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You are here: Home » 2011 » January

IBANEZ RULING COULD BE HUGE

An interesting court case was decided on Jan. 7 of this year in Massachusetts after years of litigation, and it did NOT go well for the banks. This could be nothing, or it could have a HUGE impact on our real estate industry for the next decade to come.

The basics of the case is that it was a foreclosure that was being contested by the homeowner. The mortgage had been sold many times, as many are. It turns out that the lender had been, let’s say, a little sloppy in doing all the paperwork correctly each time the mortgage was sold. They were so sloppy, in fact, that many times when the mortgage was sold, they would leave the name section blank of who they were selling it to, since it changed hands so rapidly. It’s like selling a car multiple times, and just passing the car title along each time in blank without recording each transaction with the DMV. Saves time and also saves all those pesky recording fees. What happened in this case is that they kept passing it on blank from one investor to the next, and then almost a year AFTER the foreclosure started they finally tried to record the sale of the mortgage to the foreclosing investor.

This case went all the way to the Massachusetts Supreme Court. And they ruled that the lender did NOT have legal standing to foreclose since they did not have a perfected legal ownership right in the mortgage. One of the justices even commented on “the utter carelessness” of the banks in this matter. The basic idea here is that lenders have to prove they own the mortgage before they can foreclose. And in many cases, they are going to have a hard time doing that. It remains to be seen if other courts in other states will make similar rulings, but it’s possible this is the precedent-setting case to set the tone for future lawsuits.

This does NOT mean we are all about to get free and clear homes. In most cases, the foreclosure can re-commence once the paperwork is straightened out. But that takes time, so this may lead to more delays in foreclosures. It’s also another reason for them to work on loan mods and short sales instead of risking legal challenges to foreclosures.

CHANGES TO HAFA

Over the last few years the government has tried (unsuccessfully) to coerce banks into implementing massive numbers of meaningful loan modifications to keep people in their homes at sensible payments they can afford. Since they couldn’t get banks to modify enough loans, they turned their attention to short sales. They released a program effective April, 2010 called HAFA that was supposed to result in hundreds of thousands more short sales. However, some reports say that less than 1,000 across the nation have actually closed. New changes are about to go into effect on Feb. 1, 2011 that the government hopes will open the floodgates to more HAFA short sales. The two biggest changes are regarding debt ratio and occupancy.

There used to be a requirement that the homeowner’s mortgage payment was more than 31% of their gross income to qualify. This is no longer required by the government HAFA rules (although the individual lender may still do it), and the homeowner still has to prove a hardship. The 31% was a stumbling block for many potential HAFA deals for someone that has overwhelming debt apart from their mortgage.

Under the old rules the property could not be vacant more than 90 days prior to applying for HAFA, and the homeowner had to have been relocated for job reasons more than 100 miles away. Now it can be vacant for up to 12 months prior as long as the homeowner hasn’t bought another residence yet. In addition, there is no minimum distance requirement, and the relocation does not need to be job-related. HAFA still does not cover properties bought for investment use, but now the property CAN have been rented during the 12 months prior to applying for a HAFA short sale.

I think these changes will improve HAFA short sales as it will allow more people to qualify to be considered for them. The bottom line, though, is that while lenders have to consider a homeowner for a HAFA short sale, it’s still optional for them to approve them or not.

MORTGAGE INTEREST DEDUCTION GOING AWAY?

The interest you pay on your home loan is one of the last big tax deductions left to the average homeowner. There is a rumor floating around that the mortgage interest tax deduction is about to go away. Here are the facts: As of right now, the mortgage interest tax deduction has NOT been changed. All that has happened is that it’s being discussed as one of many possible ways to solve the nation’s deficit problem. President Obama mentioned it in a speech and then his Debt Commission included it as a possible area where the government can pick up more tax revenue if it were abolished, or reduced.

The proponents of doing away with this tax deduction argue that it unfairly benefits “the wealthy,” since they normally own more expensive homes, and therefore get a bigger deduction. The opponents of change say that our real estate market is already on shaky ground, and taking away the tax deduction would tank real estate values further.

If we can set aside the “fairness” argument, I think that if the deduction is done away with across the board, it WOULD set real estate values back tremendously. Many people buy a little more home than they can afford, just because the tax deduction brings their “net” payment back into the affordable range. If that went away, prices would drop. Of course, this just proves the point that the tax deduction is artificially inflating home values. But I know that our real estate market absolutely cannot handle any more shocks right now.

I think the banking and real estate lobbies will be successful in squashing any real reform in this area. Even if something meaningful IS passed, I think they would still allow deductions up to some number, say $500,000 of mortgage balance, and even then it would be on new purchases. This way anyone that bought a home prior to this change would get to keep their deduction. And even then, this might not happen for many, many years to come.

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