Why A Moratorium on Foreclosures?

 Just when you think things are settling down and the market is improving, a new waive of recession related consequences come to light.

The summer of 2010 saw fair market activity, in fact, sales rose over 23% in the Pacific Northwest and specifically in South Puget Sound. Inventories declined, interest rates are at historic lows and buyers are eager to take advantage of lower home prices. However, we are now looking at unchartered territories, again. Last week, GMAC, was the first bank to suspend their pending foreclosures in 23 states (this now involves all 50 states), to investigate the bank’s practices related to the forging of documents needed for home foreclosures. Apparently, employees of both GMAC, Bank of America and Chase have had their employees signing documents without reading any of it or “robo-signing”. A financial manager at GMAC testified in a deposition that his job involved signing his name 10,000 times a month to foreclosure related documents without reading what he was signing, as if reading were possible when signing 10,000 of anything a month. In any case, the Senate Banking Committee will hold hearings after next month’s elections to look into the allegations that the nation’s largest banks have improperly foreclosed on struggling borrowers. Old Republic Title, one of the nation’s largest title companies, declared that they would no longer title any REO property being sold by GMAC. It will only be a matter of time before other Title companies realize that they must protect themselves, as well.

The news of this moratorium perplexed me, at first, as there was no mention of the remaining 27 states or if they would be included as they are non-judicial foreclosure states. Meaning, it does not take a judge to approve a foreclosure. Washington State is a non-judicial foreclosure state and it should not make any difference if a state is judicial or non-judicial in its foreclosures if the banks are foreclosing without proper procedures. A paper trail must prevail and the note must be in hand. An example of illegal mishandling of foreclosures is a man who lost his home due to foreclosure who did not have a mortgage, that’s right, owned his home outright and a couple who were foreclosed on due to a $75.00 late fee that they were in the process of contesting.

April Charney, the nation’s top foreclosure fighter and an advocate for all homeowners who are dealing with banks who fail to hold themselves to the same standards of documentation and recordation as they expect from their customers, says that it is important to recognize that these robo-signers are not low level bank employees. The signing is taking place only a handful of floors below the C-Suite offices, and if you think about it, this would have to be the case. This is not an accident, or something that went on without the bank’s knowledge. They all knew it was wrong. We certainly do not need to wait for our judicial system to rule on whether the banks and servicers were in fact breaking the law…just the fact that they have robo-signers signing 10,000 of anything a month is evidence of criminal wrong doing on a massive scale.

You may ask how does this affect us, especially if you are not at risk of foreclosure. Everyone’s at risk of foreclosure as long as banks are foreclosing on homes using fraudulent documents. And why are banks using fraudulent documents to foreclose?  Because the notes were never assigned to the trusts that are now trying to foreclose on the homes. The trusts are empty. Certificates in the trusts that facilitated the sale of mortgage-backed securities to investors all over the world are missing the “mortgage backed part.” Now the trusts want to foreclose, but they can’t prove they hold the loans.

A mortgage consists of a note which is the IOU the borrower agrees to repay and the mortgage or deed of trust, which is the lien on the property. The note is where the money is found, the mortgage is where the real estate is described.

Now this gets interesting. During the credit bubble, the banks put mortgage titles into a privatized system called MERS or Mortgage Electronic Registry System. 60 million properties are recorded in the name of MERS or 60% of the mortgages in this country and 97% of the loans made between 2005 and 2008. MERS is merely a vehicle for loans to pass through to trusts that are supposed to be holding the pools of loans that MERS has been foreclosing on and legally should not be entitled to do so as they never owned the loans. Courts are now privy to this information and are becoming hostile towards this process.

Wells-Fargo has gone so far as to present prospective buyers with a supposed “standard” addendum on the day of closing. This addendum states, in not so many words, that the buyer agrees to hold Wells harmless no matter what happens in the future and are not responsible for anything Wells told the buyer in the sales process. The buyer is encouraged to use a Wells Fargo attorney and title insurer and reportedly offers to split fees. So the bank is taking steps to steer buyers not to get their own legal advice. It would seem that Wells would be wise to follow suit with the other large banks and stop foreclosures.

So the question comes back to, “Who does own the loans”? Not the originator, not the trust, nor can it be owned by the investor. Perhaps, the bond insurer, but you would never be able to tie their payments to an individual property. Some people may actually not owe their mortgages, and they may never have a clear title to the property either. It’s a mess, no question about it. Wouldn’t it have been easier to modify the loans or amend the loans in some way? One thing is for sure, litigation will go on for some time while the soon to be shadow inventory increases.

 Barb Magnuson

Tax Consequences of a Short Sale, Foreclosure or Loan Modification

 When you have a short sale, foreclosure or loan modification, you may also have a cancellation of debt from the lienholder.  Each time a financial institution cancels a debt of $600 or more, the entity is required to file a form 1099-C with the IRS, and send a copy to the person who had the debt discharged.  Any amount of cancelled debt on a 1099-C must be reported as income on your tax return.  Fortunately, there are a few circumstances under which home owners can exclude this amount from income. These include:

1)     Income from the debt is fully excludable if the debt is discharged in bankruptcy.

2)     Income from the cancellation of debt is excludable for an insolvent person outside of bankruptcy to the extent that the borrower’s liabilities exceed the fair market value of their assets immediately before the discharge.  Please note that retirement accounts, 401K’s and IRA’s are taken into consideration in the insolvency equation.

3)     A homeowner whose mortgage debt was party or entirely forgiven (between January 1,2007 and December 31, 2012) may be able to claim tax relief under the Mortgage Forgiveness Debt Relief Act of 2007.  Generally taxpayers are allowed to exclude up to $2 million ($1 million if Single or Married Filing separately) of mortgage debt forgiveness on their principle residence, which is reported on Form 982.  The debt must be acquisition indebtedness with respect to the taxpayer’s principle residence.  In other words, a home equity loan is not excludable under this provision.   This exclusion does not apply to a taxpayer in bankruptcy.  An insolvent taxpayer (not in bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on the exclusion for insolvent taxpayers.

Valerie Savino

A Positive Gain

~Median Sales price was up 1.2% over 2009, down .5% from 2008

~22% more homes closed than 2009; 55% more than 2008

~20% fewer homes were on the market than 2009; 23% fewer than 2008

~Homes remained on market 20 days less than a year ago

~We have 9.5 months of inventory, down from 2009

~Our area has experienced a 24% drop in value since late 2007

~We have a strong military presence with many families moving into the area.

~Our unemployment rate is slightly lower than the average.

~Our foreclosure rate is lower than the national average.

Mechanic Liens

We have all heard about mechanics liens and most of us don’t worry because title will be cleared at time of closing. Mechanic liens are one of those liens that can linger beyond your closing. Here’s why: a mechanics lien begins at the time the contractor or subcontractor shows up at the property. He/She collects payment (usually) after the job is completed. If he/she does not get paid then they head down to the county annex and file a lien on the property. So, what if you are buying the property and the lien is not filed until after you close on it. You will be liable for the lien. Remember, mechanic liens follow the property not the owner of the property.

Hints to never have a mechanics lien haunt you.

Be proactive.

During the listing, repairs and improvements can be made to the property. Make sure the contractor gives a lien release or an invoice that shows paid in full.

Ask escrow to make sure they get a copy of all the paid invoices for any work done during the time of Purchase and Sale.

Barb Magnuson

90 Day Market Activity Summary – October 2010 

October 2010	Single Family Homes
	Total Active	# Pending Sales		# Closings	Median Price
Gig Harbor	601	118		159	$390,000
Key Peninsula	231	33		54	$175,000
South Kitsap	305	89		112	$249,000
MLS TOTAL	1137	240		325	$271,000