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TWO NEW IDEAS TO “SAVE” REAL ESTATE

Ronald Reagan once said that the scariest words you can hear are, “I’m from the government and I’m here to help!” Well, the government is feeling like they haven’t done enough to “save” the real estate market, so they are considering more ways to “help.” (Despite the fact that almost none of their earlier attempts to help have done much to help enough people to make a difference.) They are currently discussing a bevy of options. But two of them seem to be gaining some traction or at least some serious discussion.

The first one is where they make Uncle Sam the world’s biggest landlord. That’s right. Instead of foreclosing and then selling homes, they are seriously talking about turning thousands of foreclosed homes (or soon to be foreclosed homes) into rentals. They may put them on the open market, or let the prior homeowners rent them. Their thinking is that keeping all these homes OFF the resale market will do reduce the supply of homes, thereby driving home prices up. The unintended consequence of this is that it may flood the rental market with rentals, thereby driving rental prices down, which makes current landlords of all stripes unhappy.

The second idea is to refinance massive numbers of mortgages at current interest rates, even if the property is under-water or severely delinquent. This option is possible now because mortgage rates have dropped to historic lows. This would keep a lot of people in homes that otherwise couldn’t afford them but can’t get a traditional refinance because of negative equity and/or their payment history.

Both of these ideas have groups on each side of the issue that are equally as passionate for or against them, and each side has good arguments for their position. If either or both of them become reality, they could have a massive impact. Or, they may fizzle out like all the other ideas they’ve thrown at this problem.

PRINCIPAL REDUCTION UPDATE

I’ve mentioned the program “Keep Your Home California” several times this year in this article. This program is administered by the California Housing Finance Agency and they received a large infusion of cash from the federal government to help keep Californians in their homes. They have many programs available, from giving you a loan to make your payments, to principal reduction, to relocation assistance if you do have to move. You have to apply for these, and there are no guarantee of approval for any program.

Most people are most interested in the principal reduction plan, obviously. The program provides up to $50,000 in principal reduction if the mortgage lender matches the reduction dollar for dollar, for a total reduction of up to $100,000. However, this is the program that was having the most trouble getting off the ground because the big banks weren’t getting involved. The banks have been pretty reluctant to drop principal, historically. Without the big banks’ cooperation, the principal reduction program wouldn’t apply to many borrowers.

Well, it was recently announced that Bank of America is now part of the principal-reduction program. They are by far the largest mortgage loan servicer that is now part of the program, so that is welcome news! Bank of America services nearly 2 million loans in California alone. Other servicers involved are the California Department of Veterans Affairs, the California Housing Finance Agency, Community Trust/Self Help, GMAC, Guild Mortgage Company and Vericrest Financial. And the list grows every month.

For more information, call 888.954.KEEP (5337) or KeepYourHomeCalifornia.org. If you have any success with the program, please let me know.

PHANTOM INCOME UPDATE

I’m going to start with a disclaimer that I am NOT a tax accountant, so you should verify all of this with your tax expert prior to making any personal decisions. I’m just sharing some general information readily available at IRS.gov. I’m getting a lot of calls the past two weeks from people that want to hurry up and do a short sale before the end of this year, “…so they don’t have to pay taxes on it.” There are several myths out there about this issue that I wanted to shed some light on.

If your lender forgives any portion of a loan that you owe them, you may owe cancellation of debt income, also known as “phantom income.” The first myth is that this ONLY applies to short sales, but that isn’t true. It’s for any forgiven debt of any kind. So it applies in a short sale, foreclosure, and any loan mod with principal forgiveness. The good news is that there are several exemptions to this tax. First, there is insolvency, where your debts exceed your assets. Then there is bankruptcy. There is also an exemption for non-recourse loans or purchase-money loans. These are loans used to buy or build a home, or seller carry-back, and the loan has never been refinanced.

Where people are getting confused is that several years ago President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007. This opened up the exemption a bit more to include loans that had been refinanced, or home equity loans for home improvement, but only up to the amount used to buy, build or substantially improve the property. It did NOT cover cash-out loans, 2nd homes, rental property or business property. The Act is good through the 2012 tax year, so it should cover transactions that close up until 12/31/2012. Many people think it expires 1/1/2012. Even with this extra time, I think it’s possible, even likely that Congress will extend it. When they first passed it, they thought we’d be back on our feet by 1/1/2013. Even if they don’t extend it, there are still the other exemptions you can fall back on. But check with your tax expert…

BOFA LOAN HELP

Bank of America is holding a “Customer Outreach Event” next week in San Francisco. If you have a BofA loan and you are having trouble making your payments, or you are in danger of imminent default, or you just want to talk to someone face to face about your loan, you may want to check this out. This is not a “seminar” where you just sit in the audience and listen to someone in a suit ramble on about how BofA wants to help you. This is designed to sit you in front of a home loan specialist, one-on-one, to talk about your loan. You have to register ahead of time to set up an appointment. Do NOT be late for your appointment as they probably won’t hold your slot.

To register, go to www.BankOfAmerica.com/outreachevent or call (855) 201-7426 (this is a toll-free number). The dates will be Thursday August 18 through Saturday August 20. They will have appointment times ranging from 8 am to 8 pm. The event will be held at the South San Francisco Conference Center. They will have free parking available, ask for details.

There is a long list of documents you need to bring with you to the event. Do yourself a favor and bring ALL of the required documents. You don’t want to make the trip over there, get in front of someone who may be able to help you, and then have them stop just short because you didn’t bring one of the required documents.

If you attend, please let me know how it went. I’m always curious for feedback on events like this that I mention here in this article.

UPDATE ON SHORT SALE LAW

Two weeks I reported to you the MAJOR change to California law in regards to short sales. If a lender agrees to a short sale, they are now prohibited from pursuing you after the short sale for the amount of the deficiency. This is in regards to all loans on 1-4 unit residential properties, so this means a first, second or other junior loans. We hope that this is good news. Obviously the good news is that lenders can’t pursue after short sales any longer, but the concern is that junior lien holders will be less likely to approve short sales. We’ll have to wait and see how it shakes out.

There are two interesting bits of fine print in the new law that I wanted to discuss today. First, the protections provided by this new law are VOID in cases of fraud or “waste.” Fraud means that if you are not completely honest with your lender in regards to the sale. For example, if you try to hide assets, lie about your income, misrepresent the “market value” of the property, etc. “Waste” is in regards to the property itself. If you start stripping the property of appliances and other fixtures, or don’t maintain the property in a reasonable manner then they could argue that their losses are greater than they would have been and void this new law.

The other bit of fine print that is in your favor is as follows: “Any purported waiver […] shall be void and against public policy.” This seems to say that if your lender approves your short sale, but wants you to sign something saying that you are waiving your rights under this new law as a condition of their short sale approval, that waiver may not hold up in court.

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