Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

Bank of America may pay you cash to short sale your house. The payment is an element of BOA’s pilot program to encourage short sales called their “Cooperative Short Sale Program. Bank of American is working with selected real estate brokers to solicit eligible homeowners with BOA mortgages. BOA solicits selected homeowners for the short sale promotion and incentive. You cannot apply; you have to be asked.

I know the owner of a Remax franchise in Orlando who is one of the brokers BOA is using to approach eligible homeowners and to list their homes for sale. He states that BOA’s cash incentives to homeowners are in the range of $10,000 to $20,000.

Homeowners must demonstrate financial hardship and inability to afford payments. Obviously, the homeowner must cooperate with sales efforts, pay currently all home expenses, and maintain the house in good condition. Upon completion of the short sale BOA will waive deficiency judgments and report to the credit bureaus that the mortgage was resolved in a short sale.

I have written several times in prior post about attorneys and “mortgage experts” who pronounced dire predictions about mortgage lenders eventually getting tough with borrowers. I have heard scary predictions in private communications, and I have read the predictions in national publications.

The BOA program is evidence that mortgage lenders do not intend to wage war against defaulting borrowers, and instead, they may have decided it is in their best interest to seek homeowner’s cooperation to liquidate real estate at the highest price with the least expenses and delays. The Cooperative Short Sale program illustrates a significant change in mortgage company policies toward delinquent homeowners

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Don’t get snookered by a short sale. A client called me for asset protection advice. His legal problems relates to a completed short sale. The bank approved the short sale if the client signed a promissory note to pay the bank the amount the bank the deficiency between the mortgage balance and the short sale price. The bank representative assured the client that the bank rarely pursues collection of the note.

Four months after the short sale the bank sold the “short sale note” to an investor. The investor probably paid very little for the note. The investor has demanded the not be paid in full. The investor hired a collection agency to pressure the client to pay the note. The collection agent told the client that their only concession would be to give the client 10 years to pay the short sale note in monthly installments. Now, the client is very worried that the investor will sue him to accelerate the short sale note and convert the note to a judgment.

 

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Over the past year I have commented more than once that although the large national banks had generally not pursued deficiency claims on first mortgage foreclosures that smaller regional banks were becoming more aggressive. This week I spoke with a new client who had been sued for a deficiency judgment after foreclosure of first mortgage loan issued by First Priority Bank of Bradenton, Florida. Actually, after the mortgage loan went into default the FDIC closed First Priority Bank and sold the bank assets to an investor group. It is the investor group which is aggressive pursuing collection of the mortgage debt.

I am not sure why the smaller banks are so much more intent on chasing homeowners for deficiency judgments. Maybe the smaller local banks did not participate in the mortgage securitization program and held more loans in-house rather than selling them to Wall Street. Or, perhaps each loan in default represents a significant percentage of their bank assets. Whatever th reason, my observation is that the smaller the mortgage lender the greater is the borrower’s exposure to personal liability from a strategic mortgage default

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I have advised many people over the past three years to walk away from their upside down mortgages- the “strategic default.” My clients typically are worried about foreclosure’s effect on their professional lives and their credit. Today I received a phone call from a client who consulted me over a year ago about mortgage foreclosure on his primary residence. After speaking with me initially the client decided to stop paying his mortgage. He lost his home to foreclosure in July. He called for some additional legal advice. After answering his legal questions I asked him how the foreclosure affected him and whether he had made the right decisions to walk away. Here is what he said.

The client told me that after the foreclosure his life can be described as “business as usual.” He recently got a new and better job. The job application asked him about prior foreclosures, and he answered truthfully. The foreclosure was not an issue during his job interview for his new job, nor had any other prospective employer raised the issue during his job search. He said that people with foreclosure on their credit report were no longer “outliers.” Its common.

The client has been getting credit card solicitations continually. He recently purchased a new car and got a car loan. Not 0 % interest, but 8% interest. High, but not impossible to deal with. His point was that he qualified for a new car loan four months after the foreclosure. Overall, the client stated that the “psychological and social stigma of foreclosure” was much less than he expected.

 

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You would think that if you are current on your bank loans the bank would not want to call the loan or foreclose on the property. You would think that if you are performing your payment obligations and other requirements under a note and loan agreement that the bank would classify your loan as a "performing loan", or a good loan. That’s what you would think. But that’s not the case in today’s lending world.

I have had many business clients over the past years facing potential litigation with banks over mature commercial loans. Typically, these loans were related to the real estate business including the construction business, land development, or income producing commercial and multi-family residential properties. The business client is current on the loan and has never missed or been late even though his business is suffering. Without warning, the bank sends the client a letter which says the bank will not renew the loan, or may call the loan as a default, because the loan has been reclassified as a non-performing loan. The bank expects the client to pay the loan in full in a real estate market where the client cannot sell the property and cannot refinance the property with another bank because banks today are reluctant to extend new credit. The client wonders why his loan which has always been paid on time is suddenly called a "non performing" loan.

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People with problem mortgages ask me frequently what the mortgage lender and their attorneys will do if they walk away from their upside down home mortgage. What can they do to get a release of liability and what are the chances the lender will pursue a deficiency judgment? These are common questions. This past weekend I got a glimpse into mortgage lender strategies by speaking with an attorney friend named Norman Farquhar who has worked for a large mortgage foreclosure firm in Tampa for two years. He recently left the firm. Norm Farquhar is an experienced real estate litigator. He says he is typically assigned the most contentious and heavily defended foreclosure cases. Over the past two years he said his firm took in about 1,500 new foreclosures each and every month.

I asked Norm how many first mortgage deficiency judgments he or his firm pursued in the past two years. Zero. Not one. None of his clients have ever asked his firm to file for a deficiency. He also said he was unaware of any of his client banks selling deficiency claims to investors. His firm never received any inquiries from investors about purchasing their clients’ deficiency claims. Asked why there has seen no deficiency claims to date, Norm speculates the reasons are first, that the banks and the law firms are still swamped with work(he said his firm is farther under water than the homeowners mortgages) and second, because it is much more difficult and expensive to pursue and collect a mortgage deficiency judgment than it is to foreclose and take back title. Norm says he hopes some banks will pursue more deficiency claims when the market settles down because it would mean more work for attorneys who do what he does.

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I did an interview with a reported from the Palm Beach Post about personal liability for deficiency judgments. The interview was part of an article published on Saturday, June 12, 2010, about debt collection firms which buy claims against homeowner’s who defaulted on home mortgages.

The article features a New York based company called Deficiency Judgment Recovery Network ("DJRN"). DJRN that is buying pools of deficiency claims from mortgage lenders for pennies on the dollar. The article states that this collection company is going after people who could afford their mortgage but who stopped payments because their property was upside down in value: the so-called strategic defaults.

I have not heard from any of my clients that they had been pursued by a third-party collection firm to pay a claim related to their strategic mortgage default. I have not heard from any other attorney that DJRN has sued or threatened to sue their clients. The article says that entrepreneurs will start buying up mortgage delinquencies and that "it’s going to be a blood bath." That’s possible, but it’s also possible that these collection speculators may find that their rate of collection does not justify going to court to prove the amount of a deficiency claim.

Anybody with access to a computer keyboard or to a newspaper reporter can publish their opinions about deficiency collection, but no one knows for certain what other people will do in the future. The fact that I have not seen large amounts of deficiency collection by third-party investors leads me to believe that investment in deficiency claims may not be profitable.

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Just a few days ago I posted an article about banks luring homeowners into signing  false deeds in lieu of foreclosure. Here's the first example. Friday, I received the following email from an attorney who has an active and successful mortgage defense practice:

"I had a client retain me with a deficiency judgment suit this morning. Peoples Bank. They offered him a deed in lieu telling him it would resolve the claims. He signed the deed. Although the DIL started with language which said "this deed is an absolute conveyance in satisfaction of the mortgage", it had one sentence hidden in the document which says "Grantee acknowledges that Grantee reserves the right to proceed with a deficiency decree".

In the old days, a deed in lieu was an exchange of property for a release. Today, many banks are using the "deed in lieu" as a way to avoid the time and expense of foreclosure without releasing the homeowner from anything. They are presenting deed in lieu offers to homeowners who are not represented by attorneys  that the offer does not include a true release of the homeowner. In signing a deed in lieu you will lose all your foreclosure defenses which you need to negotiate favorable settlements with the mortgage company.

So, I warn all you people with upside down houses and delinquent mortgages- if your lender offers you a deed in lieu of foreclosure make sure you read all the fine print when they send you the documents. Better yet, consult an experienced real estate attorney who has been helping people defend foreclosures (not me; I don't do that type of work).

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One of this week's new clients was a man living in New York City who had over $20 million of mortgage debt, including a $3 million first mortgage owed to Fifth Third bank secured by a Florida property. Fifth Third foreclosed on the Florida mortgage, and immediately after the foreclosure sale, the lender filed a motion for a deficiency judgment. The client said he did not defend the deficiency motion (he should have defended), and court entered a $1 million personal judgment. This is one of the few cases I know of where a first mortgage lender pursued a deficiency judgment. There is nothing unusual about this client's situation other than, perhaps, the large amount of the mortgage debt. Time will tell is this lawsuit indicates a more aggressive policy by mortgage lenders in Florida.

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Many people facing foreclosure are concerned about income tax liability from the lender's forgiveness of mortgage debt. If the mortgage lender does not pursue a deficiency judgment and writes-off the loan after foreclosure the lender could send the owner a IRS Form 1099 for imputed income for the amount of debt forgiven. In the case of a first mortgage, the debt forgiveness would be the difference between property value and mortgage loan balance; a second mortgage write-off creates an imputed income issue for the entire amount of the loan. There is no imputed income from debt forgiveness on your primary residence. Most imputed income issues are related to foreclosure or short-sales of investment property or second homes.

In response to a question from a Miami attorney I spoke with a local CPA concerning income tax treatment of debt forgiveness of investment real estate. The CPA is Lonnie Young usataxhelp.com. Mr. Young explained that imputed income after foreclosure and debt forgiveness often is offset by tax losses on the real estate investment. . Consider the example of a person who buys a house for $200,000 with a $180,000 mortgage. The house is lost to foreclosure when the value is $100,000. The lender sends the owner a 1099 for imputed income of $80,000 (mortgage balance less fair value). The foreclosure is a forced "sale" after which the owner has realized a tax loss of $100,000 ($200,000 purchase price less $100,000 value at foreclosure sale). The loss offsets imputed income so the taxpayer pays no additional tax.

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When homeowners decide to let their upside down properties go into foreclosure they typically stop caring for the properties physical condition. Repairs are deferred unless absolutely necessary. After a homeowner abandons his house, as is often the case in pending foreclosures, maintenance stops. Grass and weeds grow wild, electric service stops and air conditioning is turned off. Lack of grounds and building maintenance often results in violations of local building codes. Code violations can result in fines, and violations under Florida building codes often have daily penalties. A foreclosure and subsequent bank sale resolves many assessments against the foreclosed property including real estate taxes and association dues. Code enforcement fines are not necessarily solved by foreclosure.

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As a general rule, mortgage lenders have not been pursuing deficiency judgments during the real estate recession. Second mortgage lenders have sued borrowers individually in cases. Until this week I have not spoken with any client who had been sued for a deficiency claim by a first mortgage lender after or as part of a foreclosure. I have spoke to many attorneys who defend mortgage foreclosures none of whom have reported seeing a deficiency claim by a first mortgage lender in any of the cases they are handling. This week, I saw my first deficiency judgment by a first mortgage lender. Whether this is an isolated incident by one bank in one real estate development, or an indication of changing bank policy and greater risk for mortgage borrowers is unclear.

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 I have stated before in this blog that most large mortgage companies were not pursuing deficiency judgments after foreclosure. More recently, I have seen a few situations where second mortgage holders were suing the homeowners for personal judgments. The second mortgage companies were not suing for a deficiency judgment after the first mortgage foreclosed. Instead, these second mortgage holders have filed law suits against the homeowners to collect the underlying promissory note. This means that the mortgage company does not wait for a first mortgage foreclosure and does not initiate its own foreclosure on its second mortgage. After the homeowner misses  few second mortgage payments, the second mortgage company accelerates the entire balance of the mortgage note (which is a standard provision of most notes) and sues the homeowner to collect the entire note balance. The mortgage company retains its second mortgage; any proceeds paid to the second mortgage company from a sale of the property would reduce the balance of the judgment.

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