The LA Times recently ran this article stating that homeowners who have received a loan mod are still vulnerable to defaulting on their loan.

Specifically, the article stated that “at the end of the first quarter of 2013, the (Treasury Department’s TARP Program) report found, nearly half the oldest of the HAMP modifications, from the third and fourth quarters of 2009, were going back into default.” The article goes on to give specific statistics of these “re-defaults”.

We’re coming up on the middle of 2013. What many homeowners are facing – and maybe don’t know – is that the benefits of the 2007 Mortgage Debt Relief act were extended only to the end of this year under the American Taxpayer Relief Act of 2012. If and unless Congress extends it (doubtful I think at this time), homeowners doing a short sale (or losing their home in foreclosure) in 2014 will be 1099’d without the benefit of the current IRS debt forgiveness.

If you’re struggling to keep up with your loan mod payments, consult your tax adviser sooner vice later to see what tax implications you may be facing next year – if worse comes to worst.

Bank of America recently announced that “as of January 15, 2013, there will no longer be a temporary foreclosure hold during the Cooperative Short Sale property marketing phase. We may begin or continue the foreclosure process up until a submitted offer to purchase the property is approved by all relevant parties.  Any existing short sale will not be impacted by this change.”

The cooperative short sale has been used when a homeowner does not qualify for the US Treasury’s HAFA (Home Affordable Foreclosure Alternative) program.

Yesterday the LA Times had a front page article explaining why banks today are pushing short sales – and getting them done.

Realtors, buyers and sellers in the past dreaded doing short sales – banks took forever to approve the offers (the buyers would lose patience and move on to another property) and it seemed like the lenders were always asking for more paperwork (which had already been sent in and “misplaced”).

But those days are pretty much gone. Lenders have staffed up to handle the load, offers are being reviewed in 10 days or so and in California, the new Homeowner Bill of Rights makes it easier for homeowners to do a short sale after they’ve considered all their options.

Contrary to what some might think, lenders don’t want to foreclose on a home. A vacant house is subject to vandalism, decreases neighborhood values and will probably be sold for less as a bank owned property vice had it been sold as a short sale.

Unfortunately, many homes still go through foreclosure in Ventura County, often because the homeowner waits too long before trying to do a short sale.  Once a Notice of Trustee Sale has been filed on the property, the auction will be set for 3-4 weeks out, and often that doesn’t leave enough time to market the home, get a good offer, submit that offer to the lender and then still have enough time for the lender to review that offer.  Time simply runs out.

Leslie and I counsel homeowners at the pre-foreclosure stage (when the Notice of Default has been filed) to use the first 6 weeks or so of the 3 month time frame (the Default stage) to try and get their loan mod, but if unsuccessful, then seriously consider starting the short sale process.  Homeowners need to do short sales for a variety of reasons – job transfer, divorce, death of a spouse, job loss or reduced income, medical issues, etc.

The key is to always – like a chess player – be thinking a move or two ahead and be ready to make a decision before time runs out.

Late Tuesday night, Congress reached a settlement in the “fiscal cliff” negotiations.  As a result, the Mortgage Forgiveness Debt Relief Act has been extended for another year.  The measure will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction), or foreclosure.

Effective January 1st, California’s new Homeowner Bill of Rights goes into effect.

In many respects, it is patterned after the national settlement between the federal government, 49 of the 50 states, and the largest lenders earlier this year.

But the new law will, in my opinion, now make the filing of a Notice of Default more significant in 2013.

Key parts of the law include:

• Applies to 1st deeds of trust
• Bans lender policy of “dual tracking”
• Lender must provide single point of contact
• Within 5 days of filing the Notice of Default, lender must give borrower notice of “foreclosure prevention alternatives” which include loan modification and short sale.

When a lender/servicer files a Notice of Default (or Notice of Trustee Sale) in 2013, it will mean:

• The homeowner hasn’t applied yet for a loan mod, or
• The homeowner has “busted” (failed) their trial (or permanent) loan mod, or
• The request for a loan mod was denied, and now
• The legal time clock for foreclosure has started.

A homeowner now has 2 choices – Plan A or Plan B:

• Plan A – apply for a loan mod if they haven’t already done so.
• Plan B – consider the benefits of a US Treasury HAFA short sale.

A number of factors may suggest doing a short sale (ie, loss or reduction in income, change in marital status, medical expenses, job relocation or other financial hardships) instead of losing the home through foreclosure.

The US Treasury HAFA (a “graceful exit”) short sale program is designed for these homeowners.

Timeline considerations…

Foreclosure in California ( a “non-judicial” state) is a 2 stage process:

• Filing of the Notice of Default stage – a minimum of 3 months
• Filing of the Notice of Trustee Sale – a minimum of 20 days

For a more detailed summary of the Bill of Rights, please see the California Association of Realtors legal summary.