New Jersey Attorneys, Practical, Strong, Respected Advice
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Courts, Modifications, Short Sales, and Deed-in-Lieu
By Nicole L. Voigt, Esq., Attorney at Law
Nicole L. Voigt, Esq., Real Estate Attorney
Homeowners facing foreclosure find themselves in a marketplace. They receive solicitations from private companies guaranteeing workouts (be careful – these are often scams). They hear newscasts of branded government programs intended to save homes. They receive notice of the opportunity to participate in foreclosure remediation. They receive notices from lenders, possibly including information on trial relief programs and pre-qualified programs. New programs are frequently publicized, while the eligibility requirements aren’t. Distressed homeowners find themselves in a maze of options and conflicting goals.
Adding to this complication, the investors and servicers of most mortgage loans change as the loans are assigned to new companies or transferred to new mortgage servicers, even in the midst of a foreclosure. This affects eligibility for programs, and leaves some homeowners unclear about who they should deal with. And for homes with first and second mortgages, even more questions arise. Once foreclosure papers are filed, the homeowners have a limited time to file a defense in Court, and/or to apply for Court foreclosure mediation.
So what is the lay of the land for homeowners facing foreclosure?
It depends. The distressed homeowner’s short and long-term goals must be compared to the currently available “loss mitigation” programs. Determining which programs are available requires identifying specific criteria of the loan, such as its servicer, investor, origination date, whether the home is the primary residence, etc. The client’s goals might include the following: 1) Stop the continued accumulation of debt; 2) Use current mortgage relief programs to obtain forgiveness of the mortgage debt without tax penalties; and 3) Obtain a final disposition of the foreclosure action as soon as possible. Each of these goals is discussed, below:
1. Stop the continued accumulation of debt. Once in default, unpaid principal and interest continue to accrue, and the homeowner is responsible for all of the lender’s foreclosure related expenses, including any escrow balance accruing for municipal taxes, if advanced by the lender. Therefore, the total amount owed on the debt increases with time. This results in both uncertainty and continued accumulation of debt.
2. Use current mortgage relief programs to seek forgiveness of the deficiency without tax penalties. The federal government programs for mortgage debt relief are currently marketed under the Making Home Affordable (MHA) program, and the various programs have eligibility criteria based upon the borrower’s loan terms and circumstances. These programs are important to homeowners because they provide incentives for lenders to forgive debt. These programs change and their continued availability is a political matter and cannot be guaranteed. For example, the MHA programs which were scheduled to expire on December 31, 2013, have been extended through December 31, 2015. These programs include, without limitation, the Home Affordable Foreclosure Alternatives program (HAFA, i.e. short sale or deed-in-lieu of foreclosure), the Home Affordable Modification Program (HAMP, i.e. loan modification), the Home Affordable Refinance Program (HARP, i.e. refinancing with negative equity). However, many of these programs are only available for loans originating prior to January 1, 2009, among other restrictive eligibility requirements. Visit www.makinghomesaffordable.gov for more information.
If not eligible for these programs, it is still important that the homeowner consult with their lender to determine if other programs might be available. New programs are still being developed and existing programs may be further revised. In addition, lenders have “regular” programs, whereby they grant relief outside of the Making Homes Affordable and similar programs.
In addition, as per federal rules, any debt discharged by a lender, whether after a foreclosure, through a short sale, or a deed-in-lieu, is generally considered taxable income by the Internal Revenue Service. However, the Mortgage Forgiveness Debt Relief Act of 2007 applies to mortgage debt forgiven in calendar years 2007 through 2013 for qualified principal residences and allows eligible discharged mortgage debt to be excepted or excluded from taxation. Obtaining a discharge of mortgage debt, while this program remains available avoids tax penalties for eligible loans. As of this writing, the program has not been extended into 2014, although the extension is being considered. For tax matters, I always recommend confirming eligibility with an accountant.
3. Obtain a final disposition of the foreclosure action as soon as possible. Delays in obtaining final relief from foreclosure will delay the homeowner’s financial recovery thereafter. Underwriting requirements on future loans typically require the passage of minimum time periods after foreclosure during which the homeowner must demonstrate positive financial history. During these minimum time periods, the homeowner’s ability to obtain credit for necessities and housing may be impaired. Disposing of the foreclosure starts the clock running on the recovery period, allows the motivated homeowner to begin taking steps to repair credit and save for a better financial future. Credit counseling is available.
Generally speaking, a homeowner facing foreclosure has five options:
1. Default Foreclosure. Allow the foreclosure to proceed through the Court uncontested. Eventually, the lender will obtain a default judgment of foreclosure and a sheriff’s sale will be scheduled. The home will be sold and remaining occupants removed. The mortgage lender may also seek a deficiency judgment against the borrower for all owed monies which are not paid by sale of the home. Although many lenders have foreclosed without seeking deficiency judgments, no homeowner should count on this outcome. Loss of the home and a deficiency judgment against the borrowers are the worst possible outcome, and the primary reason for considering other options that provide more certainty and potentially avoid a deficiency judgment.
2. Oppose the Foreclosure. File an answer to the foreclosure with the Court, based upon defenses to the foreclosure claim. This only provides relief if the homeowner can prove the defenses. Unfortunately, many foreclosures are indefensible, meaning the homeowners failed to pay without legal justification. The homeowner’s closing and loan documents must be reviewed by an attorney to determine if the foreclosure is defensible, and warrants the time and expense of a litigation defense.
3. Modification. Seek a modification or relief program refinancing and modifying the terms of the loan, to reduce the interest rate and spread the loan out over a longer period of time. Modified loan terms vary and must be carefully reviewed against a homeowner’s long-term goals. Most homeowners will only obtain a lower monthly payment by lowering the interest rate and spreading the loan out over a longer period of time. A balloon payment may still be owed at the end of the loan term. When evaluating a proposed modification, the homeowner should understand how long he or she would need to be in the home, and how much the market must improve, for the homeowner to again have sufficient equity in the home to sell it. Otherwise, the homeowner may likely be committing to remain in the home, without equity, for an undetermined period of time.
4. Short Sale. List the home with a realtor and seek approval from the lender to sell the home for less than it is worth. This is called a “short sale,” and approval must be obtained through the lender’s servicer of the loan. If a short sale is approved by the mortgage lender, the lender takes the proceeds of sale, and the homeowner is relieved of the home and the foreclosure action. As part of the short sale approval process, the homeowner should seek documented forgiveness of all monies owed to the lender in excess of the proceeds of sale. It is important that the homeowner use a real estate agent and an attorney who are familiar with the short sale process, and willing to do the extra work. Short sale approvals will contain conditions.
5. Deed-in-Lieu. Give the home to the lender. This is called a Deed-in-Lieu of Foreclosure, and approval must be obtained through the lender’s servicer of the loan. Deeds-in-Lieu, or DIL, are the simplest method for disposing of the distressed home. The homeowner signs a DIL agreement and the deed itself, and delivers the home to the lender free of all personal property and occupants, in exchange for debt relief. Like the short sale, as part of the DIL approval process, the homeowner should seek documented forgiveness of all monies owed to the lender. DIL approvals will contain conditions. This is sometimes called “Cash for Keys,” because homeowners might receive relocation assistance in exchange for the DIL.
During the foreclosure, the homeowner has the option of submitting the matter to Court foreclosure mediation. This might be helpful for contested foreclosures, and for homeowners seeking foreclosure relief through modification, a short sale, or DIL. Discuss with your attorney the costs/benefits of using the Court mediation program, and be aware of the deadline for filing.
I highly recommend consulting with an attorney to determine how the homeowner’s specific facts may change the general advice contained herein. The attorney can assist with formulating short and long-term goals, evaluating foreclosure defenses and whether an Answer should be filed in Court, determining a strategy for foreclosure relief, and submitting applications to the lender. It is important that a homeowner contact an attorney as soon as he or she is served with foreclosure papers, if not before, given response deadlines and accumulating debt.
BE ADVISED that these comments are not legal opinions and are not to be relied upon as legal advice. If you need legal advice, contact your county bar association; most of which have referral services.