San Diego short sale

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Friday, August 22, 2008

Fannie and Freddie may not be around to guarantee loans much longer.

If fannie and freedie go under - once would expect interest rates to rise- significantly. Buffett mentions they were able to mis price their products because they had the federal govt behind them.

Will the government nationalize these companies? Does this action distort the price of homes.




Bloomberg.com: Worldwide
Aug. 22 (Bloomberg) -- Fannie Mae and Freddie Mac, the two largest mortgage finance companies, ``don't have any net worth,'' billionaire investor Warren Buffett said.

``The game is over'' as independent companies said Buffett, the 77-year-old chairman of Berkshire Hathaway Inc., in an interview on CNBC today. ``They were able to borrow without any of the normal restraints. They had a blank check from the federal government.''

Freddie Mac and Fannie Mae touched 20-year lows yesterday on the New York Stock Exchange on speculation a government bailout will leave the stocks worthless. U.S. Treasury Secretary Henry Paulson won approval from Congress last month to pump emergency capital into the companies, which account for more than half of the $12 trillion U.S. mortgage market.

Fannie and Freddie mispriced their products and ``kept existing because they had the federal government behind them,'' Buffett said. Omaha, Nebraska-based Berkshire had been among the largest holders of Freddie until about 2001, when it became apparent the company wasn't being run well, he said.

Wednesday, August 20, 2008

Short sales - things to consider when turning over your financials to the lender

Realty Times - Short Sales Set Sail Again
Ironically, while you are proving insolvency you also may reveal the dark under side of your original application. Insolvency today could be rooted in financial trouble that began before you purchased your home -- trouble you didn't reveal to your lender who could now consider your tight lip fraud from the past.

That might attract the attention of federal authorities who've been cracking down on mortgage fraud, a federal crime punishable by up to 30 years in a federal pen or up to $1 million in fines -- or both.

According to the FBI's "Financial Crimes Report To The Public Fiscal Year 2006," 20 percent of today's mortgage fraud stems from a home buyer lying about income, debt or other information in order to buy a home.

Much of the remaining 80 percent of mortgage fraud also involves deceit, deception and misinformation, according to the FBI.

In addition to reopening your application, the short sale will look at other liens against the home.

Short Sales and Release from a deficiency

Realty Times - Housing Counsel: What's a Short Sale
The first step is to contact your financial and legal advisors. Do not contact the lender until you fully understand the potential risks involved. Under Federal law, when a debt is forgiven, it can be treated as ordinary income on which tax must be paid. Thus, if your lender allows you to sell the property to $475, less a 2 percent commission, you will pay off your $500,000 mortgage and have a deficit of almost $35,000. According to many tax professionals, you will have to pay income tax on this amount even though you did not actually receive the money.

Furthermore, you want to make absolutely sure that even should the lender approve the short sale, you will not be obligated to make up this difference, which is called a deficiency. Unfortunately, most lenders will not put their agreement in writing, so your legal advisors will have to satisfy themselves -- and you -- on this matter.

Taxation of short sales in California

For some the mortgage debt forgiveness act may apply.
Also, note - you must consider taxation issues with the California Franchise tax board as well as the IRS if you have property in California

Online Exclusive: Short Sales: Taxing What Isn't There
The IRS does recognize four situations in which cancellation of debt will not result in tax liability for the seller. A seller may avoid tax liability:

* When the borrower receives a bankruptcy discharge and the deficiency was included in the bankruptcy
* When the borrower is insolvent at the time of the cancellation of the debt. Insolvency would occur when a borrower’s liabilities exceed assets. Note that seller would have to prove this insolvency to the IRS when filing a tax return.
* When the debt was secured by a nonrecourse loan. Under a nonrecourse loan, the lender does not have the legal right to collect a deficiency judgment from any assets of the debtor not pledged to secure the loan. While most home mortgages are do not fall into this category, purchase money loans on a person’s residence are nonrecourse in some states.
* When the tax liability from the cancellation of debt on an investment property can be offset against other business liabilities and expenses. This exception does not apply to properties occupied as a residence by the mortgagor.

In many short sales, a seller would be able to qualify under the first two of these exemptions, especially since it was almost certainly necessary to show financial hardship in order to convince the lender to agree to a short sale. However, it is the seller’s responsibility to notify the IRS why the amount in the 1099-C should not be counted as ordinary income. Otherwise, the IRS will consider the forgiven debt as income and penalize the seller for unpaid taxes.

Short Sale, Deed in Lieu, Foreclousure - Effect on Credit score

This is a very interesting statement from the creators of the FICO score. It does seem to contradict most everything you read from Realtors.

Two Alternatives to Foreclosure - WSJ.com
A Blow to Credit Scores

What short sales and deeds in lieu of foreclosure don't do is minimize the impact on a borrower's credit score. All three proceedings have roughly the same negative impact on an individual's credit score, says Craig Watts, spokesman for Fair Isaac Corp., which created the widely used FICO score.

Mr. Watts says that to date little analysis has been done distinguishing, for instance, the credit risk of individuals who completed a short sale versus those involved in a foreclosure. For that reason, "the model ends up treating them [a short sale, a deed in lieu of foreclosure, and a foreclosure] all the same."

Short Sales and Deeds in Lieu - alternatives to foreclosure

If you get to read the entirely article - In my opinion they place too little emphasis on the fact that many if not most lenders are not agreeing to release sellers from the deficiency balance. (at least not in the initial paperwork) you must be prepared find ways to gain leverage over the junior lien holders in California, by using California law to your advantage.

Two Alternatives to Foreclosure - WSJ.com
A second benefit of short sales and deeds in lieu of foreclosure is that borrowers will generally face a shorter waiting period before they can obtain another mortgage.

Many lenders primarily make loans that they can sell to big mortgage players Fannie Mae and Freddie Mac. Starting Aug. 1, Fannie Mae generally will not buy loans made to borrowers involved in a short sale in the past two years. That's shorter than the four-year wait time if you have a deed in lieu of foreclosure on your record, and the five-year wait time if you have a foreclosure on record. (The current wait time is four years for a foreclosure or a deed in lieu of foreclosure; there is no existing policy for borrowers with a short sale.)

Freddie Mac generally won't guarantee loans made to borrowers who have had a foreclosure in the past four years, says Freddie Mac spokesman Brad German. (If the foreclosure was due to circumstances beyond the borrower's control, such as a medical emergency, then Freddie Mac will guarantee the loan in two years' time). The company considers short sales and deeds in lieu of foreclosure a significant negative but not an "automatic no," says Mr. German.

A Blow to Credit Scores

What short sales and deeds in lieu of foreclosure don't do is minimize the impact on a borrower's credit score. All three proceedings have roughly the same negative impact on an individual's credit score, says Craig Watts, spokesman for Fair Isaac Corp., which created the widely used FICO score.

Mr. Watts says that to date little analysis has been done distinguishing, for instance, the credit risk of individuals who completed a short sale versus those involved in a foreclosure. For that reason, "the model ends up treating them [a short sale, a deed in lieu of foreclosure, and a foreclosure] all the same."

If homeowners are interested in pursuing a short sale, they should open discussions with their lender or loan servicer before attempting to sell their house.

For both short sales and deeds in lieu of foreclosure, borrowers will have to present a "hardship letter" to the lender or servicer detailing why they are unable to make their mortgage payments.

Lenders have shown increasing willingness to negotiate short sales and deeds in lieu of foreclosure because of the losses they frequently incur in foreclosures.