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Tax Fact 10-Mortgage Debt Forgiveness: Forms 1099-A and 1099-C

Kent Anderson, Oregon Bankruptcy Attorney — Fri, 19 Mar 2010 21:15:07 +0000

If your home is foreclosed, sold at a short sale, or if you give the home back to your lender in satisfaction of your debt, IRS Tax Fact 10 tells us to watch for a 1099-C or 1099-A statement in the mail during the next calendar year. Lenders are required to send the 1099 forms by the last day of February in the year following the tax year in which debt cancellation or forgiveness occurs. When you get the 1099-C, look at it carefully. If you think something is wrong on the notification, call the lender who issued the statement and see if you can get them to correct it. This is easier said than done but the IRS recommends that you take this course of action.

When looking at a Form 1099 that involves debt cancellation, you should pay particular attention to the amount of debt listed as forgiven in box number two as well as the value listed for your home in box number seven. The amount of debt forgiven should be the value of your home at the time the debt was cancelled subtracted from the amount of debt you owed. If either of those numbers are wrong, you could end up paying more tax than you owe.

Remember, if you received a 1099-C as a result of a foreclosure, short sale or deed in lieu of foreclosure, the amount reported as cancelled debt will be considered as income unless you file a Form 982 with your federal tax return. A copy of your 1099 is sent to the IRS and a computer will match it against your return after it is filed. If there is a mismatch, you may be sent a Form CP2000 letter suggesting that you owe more tax.

If the numbers on a 1099 are incorrect, there are some procedures by which you can contest the error. If the 1099 was sent by someone with intent to harm you, federal law allows you to collect statutory damages and attorneys fees if you must go to court. Tax professionals know how to deal with erroneous 1099 reports. If you are unable to convince your lender to correct the 1099, it is time to see a tax lawyer for help.

Tax Fact 4-Only Certain Mortgage Debt Qualifies For Exclusion

Kent Anderson, Oregon Bankruptcy Attorney — Sat, 13 Mar 2010 23:55:43 +0000

Mortgage debt forgiveness is considered to be income unless it is excluded. Principal residence debt has its own exclusion from income if it is cancelled or forgiven by the lender. To “qualify” it must be what is defined by the Internal Revenue Service as “qualified principal residence debt”. The debt must have been used to buy, build or substantially improve the principal residence of the taxpayer and the home must act as security for the debt.

With the substantial increase in home prices that occurred over the ten years beginning in 2000, many people sought to access this “residential piggy bank” by refinancing their home. Often, the funds borrowed in such a refinance were used to pay bills unrelated to the principal residence like credit card debt. The IRS will not allow the use of that “residential piggy bank” money for general consumer expenditures. If the money is not spent on the principal residence, the taxpayer will not be permitted to exclude it from income if the debt gets cancelled. If the money is used for some purpose other than buying, making a substantial improvement or building your home it is not “qualified” for the exclusion allowed by the Mortgage Forgiveness Debt Relief Act of 2007.

It is important to note that borrowing against a home does not create a tax liability in and of itself. A taxpayer can borrow against a principal residence and use that money for any purpose. However, if the debt is cancelled, that portion of the debt secured against the home and used for purposes other than paying off existing debt that is “qualified” would constitute taxable income unless it is otherwise excluded.

In most cases, if a home equity line of credit is cancelled in whole or in part, by foreclosure, short sale or restructuring, the amount cancelled or forgiven will be considered income in the year in which the cancellation occurred. The Mortgage Forgiveness Debt Relief Act of 2007 will not exclude any portion of the home equity line of credit unless it too was used for substantial improvement of the home. However, there are other exclusions that may apply.

Tax Fact 2-Mortgage Debt Forgiveness Exclusion Financial Limits

Kent Anderson, Oregon Bankruptcy Attorney — Thu, 11 Mar 2010 23:46:20 +0000

In order to qualify for full exclusion from income when debt is cancelled on the taxpayer’s principal residence, the amount of debt cancelled cannot be more than two million dollars for a married couple or individual; or if an individual is married but filing a separate return, the debt cancelled cannot be more than one million dollars. Even in California that would be a pretty big house. The two million dollar limit does not refer to the amount of the home loan, the limitation is only applied to the amount of debt cancelled or forgiven. The amount of debt cancelled is calculated by subtracting the fair market value of the principal residence from the amount of debt secured against it at the time of cancellation.

Debt cancellation on a principal residence can occur in a number of different ways. The most common way people will see this occur is when there is a foreclosure. In a foreclosure sale, the property is often sold at a value which is less than the amount of the debt. This will cause cancellation of debt income.

Another situation in which mortgage debt forgiveness can occur is a short sale. While that term has long been used in describing certain stock transactions, it has gained popularity in describing the sale of a property for less than the amount of debt secured against it. When that happens, the lender is paid a “short” amount and does not get paid the remainder of the debt. For debt cancellation to occur, the lender would have to forgive the amount it failed to receive in exchange for the release of its lien. This type of transaction has become a common practice when lenders want to avoid the cost of foreclosure. A homeowner is generally able to sell their residence for more money than it would bring at a foreclosure sale.

Congressional Oversight Panel: Still Failing

Karen Oakes, Southern Oregon Mortgage Law Attorney — Mon, 01 Mar 2010 04:16:07 +0000

The December report of the Congressional Oversight Panel presents a finding that the TARP (Troubled Asset Relief Program) overall assisted in preventing a bigger crisis, but it created created more challenges and encouraged risk-taking. Earlier reports mentioned the abyssmal failure of the foreclosure prevention/mortgage modification program and the government’s awareness of this failure. The panel has made recommendations to attempt to fix the issues. However, in the December report, the following remains a key failure:

The foreclosure crisis continues to grow. More than two million families have lost their homes to foreclosure since the start of this crisis, and countless more have lost theirhomes in short-sales or have turned their keys over to the lender. Foreclosure starts over the next five years are projected to range from 8 to 13 million, but more than a year after the TARP was passed, it appears that the TARP’s foreclosure mitigation programs have not yet achieved the scope, scale, and permanence necessary to address the crisis.

Executive Summary, Elizabeth Warren Introduces December Report

The growth of the crisis is no surprise to consumer attorneys; those working in the trenches see our clients’ frustrations grow daily. The government needs to act decisively and quickly to end this crisis by forcing action from the mortgage companies with serious repercussions for those companies who continue to fail to provide permanent modifications.

Is The FDIC Paying OneWest Bank Not to Modify Loans?

Kent Anderson, Oregon Bankruptcy Attorney — Sun, 14 Feb 2010 23:48:34 +0000

No, the FDIC is NOT paying OneWest a bonus if they avoid loan modification. Despite the allegations of a recently circulated internet video, the FDIC agreement with OneWest Bank does not provide a financial incentive to encourage short sale rather than the modification of delinquent home loans. In fact, OneWest Bank is contractually required to participate in the Home Affordable Modification Program (HAMP) by its loss share agreement with the FDIC.

The FDIC OneWest Bank Factsheet sets out details of the purchase, by OneWest Bank, of IndyMac F.S.B., after IndyMac was declared insolvent. It is important to note that the acquisition was competitively bid. According to the FDIC, the deal with OneWest Bank for purchase of IndyMac Bank was in the best interests of the FDIC which is funded with fees paid by member banks, not taxpayer money.

With respect to HAMP loan modifications, OneWest is contractually required to do the following:

follow HAMP procedures to develop affordable loan modification terms for the borrower
determine whether the recovery on a modified loan is higher than the recovery from a short sale or foreclosure
modify the loan using HAMP guidelines if the recovery of a modification is higher than the recovery of a short sale or foreclosure
loss share coverage cannot be factored into any recovery calculation for loan modification, short sale or foreclosure.

The FDIC states that it has not yet made a single loss share payment to OneWest. Only 7% of the loans OneWest Bank is servicing are owned by OneWest and are part of the loss share agreement with FDIC.

This is not to say that the HAMP loan modification program is working. Loan modifications have been a terrible disappointment to many distressed homeowners. However, it is wrong to say that the FDIC is collatorating with OneWest Bank to make a bad situation worse and bilk the taxpayers in the process.

Is There A Mortgage Double Standard: Commercial and Residential Real Estate

Carmen Dellutri — Tue, 09 Feb 2010 10:19:40 +0000

As a mortgage foreclosure defense attorney, it really burns me up that homeowners are once again getting the short end of the stick. There is a double standard going on in this real estate meltdown. Lenders are telling homeowners that they have a “moral obligation” to pay their mortgages, and the failure to do so will result in a foreclosure proceeding. Yet this begs the question: Are Lenders treating commercial real estate defaults the same way that they are treating residential real estate defaults.

In Southwest Florida, times are tough. If you take a ride down any street, you will see For Sale and For Lease signs everywhere. This meltdown is not limited to homeowners. Strip malls need tenants. Commercial buildings need tenants. I was offered a lease on some beautiful commercial real estate (office space) for $5.00 a square foot, which used to lease for $18.oo per square foot. Yikes!

I recently heard that in the not too distant future, over 800 billion dollars of commercial real estate will have to be re-financed or paid off. Let’s get one thing straight before proceeding. The corporate world, with regard to the commercial real estate market, works differently than the individual homeowner who falls behind on the mortgage on his home. We all know what happens when the homeowner falls behind, or even worse, is instructed to fall behind on his home, the homeowner has to apply for a meaningful loan modification. I think the homeowners odds are better in Las Vegas. I’m not advocating taking the mortgage money to Vegas and doubling down.

But ask yourself this question: What happens when a publicly traded company cannot honor its commitments. Do they receive harassing phone calls? Are they threatened with foreclosure? Probably not. What really happens is that they are probably invited in for a meeting with some Vice President. The client gets an opportunity to tell the bank what is going on and what can be done to save the company and the bank.

A deal may be struck at that time or another meeting will be scheduled wherein the company can provide the lender with more information. This is the typical way a corporate transaction is handled. It seems that when it comes to commercial real estate, no one wants to get their hands dirty. However, when it comes to residential real estate, it seems the lenders pull out all the stops to get the no-good homeowners out of their houses.

This post was written by Carmen Dellutri, Esq. of The Dellutri Law Group, P.A.

Mortgage Deficiencies after Foreclsoure

Nicholas Ortiz, Attorney at Law — Wed, 03 Feb 2010 21:10:18 +0000

CNN Money recently posted an article, which can be viewed here, on the problem of mortgage deficiencies for people facing foreclosure or attempting work outs or short sales with mortgage creditors. The article rightly points out that a lender’s right to pursue an unpaid mortgage balance after foreclosure varies in accordance with state law, and the article focuses primarily on Florida. Here in Massachusetts, there are two key points to remember about a foreclosing mortgagee’s right to hold a borrower liable for a deficiency:

1. The mortgage lender must send a notice, usually called “Notice of Intention to Foreclose and of Deficiency After Foreclosure of Mortgage,” to the borrower at his last known address not less than twenty one days before the date of the sale, and;

2. A mortgage lender must sue within two years of the foreclosure sale to hold the borrower liable for any deficiency.

But this is Massachusetts foreclosure deficiency procedure, if you are in another state, you should consult an attorney there if you’re curious about your exposure and options. Moreover, the scenarios described in the CNN article, in which borrowers have been surprised by demands for deficiencies after short sales, are cautionary tales: You should always know what you are agreeing to and, if possible, have an experienced attorney review your documents before you sign them.

Qualifying for a Mortgage Is Getting Tougher

Wendell Sherk, Missouri Attorney — Mon, 01 Feb 2010 12:30:52 +0000

Borrowing for a home has been tough ever since the subprime securitized loan market collapsed a couple years ago. Without government help through the FHA, many such loans would not be made right now.

But although the government is backing FHA, Fannie Mae and Freddie Mac and shoring up the mortgage market by backing many of these loans — and the Federal Reserve helped further by buying a lot of mortgage paper — it is also trying to avoid taking excessive risks and losses. So recently the the government-backed entities are forcing originators — mostly banks — to take back bad or risky new loans. And mortgage securitized trusts are following suit.The process is known as “repurchase.” Fannie, Freddie, the trusts all agree to buy loans from originating lenders if the loans conform to their guidelines about the type of property, loan, and borrower qualifications. And FHA (and other mortgage insurance providers) agrees to guarantee the performance of some of these loans. But if the loans don’t in fact conform — for example, the loan was for a primary residence but the borrower is actually buying a second home or a rental — then they can force the originator to take it back –along with the risk of default losses.

In the past, the right to force repurchase was more a theory than a fact. But in the last quarter the compelled repurchases have jumped as much as 125%. Ultimate lenders and insurers of loans are demanding originators be more careful and not simply make loans for the sake of closing loans. Average credit scores for Fannie and Freddie loans have climbed over the last two years from 720 to 760, as a result.

The net result is and will continue to be a tightening of the mortgage market. Riskier loans with little or no down payment and lower credit scores will be harder to find, and harder to resell if made.

In the long run this is a good thing for the marketplace. Original lenders ought to have significant “skin” in the game so they don’t simply make a loan in order to score a quick profit (and earn a commission for the salesman). A return to more careful mortgage lending will help communities stabilize and keep real estate prices in line with actual values than the hyperinflated fantasy prices of the last decade.

In the short term, it’s going to mean consumers will have more trouble getting a new mortgage and property sellers will have to wait longer to find a buyer. It took a decade for us to dig the hole and it could take as long (or longer) to dig back out of it.

I Lost My House, Can The Bank Still Sue Me?

Kurt O'Keefe, Detroit Consumer Attorney — Sun, 31 Jan 2010 19:49:45 +0000

In some states, once bank forecloses and gets your house back, you do not owe them any money.

But not everywhere.

Check with an attorney in your state.

In Michigan, we have foreclosure by publication, an auction process, or through a court.

If the mortgage company bids the amount you owe at the foreclosure auction, you owe them nothing.

However, if they bid less, and it is a reasonable market price, you can be sued for the deficiency, that is, the difference between what they bid and what you owe.

Florida is another state that allows mortgage companies to sue after foreclosing.

If the first mortgage holder forecloses in Michigan, and gets the house back, the second mortgage company gets nothing.

The second mortgage company can sue for whatever amount of money is owed.

In judicial foreclosure, the mortgage company sues in court to get the house back.

And, the mortgage company can get

Of course, any suit for money by a mortgage company can be stopped by filing bankruptcy.

What if you have two mortgages, and do a short sale?

Well, as a lawyer, what can I say? It depends.

The second mortgage company has to sign off for title to the real estate to transfer, that is, for you to sell your house.

But signing off their lien on the house does not mean you do not owe them any money, it just means they do not have your house as security for the loan any more. You still owe on the note, and they may forgive the loan, or not.

Same with the first mortgage. They can sign off their lien on the house so the short sale takes place, but that does not automatically mean that you do not owe them any more money.

I Lost My House, Can The Bank Still Sue Me?

Short Sale May Cause Problems

Kent Anderson, Oregon Bankruptcy Attorney — Fri, 08 Jan 2010 01:07:21 +0000

When you sell your home for a price that is less than the total debt secured against the property it is often referred to as a “Short Sale”. Due to falling home prices and booby-trap loans, a short sale is becoming one of the few alternatives to foreclosure. Does it help a hard pressed homeowner or does it cause more problems than it solves?

Many of my clients have told me that they are attempting to sell homes and rental properties they own because they are no longer able to make the payments. They want to avoid foreclosure, and hope to avoid bankruptcy. In some cases, the sale of real estate for less than the amount owed can help to reduce a payment burden and stretch cash flow. However, there are several possible problems that can result from a short sale.

First, a short sale is only possible if the lenders holding a lien on the property are willing to cooperate. In most cases, it is impossible to sell property to a third party with paying all debts secured against the property in full or obtaining a release of the lien from the lender.

Second, a short sale will generate debt cancellation tax if any of the lenders satisfy their debt without being paid in full. The cancellation of debt creates income for the borrower that often results in an increase in tax liability. Under some circumstances, such as when the debt was qualified personal residence debt, and only incurred to acquire or make substantial improvements to the borrower’s personal residence, the cancelled debt may be excluded from income for tax purposes.

Finally, when a second lender is involved in the short sale, they may not be paid at all. The rapid increase in home values during much of the last ten years led to frequent use of the Home Equity Line of Credit by homeowners. If these lenders are not paid when the home is sold, they may release their lien and permit the sale but will want their loan to be paid in the future.