Mortgage Defaults Under the Quarantine due to COVID-19 Coronavirus and the subsequent forbearance, short sales, loan modifications and extended mortgage grace periods in New Jersey and Pennsylvania

We live in crazy times. Mandatory quarantines are devastating businesses nationwide and unemployment levels are historic. Federal and State governments are doing what they can to help.

For example, there have been foreclosure suspensions, cancellations and moratoriums; stimulus checks, forbearance, extended grace periods for mortgage payments, small business grants and loans; just to name a few.

We expect that these programs and policies will not be enough to help and there will be another housing crash in New Jersey and Pennsylvania due to the record number of mortgage defaults. For example the grace periods and forbearance for mortgages are being handled by the mortgage servicer or mortgage bank. These are the same entities that were entrusted to help homeowners during the financial crisis. As an attorney on the front lines helping homeowners during the financial crisis I can tell you that the mortgager servicers and mortgage banks failed miserably at implementing the programs designed to help people save their homes. This resulted in record numbers of short sales; something I believe will be coming again.

If you have experienced any type hardship due to COVID-19 Coronavirus please contact The Sokol Firm for a free consultation. We helped thousands of homeowners during the financial crisis and expect to do the same again.

William Sokol, Esq.

856.528.2012

Bill@thesokolfirm.com

Why should a Realtor use an attorney to process their short sales?

TIME: Short sales can be very time consuming. The hours will pile up as you collect and create documents, scan, fax and/or email large files only to have the bank lose them and sit on hold endlessly waiting for an update. You’ll also lose time explaining the process to the Buyer’s side of the transaction, coordinating closing costs with the Title Company and chasing after the parties for updated documentation. Unless you are getting paid extra for all of this work a Realtor’s time is much better spent listing and showing houses.

LAW: Realtors should seek to avoid providing legal advice or practicing law. The unauthorized practice of law could land a Realtor in big trouble. The processing of a short sales contains many legal issues: How do FHA, Conventional and VA short sales differ? Should the homeowner continue to pay their mortgage? Should the homeowner continue to pay condo or association dues? What about homeowner’s insurance? What happens to the deficiency in a short sale? Will the homeowner have any negative credit implications or tax ramifications from the short sale? Should the homeowner file Bankruptcy? What happens if their home goes to foreclosure? These are just a sample of the legal questions our firm sees on a daily basis. By referring the Seller to an attorney a Realtor can avoid giving advice on these complex legal issues.

EXPERTISE: Processing short sales is not rocket science. However it does take a firm understanding of real estate, the short sale process and clearing title. A single mortgage short sale can be simple. However many distressed homeowners have more issues than just one underwater mortgage. They will frequently have second mortgages, home equity lines of credit, past due condo or association dues, various types of judgments, past due child support or alimony, past due municipal utilities, unpaid real estate taxes and Federal IRS tax liens. Unless you understand how each of these work, and more importantly, how each of these work in the dynamic of a short sale you should not venture into handling short sales without the expertise of a short sale attorney.

COST: Many attorneys are paid at closing from the proceeds of sale. Our firm never charges the Seller, Buyer or Realtors directly. None of these parties will pay our fees out-of-pocket. Therefore you may be able to secure an attorney for the short sale at no charge.

Short Sales and Bankruptcy

If you are considering doing a short sale on your property but are currently involved in either a Chapter 7 or Chapter 13 Bankruptcy then you may find the below information helpful.

Chapter 7: In order to do a short sale on your property during an active Chapter 7 Bankruptcy you need to wait for the Trustee to issue an order abandoning their interest in the property.

Chapter 13: In order to do a short sale on your property during an active Chapter 13 you will need to have your attorney file a motion to allow the sale to take place. If you are using a Realtor and Real Estate Attorney you may also need your attorney to file a motion for Application for Retention of Professional.

Please be advised that if your Bankruptcy has been discharged then the above general information does not apply.

Why Foreclosure should NOT be an option

Our firm is licensed to practice law in New Jersey and Pennsylvania. If you are facing foreclosure in either location you should seek legal advice regarding your alternatives. If you let the home go through a foreclosure you could be facing a deficiency lawsuit once the foreclosure is finalized. In plain language you could be sued after the foreclosure for any balance remaining on the mortgage. A short sale or deed in lieu of foreclosure could avoid this perilous situation by getting a deficiency waiver in writing from the mortgage lender. For information on how to avoid a deficiency suit please contact a real estate professional or attorney.

Determining a Listing Price for a Short Sale

Absent any list price guidance from the short sale lender you are going to want to list and sell the home for fair market value (FMV). At some point during the short sale process the short sale lender is going to conduct a valuation of the property such as an appraisal or broker price opinion. This amount, will which presumably reflect FMV, will be compared to the sales price. If the amounts are too far off the short sale lender will make a counter-offer or simply decline the file.

The short sale lender is generally not going to give the house away for nothing since they could foreclose and sell it themselves for FMV. This is why it is important to avoid low-ball offers and sell the home for what it is actually worth.

 

How will a Short Sale or Deed in Lieu of Foreclosure impact my credit?

First things first, all negative items stay on your credit report for 7 years. Miss a mortgage payment? Seven years. Miss a credit card payment? Seven years. Short sale, deed in lieu or judicial foreclosure? Seven years. A notable exception is Chapter 7 Bankruptcy which stays on your credit report for 10 years.

So if a short sale, deed in lieu and foreclosure all remain on your credit for 7 years is there any advantage to doing one over another?

Yes. It is widely believed that both the short sale and deed in lieu will allow you to recover and rebuild your credit faster than a traditional judicial foreclosure.

Please also remember that judicial foreclosures can take months to years for completion. During this time the borrower is sustaining monthly missed payments on their credit report. They can’t even begin to rebuild and repair until the foreclosure is fully completed. I have seen foreclosures take five years in New Jersey. Imagine 5 years worth of negative reporting followed by 7 years for the foreclosure. Not the best way to sustain good credit.

On the contrary “most” short sales and deed in lieu cases can be completed in a matter of months which is generally much quicker than sitting around and waiting for the foreclosure to finalize. As a result settlement on a short sale or deed in lieu will stop the continual monthly damage and allow the repair and rebuilding to begin much sooner.

Put another way, the “rebuilding event” or the period at which credit can start to be rebuilt happens much quicker in a short sale or deed in lieu (settlement) than in a foreclosure (Sheriff Sale).

What is a Deed In Lieu of Foreclosure?

A deed in lieu of foreclosure is a real estate transaction where a homeowner transfers title to their property over to their mortgage company to avoid foreclosure.

The homeowner benefits when the mortgage company forgives the deficiency.

The mortgage company benefits by avoiding the costs of a court-ordered foreclosure and maintaining an REO property.

Both parties benefit by not waiting endlessly for a court-ordered foreclosure to be completed.

In general, for a deed in lieu to be successful, the property must be vacant and in good condition and title must be clear. The borrower must also be experiencing a hardship and is generally delinquent on payments or in some stage of foreclosure. Also, depending on loan type, the borrower must have a least attempted a loan modification or a short sale prior to trying the deed in lieu.

If the deed in lieu is successful and the debt is cancelled the borrower is issued a 1099C for the forgiven debt. I have another post illustrating how cancellation of debt is handled.

The deed in lieu is a very complex transaction and an attorney should be consulted before attempting.

 

What are acceptable hardships for a Short Sale?

One of the key ingredients for a successful short sale is having some kind of hardship. After all we are asking the mortgage company to accept less than what is owed and to forgive any outstanding debt. Here is a list of acceptable hardships from a variety of sources such as Fannie Mae and the Department of Housing and Urban Development.

  • death of a borrower or co-borrower;
  • long-term or permanent illness or disability of a borrower, co-borrower, or dependent family member;
  • divorce or legal separation of a borrower or co-borrower; or
  • distant employment transfer/relocation, including a PCS order, greater than 50 miles one way from the borrower’s current principal residence to be closer to employment.
  • a loss of or reduction in income that was supporting the Mortgage;
  • a change in household financial circumstances;

If you are experiences any of the hardships and your home is located in New Jersey or Pennsylvania please contact us for a free consultation at http://www.thesokolfirm.com.

What happens to the balance of the debt in a Short Sale?

In most cases the balance of the debt is forgiven and a 1099C will be issued (see my post on forgiven debt taxation). You should always carefully read the short sale approval letter. You are looking for something stronger than “we agree to release our lien.” Releasing the lien is great but what about the debt itself? Look for language that mentions a deficiency waiver or full settlement.

Special note regarding VA Short Sales or Compromise Sales: a successful short sale will result in a deficiency waiver but the homeowner will lose their VA entitlement benefits unless the VA is reimbursed for their loss.