AN UNFORGIVING STATE: WHY THE MORTGAGE DEBT FORGIVENESS ACT RARELY APPLIES TO ARIZONA HOMEOWNERS

As the year continues, many Arizona agents, lawyers and brokers are warning of the impending end of the Mortgage Debt Forgiveness Act. They profess that if homeowners miss this tax break, the financial consequences could be catastrophic. As a result, homeowners are being pressured to sale their properties prior to the end of the year. But here is the rub; the Mortgage Debt Forgiveness Act does not apply to ninety percent of mortgages in Arizona and these scaremongers are advertising under the ruse of an inapplicable tax provision to accelerate homeowners into listing their properties.

     A.           Cancellation of Debt Income

Generally, when a debt is forgiven the debtor has to pay taxes on the forgiven debt. The rationale behind this tax is that the taxpayer never paid taxes on the original loan amount because that loan was eventually going to be paid back. As a result the IRS does not consider a loan to be income. But, once a loan is forgiven, because it will not be repaid, the taxpayer has effectively received income. The taxpayer enjoyed the benefit of the forgiven loan and unless that income is taxed, it would be tax-free money. For instance, if I lend a taxpayer $100 dollars and that taxpayer spends it on a boat, after I forgive the debt, the taxpayer would still own the boat. Unless the government taxes the forgiven $100 dollars, the taxpayer would have bought a boat with tax-free income, creating a windfall for him or her. The Internal Revenue Code eliminates this potential windfall by taxing forgiveness of debt.

At times, forgiveness or cancellation of debt income can create harsh results on taxpayers. To alleviate these harsh results, there are provisions in the tax code that mitigate the effect on taxpayers. The Mortgage Debt Relief Act is one of those mitigating provisions. 

     B.            The Mortgage Debt Forgiveness Act

The Mortgage Debt Forgiveness Act is found in the Internal Revenue Code under section 108.[1] Section 108 is titled “Income from Discharge of Indebtedness” and only covers cancellation of debt income. What that means is that section 108, and therefore the Mortgage Debt Relief Act, only applies when a taxpayer receives income from the discharge (forgiveness) of indebtedness.

So what is the problem? In a short sale, we have a home that is upside down. The short-sale price is less than the outstanding mortgage. Therefore there is a remainder and the bank must have forgiven the remaining portion – correct? No – that is incorrect. When a loan is non-recourse, and the owner disposes of the property, there is no forgiven debt, therefore there is no cancellation of debt income and therefore the Mortgage Debt Forgiveness Act does not apply! Let me explain.

Here in Arizona, under the anti-deficiency statute, most purchase money mortgages on real property are non-recourse obligations.[2] A non-recourse loan means that the lender’s only recourse against the homeowner is the property itself. In other words, the lender cannot sue for any deficiency. Under Arizona law, if a mortgage is a purchase-money-mortgage, is secured by a property that is two and half acres or less, and is utilized either as a single one-family-dwelling or a single two-family-dwelling, then the mortgage is non-recourse.  If the property and loan qualify, then regardless of any language in the contract, the mortgage is non-recourse.

The reason why it is important to differentiate whether a loan is recourse or non-recourse is not just because it affects whether the lender can sue the homeowner. This distinction also has profound effects on the tax consequences. If, as in almost all instances of purchase money mortgages in this state, a loan is non-recourse, it will not lead to cancellation of debt income[3] and therefore cannot be covered by the Mortgage Debt Forgiveness Act.

Instead, what happens is that the amount of non-recourse debt is considered to be the sale price of the property. In other words, the true sale price is ignored and is instead replaced with the amount remaining on the non-recourse loan.[4] That is a difficult concept to grasp. Essentially, the United States Supreme Court ruled that because the lender cannot pursue the borrower for any outstanding deficiency there is no debt to forgive. However, just because a mortgage is non-recourse does not mean the homeowner is off the IRS’s hook.  Instead the total amount of the debt immediately prior to the foreclosure or short sale will be considered the sale price. The adjusted basis (AB) is the purchase price less any depreciation plus the cost of any major improvements.  The taxpayer’s gain or loss is the difference between these two numbers.

One last point worth considering on non-recourse debt: if the taxpayer has owned and used the property as a principal residence for periods totaling at least two years during the five year period ending on the date of foreclosure/short-sale, then the taxpayer may exclude up to $250,000 ($500,000 for married couples filing jointly) from income.  Any excess must be reported as capital gains.

Example

Taxpayer bought a single-family residence in January 2005 and lived there until December 2011.  The original purchase price was $220,000, the home is worth $100,000 at short sale, and the mortgage principal remaining was $200,000.

Amount property closed at short-sale = $100,000
Total amount of debt prior to foreclosure = $200,000
Original purchase price = $220,000

The taxpayer ignores the sale price at the short sale ($100,000) and instead uses the amount of the loan as the sale price for tax purposes ($200,000). Because the taxpayer bought the property for $220,000, the taxpayers gain or loss is $200,000 less $220,000, leaving a long term capital loss of $20,000

The taxpayer would realize long-term capital loss of $20,000. However, because the property is the taxpayer’s principal residence, it is not a business loss and the taxpayer cannot use that loss to deduct against income.

        C.            Conclusion

Arizona is in the minority of states that have enacted statutes making most residential property purchase-money mortgages non-recourse. As a result of these statutes, the Mortgage Debt Forgiveness Act only applies to a small subset of the population. Unless, you took a cash-out refinance and reinvested the money into your home, the Act probably does not apply to you. That being said, a short-sale may be beneficial to upside-down homeowners. In fact, many Arizonans would benefit from reducing their monthly housing payments and acquiring a property in which they can begin building equity. However, the decision to short sale should be made by informed individuals working from sound financial principals. Not scare tactics.

Arboleda Brechner’s tax, real estate and mortgage mediation groups are well versed in the consequences of disposing of distressed property. If you would like to schedule a meeting to discuss how we can inform you about your rights and obligations in a short sale, loan modification, walk away or foreclosure please contact Kevin W. Hardin at 602-482-0123 or www.MortgageMediationGroup.com or follow us on facebook at www.facebook.com/hardanswersfromhardin

Carlos Arboleda, Esq

Paul Valentine, Esq

Carlos Arboleda graduated University of Arizona School of Law and was admitted to the Arizona Bar in 1996.

Paul Valentine obtained is LLM in Tax from NYU School of Law and is a federally authorized tax practitioner. He is admitted to the Massachusetts Bar.

Appellate Court Ruling Could Spur HAMP Lawsuits

See Original Article Here.

And so it begins. Or rather, so it turns. Like a soap opera that never ends. Hundreds of thousands of homeowners have been led to believe that the Home Affordable Modification Program was here to help them. There were misled. All too often we have clients that come into the firm having worked in good faith with the lender, just to be denied a HAMP loan modification, when they know they meet all of the guidelines or worse the made their Trial Modification payments just to have their home foreclosed right from underneath them. This article describes one such homeowner that did not take it lying down and sued.

At some point a homeowner has to take control of the process. It is true that a homeowner is not owed a loan modification. There is no contractual requirement for a lender to complete a loan modification for a homeowner, but what happens when the homeowner contacts their lender and requests a loan modification and the lenders begins the process leading the homeowner to believe that there is a process that is beginning. Including ceasing payments, making trial mod payments etc. Somewhere along the way, there becomes an agreement or contract if you will and if the lender suddenly sends the payments back, forecloses or misrepresents the homeowner’s qualifications for the program, the homeowner deserves their day in court to save their home.

The author of the article contemplates that somehow this will be a deterrent from the lender participating in the HAMP program. That is laughable as most of the lenders have FAILED miserably in complying with the program to start with. It is time to take control and take it to the lender.

“Are you or do you know someone that is upside down in their home? Facing foreclosure? Considering walking away? Arizona has unique foreclosure and deficiency laws you should know. Contact me to understand your legal rights and obligations.”

So I get this email from a colleague that likes to tease me about my ongoing argument that we are missing inventory. It states that FHFA is going to start selling REO property to investors. This inventory is mostly rental property. Document here. I was fascinated by the fact that, yes, there are homes in this market for sale that are not in the MLS. Fannie and Freddie are in the landlord business. This program is a Pilot and denotes that it is a small number of potential homes available and if successful, there will be more sales of homes held by the Agencies. You can see the mix here. 90% of the homes are filled with tenants. It will be good to see the REO market come back and present further opportunities to investors in the greater phoenix area.

It was just two weeks ago that I sat down with a company that is approved by Fannie Mae to rehabilitate REO property for them. They had over 1,100 Fannie Mae REO properties in various stages of repair and rehab, which were not in the MLS. I asked them how much of the market share do they have. Their response was “Maybe about 10% of the market.” That would mean that there is over 10,000 properties here in AZ that are going to come to the market soon.

A recent report by Amherst Securities, I could not find the link and will provide once I find it again, analyzed that there is over 20,000 homes in greater phoenix that were purchased by investors at Trustee Sales that are being held as rentals till the market improves. Those homes being held, were not purchased to hold, it was the result of a foreclosure market that has increased in price such that flipping the homes were no longer affordable. The intention of those investors is to put them back on the market as soon as they can.

We may have a shortage of inventory in the MLS, but we don’t have a shortage of real estate opportunity in Arizona. This issue may little solace for homeowners that are significantly underwater in their home, but for those with break even or slight equity positions in their homes, investors that purchased in the last year with the intent to flip but stuck will start seeing a light at the end of the tunnel.

What homeowners who are upside down should take away from this is that NOW is the time to get out of that home and start looking at either purchasing a home now, prior to the short sale or locking in an affordable rental position post short sale so they can reestablish their credit quickly.

“I am looking for someone to blame.”

At least that is the statement made by every homeowner that comes into my office, article written, testimony by official (elected or appointed), commentator, news reporter or blogger. Society has come to conclude that if they somehow they discover who is to blame, then a solution will appear. It will not. Being the smartest guy in the room and pointing to a key point in the time line with Glass Steagall was repealed as the cause, will not buy you a cup of coffee. Discussing key decisions made by the great criminal mind Barney Frank while he was ranking member of the Financial Services Committee, will take years off of your life and solve nothing. Making grand claims that we should just let the banks fail, is just silliness and naive. Waking up a realizing that there are over $60 Trillion dollars in contracts i.e. Mortgage Backed Securities, Collateralized Debt Obligations, CDO squared transactions etc etc that are backed by less than $11 Trillion in mortgage loans and then telling the world about it, makes for good material to get the kids to go to sleep at night. Enforcement, or the lack thereof, should be a major conversation point, but focus it toward those that need to enforce it and they cry when you realize it is the same entities that participated in the first place.

I run a large practice group at a law firm here in Phoenix, AZ. I do about 50 consults a month personally. I have been doing it for the last 4 years. That is over 2,000 homeowners. I can tell you that it is an urban myth that this problem has anything to do with irresponsible homeowners. I can count on two hands the number of people that I might raise my eyebrows about how they purchased their home and how they could afford it.

These people purchased these homes and or financed these homes from 2003 to 2008 (yes, I have homeowners as late as 2008 affected) and they paid their payments on time till something happened (Death, disability, lay offs, pay cuts, sickness, divorce etc) The only reason it was ever a problem is that their home was no longer worth what they owed. Negative Equity is the key issue for homeowners. It is only now that I am beginning to see people come in facing a lack of affordability of their mortgage tied to the type of mortgage i.e. Interest Only period expiring, Negative Amortization mortgage is recasting etc. The ARM folks are laughing right now. Their ARM is adjusting and their payment is going down. NOT UP. The only exception to this are those who obtained their loan from greedy criminal minded originators who sold the loan with margins between 4 and 5.5%. I have reviewed HUDS with mortgage broker commissions as high as $20K on a $300,000 mortgage, but this was not irresponsibility of the homeowner. It was a lack of enforcement of current laws.

There is a blind octopus we call a servicer which with one tentacle is attempting to modify the loan, another attempting to threaten the homeowner, yet another filing a foreclosure with completely inadequate or worse yet fraudulent affidavits, the homeowner attempts to short sale the home just to be met by a $20 an hour Rivet Faced, Tattooed Ass’d kid who can’ tell the difference between a pay stub and hall pass, denying the short sale because the homeowner failed to turn in all documents. We have an entity that cannot find its Ass with all tentacles, a bright light and Google Maps.

After thousands of clients and reviews and audits of their documents I conclude, what many have discussed, these servicers are NOT the Banks, They DO NOT own the loan in question. They DO NOT have legal rights to even collect on the payments. Most times these servicers do NOT even know who does. This dance we are involved in is one of the largest coverups that I think history will ever know. This includes even a population of Fannie and Freddie loans.

Homeowners and their advocates are in a position to cease being distracted by conversations about TARP, Home Affordable etc. and start focusing on one thing. It was not irresponsible homeowners that caused it. It was decisions by Congress, Treasury and the Federal Reserve to begin a systematic removal over a 17 yr period of those controls that would prevent this Ponzi Scheme that Mortgage Securitization became from becoming what it is today. It was not one President, It was not one political party. It was not two purported GSE’s that caused it.

The scheme is becoming unraveled as we speak. It will take years to be able follow it to its source. In the mean time, each and every homeowner should fight for their right to keep control of their property till the proper party appears and demonstrates that they are in fact the one with authority to enforce the mortgage / deed of trust and and have presented proper and legal documents demonstrating that before they deny someone their quiet enjoyment of their home. If Life, Liberty and the Pursuit of Happiness are the keys, then we must fight for those rights.

Remember it is not about getting a free home. It is about the Law, and the legal right of some “party” to take the home.  You would never allow someone to steel from you. You would never allow a court to put a person in jail. You would never allow a court to condemn a person to death. Without Due Process and proof.

Stop blaming what caused it. That is for the historians and frankly will not assist in the solution at all. I wish I had the hundreds of hours back that I have wasted on these conversations so I could devote them to just helping a few more homeowners navigate their own personal hell they are in.

When you are responsible, to any degree, with the flow of income into your employer, company, family etc., you are always looking for new ways to increase your reach. About 2 yrs ago I had the privilege of meeting Gia Heller with the National Business Experts. I was blown away by her idea of a networking group on Facebook, Arizona Women Networking. I had felt at the time Facebook was so NON business. Was I ever wrong. One of the key aspects of business is relationships. If the only way I was building new ones was through networking groups like BNI and others, I was not going to go as far as I could.

Well, I did not make a decision at that time. I hesitated. As they say, “He who hesitates, is lost.” Lost I was. I did start paying attention to her and join her open group at Friends of Gia Heller and began to figure it out. I realized that the kind of networking she was doing was so different from any other group out there.

6 months ago I went to an introduction and interview session to learn what it was all about. WOW. Arizona Women Networking had grown to add Arizona Men Networking and then grew into what is known as The National Business Experts. I joined. For $50 dollars a month, how could I turn it down?

I get 4 hours a month of Social Media Training,  I get to go to two tremendous meetings a month where nationally recognized speakers come to talk about how to improve your business like Sharon Lechter of Rich Dad Poor Dad and Outwitting the Devil fame, Les Brown another nationally renowned speaker and others, membership to a local chapter of the TNBE, The Phoenix Business Experts, and further the chance to attend two networking lunches a month with a even more local chapter in my circle of influence. Really? For only $50 a month? Where else can you go to get that much for that price? But wait, there is more.

So hear is the deal. It is not a single layer deal. Networking is only one layer of this cake. There is the training, but in addition to that, through involvement with the members, you learn what to do with that training. Even if you don’t meet one single new client, or get one referral, the education you get on how to integrate your Linkedin, Twitter, Youtube, Website, Facebook Page, Facebook Profile and Blog is priceless. But wait, there is more!

Every member of The National Business Experts is your sales force. That’s right. My fellow members in the group help me by commenting on and sharing my posts to their network of friends increasing my touch exponentially. I in turn help them by doing the same. There is simply no other group I have found that is as significant and effective as this group.

If you are responsible for your companies revenues and you are not active in Social Media, I predict as well as every other expert out there, that in the next few years, you will either have no company to be responsible for, or your company will find someone to do it for you. You need to follow the links in this post and see what I mean. If you want to learn more, call me 602-571-9644. That is my personal cell phone. You can be my guest at the next Monthly Information Session and learn more. To be clear, this is NOT an MLM. I get nothing from this testimonial or you joining, other than to bring one more professional into a group that I am very proud to be a part of.

The Treasury Department will withhold Home Affordable Modification Program payments from JPMorgan Chase (JPM: 33.95 +2.17%) and Bank of America (BAC: 5.88 +1.73%) for the third straight quarter.

With so many homeowners facing foreclosure for so long you would think Chase would get it? On the other hand, maybe they do. It has been several quarters that Treasury has been warning them to get their act together and still no result. Now they are holding back money. I read the article with great interest till I noticed the part about how much money Chase has received to date from Treasury. Putting aside what I think I know and what I KNOW I know about HAMP, the numbers quoted make no sense.

“Both Chase and BofA combined to start 315,000 permanent HAMP modifications and extended more than 800,000 three-month HAMP trials.” Ok, so that is our basis of numbers. Then we get this quote, “The Treasury uses Troubled Asset Relief Program funds to pay servicers $1,000 for every permanent modification and another $1,000 every year the new loan is current.” Wow, only $1000 per mod plus another $1,000 per year as long as the loan is current. Well let’s see, if we then assume every mod lasts for only one year and is current, putting aside the fact that we know the default rate on them runs between 30% and 65% depending on whoever is tracking and reporting the numbers, then that is $2,000 per loan mod. As the article did not tell us how much of the 315,000 perms were done by each, I will split it in half with BofA. That leaves us 157,500 laon mods done by Chase. 157,400 mods times $2,000 per mod equals $315,000,000 dollars for Chase. For both of them that is $630,000,000, Six hundred Thirty Million Dollars. Over half a Billion Dollars of payments possibly due to or paid by Treasury to these two lenders.

Now, putting aside the fact that this is allot of money. Here is the quote that my eyebrows really raised on, “According to Treasury data, more than $87 million in HAMP payments went to Chase so far, and another $80 million went to BofA.” That is $167,000,000 million dollars actually paid. Now, I am confused. If BofA and Chase are due $630,000,000 and have only been paid $167,000,000 that means that $463,000,000 is in arrears and being held by Treasury to be paid when they get their act together. You are a lender or lenders that are owed almost half a Billion Dollars and all you do is pull your head out of your ass and get paid and you still cannot figure it out?

I understand why in law school my Commercial Law lecture professor (Douglas Whaley) always used Octopus National Bank to stand in for the bank. They are in fact a Blind Octopus that cannot find it’s ass with all hands, a bright light and Google Maps. Of course the real joke is that an octopus has no ass!

Arboleda Brechner (www.abfirm.com) is pleased to announce the addition of Kevin W. Hardin CMB, CMC, CMPS to the firm. Mr. Hardin was previously the Director of the Mortgage Mediation practice group (www.MortgageMediationGroup.com) at Thomson Law, PLC, the leading practice group involved in Short Sales and Foreclosures here in Arizona. With negative equity and foreclosure issues growing unabated it is becoming increasingly necessary to bring additional tools to the fight for homeowner’s rights and their dream of home ownership specifically. Mr. Hardin possesses the highest educational credentials from the mortgage industry and as a JD Candidate at Concord Law School he will be a great addition to the team. While Arboleda Brechner’s work PRIMARILY involves BANKRUPTCY, ASSET AND ESTATE PLANNING, TAX, REAL ESTATE AND GENERAL litigation in Arizona, THE FIRM also assist businesses confronted with VARIOUS legal issues throughout the world, including Costa Rica, Venezuela, Mexico, and Switzerland. Mr. Hardin may be contacted at  888-909-1030 or www.MortgageMediationGroup.com

“Remember, if you are or know someone that is facing a point today or in the near future where the home is no longer affordable or it no longer makes sense to keep paying and the home is underwater, please call us to learn what legal obligations and rights exist before the home is short sold, foreclosed or walked away from.”

If being the victim of Nazi persecution was not enough, a client of ours has another injustice to suffer under Chase. The client came to us because he has been fighting to keep his modest home from foreclosure for two years. He has been given 3 Trial Mod periods just to be denied a permanent mod each time. Each time due to unacceptable form of income.

Many years ago, Mr. H, we will call him, was interred in a concentration camp as a very young boy. They branded him and tattooed a number on his arm. He pulled his sleeve up and showed me it. I got this massive case of chills. My wife is Jewish and we raise our children Jewish and the stories and atrocities come flooding into my mind. He was very proud of his survival and coming to America to live, work and retire. Many years ago a settlement was reached with the German and Hungarian governments to compensate holocaust survivors. The documents he gets are not in English but the deposits are made like clockwork  into his accounts.   http://www.claimscon.org/index.asp

Mr. H. wants to keep his house. His son, who lives with him, is disabled now and can no longer contribute to the home. This represents a clear hardship. He has given them two years of bank statements in the quest to keep the home, and right there on those statements are his deposits. Of course the payments come in the form of Euros and the bank then does a calculation for conversion to US Dollars, also right there on the Bank Statements. This is just one example of the pendulum swing of over regulation.  They MUST have an award letter, IN ENGLISH, to verify income. Otherwise, Chase will not use the income to qualify for the modification. We live in such an ethnocentric society. Chase is clearly one of the biggest idiots in the business. Nazi’s took his home and family first, now Chase is going to do it again. We will help the client pro bono and hopefully stick this up Chase’s left nostril.

“Remember, if you are or know someone that is facing a point today or in the near future where the home is no longer affordable or it no longer makes sense to keep paying and the home is underwater, please call us to learn what legal obligations and rights exist before the home is short sold, foreclosed or walked away from.”

I was sent a video from Fox News in which Bob Massi was interviewed about Mortgage Insurance. Watch Video Here. Watch the video first for the rest to make sense.

Here is the issue. They are discussing concept of Subrogation. That is the right of the mortgage insurance carrier to step into the shoes of the Lender after paying the loss claim and assert what rights the lender has or had against the borrower to recover the amount paid. Now, that is all great but we need to understand the relationship of the parties. The Lender is the named insured party, the borrower is not. So the Lender is the First Party. The homeowner, who has actually been making the insurance payment in most cases, is the Third Party. Under the common law principal of subrogation there should be no reason why an MI company cannot pursue the borrower.

Now, let’s apply it to Arizona, where I work as Director of the Mortgage Mediation Group and handle short sale and deficiency liability issues. Under Arizona Revised Statutes, specifically ARS 33-814(g), a Lender is precluded from securing a deficiency on a single one to two family dwelling of 2.5 acres or less that is limited to and which is utilized as a single one to two family dwelling. Without spending the next two pages discussing what this means is simply that most MI covered first conventional mortgages on one to two family homes in Arizona are protected from any deficiency after a foreclosure (trustee sale).

If the MI policy allows the MI company to step into the shoes of the Lender, the MI company will start driving the bus. Now, if you are doing a short sale and negotiating with the lender, that lender is going to inform the parties that MI must approve the sale. Next comes the classic Greenmail tactic. The MI company makes a demand for a cash contribution. Everyone starts jumping ship. Here is the problem. In most cases, there is no legal right for the MI company to make the demand. If they are going to subrogate, they should already have paid the claim. Here they have not. In order for the MI company to have a valid claim for that money, the lender would have to have had that right. They do not. This brings us to a Third Party Bad Faith Claims. Too many times we here that that short sale collapses or worse the borrower agrees to a promissory note to the MI company.

If you or you know someone that is contemplating or is in a short sale right now and an MI company is engaged in this tactic, contact our office immediately. There are proper responses to these demands that an attorney can deliver will save you, clients or friends from this evil deed.

“Remember, if you are or know someone that is facing a point today or in the near future where the home is no longer affordable or it no longer makes sense to keep paying and the home is underwater, please call us to learn what legal obligations and rights exist before the home is short sold, foreclosed or walked away from.”