstaff, at least not initially. I’m guessing they’d want to stick to a few large markets to get the administrative efficiencies of dealing with fewer property managers and analyzing fewer rental markets. I’d be curious to hear from anyone in Arizona who’s solicited for the program outside of the Phoenix area.

Keep in mind that Bank of America is only offering this to 1,000 people, which represents a very small fraction of all their customers facing default. Even if a homeowner isn’t contacted for this program, it’s important that they know there are often better options than foreclosure. Many people could still be eligible to do a short sale and avoid many of the consequences of foreclosure.

Bank of America Press Release

Distressed Property Institute

Special thanks to Alex Charfen of the Distressed Property Institute for keeping us CDPE®’s up to date on these issues.

As a disclaimer, this is not intended to be advice, legal or otherwise. It is also not intended to be an official or comprehensive guide to this program, as their terms could change. See Bank of America’s website for more information.

Bank of America Refines Short Sale Process

The Distressed Property Institute recently hosted a webinar with Mr. Bob Hora, Senior Vice President of Bank of America, to discuss recent updates to BofA’s short sale process.

Mr. Hora asserted that Bank of America is committed to doing short sales and rejected the myth that banks have incentive to foreclose, saying that the bank doesn’t want more repossessed property on their books. Some interesting figures: Bank of America closed 42,000 short sales in 2009, 90k in 2010, will close more than 100k in 2011, and they plan to do even more in 2012.

Short sales have a reputation for taking a long time and BofA’s goal is to shorten the process. They’ve been hiring more people and have gone from 200-250 short sale employees a couple years ago to now having 3,000 employees working just on short sales!

Bank of America is sending out targeted solicitations to homeowners who are at risk of foreclosure. This includes a transition guide that goes over options to avoid foreclosure, deed-in-lieu (DIL) of foreclosure, why you should consider a short sale, HAFA, avoiding scams, etc.

Mr. Hora went over some of the reasons that keep BofA short sales from closing, such as improper documentation, valuation issues, unallowable fees, etc. Also outlined were the specific procedures to escalate a problematic BofA short sale. It is Bank of America’s belief that a “trained agent…makes a big difference.”

He reiterated that agents should be expanding their short sale knowledge, should know their marketplace, and should set appropriate expectations with everyone involved. Short sales aren’t going away anytime soon and they’re usually a worthwhile alternative for homeowners facing foreclosure.

In Flagstaff, the number of short sales and foreclosures have been holding steady, but with improved processes and agent training on short sales, perhaps we’ll be able to put a dent in the number of foreclosures.

Pre-Approved Short Sales

Some buyers in Flagstaff seem to be wary of making offers on short sales for a couple reasons in particular. They don’t know how long the process will take and whether the short sale or price will even be approved.

This is understandable considering that in a conventional short sale, the seller’s lender (who has to approve the short sale) isn’t involved much, if at all, until there is a contract to purchase the home. There are things a knowledgable real estate agent can do to shorten the time frame and increase the chances of success; however, in this situation there’s no way of knowing exactly if and when the short sale will be approved.

Herein lies the benefit of pre-approved short sales. In a pre-approved short sale, the seller’s lender approves the short sale upfront (before an offer is made). They determine a minimum price or net proceeds that they’ll accept and they usually have set time frames for responding to offers. As you can imagine, this makes the listing that much more appealing to buyers, who then have a better idea of their chance of successfully closing on that short sale in a reasonable amount of time. Another benefit is that there’s usually a specific amount of time that the foreclosure process is halted while the seller attempts to sell the home.

The two most common types of pre-approved short sales are HAFA and FHA. In these programs, the short sale is processed through your lender but the guidelines and qualifications are set by the government. Unfortunately, not every loan or borrower is a candidate for these programs and not every lender participates; however, it’s worth finding out. Many major lenders, such as Citibank, Wells Fargo, Chase, and BofA are also beginning to roll out their own “in-house” pre-approval programs. If you’re a homeowner considering a short sale, the first person to talk with is a real estate agent who is knowledgable about short sales and can walk you through some different options.