Your mortgage company is also required to give you a certificate of discharge within thirty days after your mortgage is paid off.  If they fail to do so, they will be liable to you for $500.  If they haven’t given you the certificate within sixty days, you are entitled to $1,000, and if not within ninety days, you can get $1,500.

If the mortgage company refuses to comply with these requirements, you may have to bring a lawsuit to compel them to discharge it.  You will need to make sure that you have evidence showing that your mortgage has been paid.  Before you bring a suit against the mortgage company, you should send them a written request, asking for the certificate of discharge.

Last month, the Obama Administration announced changes in the making homes affordable program related to short sales.

You are short of the funds needed to pay the liens, or mortgages, on the home.

Title to your real estate can only be transferred, or sold, is if the mortgage companies sign off, or agree.

You cannot force them to take less than you owe them.

But, in this market, sometimes the mortgage company will agree to take less than the balance.  That way, they at least get some money, and avoid the cost of foreclosing, taking the property back, fixing it up, hiring a realtor to sell it, and so on.

The mortgage company may release their lien to allow the sale to close, but may insist on you signing a note to pay the difference.

That is, if you owe $150,000, and sell your home for $100,000 net closing costs to the mortgage company, they may require that you sign a contract to pay them the $50,000 difference.

Consumer attorney David Leibowitz has posted on this situation, in which you may still want to file bankruptcy.

Some times the first mortgage company will take the money and run, and release you from paying the balance.   Be sure you know the tax consequences of a short sale.

Ooops, what if you owe a second mortgage?

Ruth Simon of the Wall Street Journal did a story last month on short sales and second mortgages.

Second mortgage companies have to sign off for a sale to go through, of course, they will not normally do so without getting money.

So, the first mortgage company agrees to give them something out of the sale proceeds so that the sale goes through.

But, that second mortgage company can sign off its lien and still chase you for the balance.

If you are unsure about what happens after a short sale, consult an experienced attorney.

Some of the backlog is due to a slowdown in the pace of foreclosures.  Fannie Mae and Freddie Mac put a temporary moratorium on foreclosures late last year as did some other lenders. 

Housing prices are in a free fall across the country.  The Post article revealed that existing-home prices fell another 16.8 percent in May compared with a year ago.  Since so many more distressed mortgages are in limbo, it is expected “that foreclosure rates are likely to increase dramatically during the second half of this year and into 2010 as lenders work through the backlog.”  The likely result will be an even further drop in home prices.  

American’s consumer law experts, the National Consumer Law Center, have assembled the information about the various programs to help home loan borrowers in financial distress into one website.

The site includes a summary of programs, guidelines, progress reports, fact sheets and participation agreements with lenders.

Be wary - there is lots of bad advice and many mortgage modification scams out there.  NCLC gives you information you can trust.

Unfortunately, the law is limited in its application to a principal residence occupied by the borrower at the time of the default and only if the loan is the first lien against the residence and was recorded between January 1, 2003 and January 1, 2008.

A mortgage loan servicer can apply to the California Real Estate Commissioner for an exemption to this law (reducing the time period for cure back to 90 days) if they have implemented a loan modification program with specified features. Once the Real Estate Commissioner concludes that the program meets the necessary requirements, the mortgage loan servicer will receive a permanent exemption.  Eventually a list of exempt lenders will be published.

Faced with a growing number of foreclosures, the Calfiornia legislature is at least trying to do something.  Unfortunately, like many of the “modification” plans, this bill has an easy “out” for the mortgage companies.  All they need to do is to have in place an appropriate means to modify loans.  Nothing says they have to grant any modifications!

Federal tax law provides for tax on debt that is canceled or forgiven without full payment.  Unless you fit within one of the exceptions allowed by the IRS, the loss of your home could result in tax due.

Tax on canceled debt is not new.  However, it has not been much of a problem for consumers in the past.  I have written articles about debt cancellation tax and some of the ways it can be avoided.  My colleagues have answered the question “What is debt cancellation tax” in others.

Several factors have combined to make this ironic problem a consumer issue.  The run up of home values in recent years and the aggressive marketing of home loans, often to people who can not afford to pay them have combined with new computer technology used by the IRS to pinpoint transactions when debt is canceled.  The result has been the issuance of tax due notices to increasing numbers of financially distressed consumers.

The housing bubble is over but not forgotten.  Easy home loans are a thing of the past.  Like a great party that was just too much fun, the morning after can leave quite a hangover.  About 10 years ago the IRS started to require all banks and most other consumer lenders to report when a debt is canceled without full payment.  For several years now lenders are required not only to report the interest you pay them but to report any debt they cancel in connection with your loans.

In December of 2007, Congress passed the Mortgage Foregiveness Debt Relief Act of 2007, it offered a window of protection from tax for homeowners who only borrowed against their home to buy it in the first place or to remodel.  It was originally set to expire at the end of 2009 but was extended through 2012 when congress passed the TARP legislation.

Other exceptions to the debt cancelation tax available to homeowners are the bankruptcy exception and the insolvency exception.  However, the debt cancelation must be reported on the tax return using the appropriate form or the IRS will assume no exception applies and send a notice that can lead to the assessment of additional tax.

What can you do if you may lose your home to foreclosure? There are two main ways to deal with the problem.  First, if the loan in foreclosure involves money you used to buy the home or for a major improvement of your home, the Mortgage Foregiveness Debt Relief Act will probably apply and no tax will be due if the return is properly prepared.

As an alternative, if the loan was a refinance and you used some of the loan money to pay other consumer debt, bankruptcy may be your best option.  Timing is important and if a foreclosure of your home is in process, talk to an attorney immediately.  Bankruptcy is only helpful in avoiding tax if a discharge is entered before the debt is otherwise disposed of by the foreclosure.

Despite a default in payment homeowners often have defenses under state or federal law.  There are a number of lawyers in Mortgage Law Network who can quickly evaluate your situation and recommend a strategy for dealing with the lender.

If you file for bankruptcy protection, your property will be covered in the bankruptcy case and the foreclosure will automatically be stayed.  However, the stay is only temporary in many cases.  For this reason, it is important to either choose a lawyer with foreclosure defense experience or consult with a consumer home loan specialist before looking to bankruptcy alone as a solution.

While the bankruptcy case is open - up to five years in a Chapter 13 bankruptcy - the bankruptcy automatic stay will stop the foreclosure and can prevent the lender or loan servicer from foreclosing on the property based on past due payments from the time before the bankruptcy is filed. The lender can still foreclose if you fall behind on payments that come due after the bankruptcy is filed, and they may also be able to get the bankruptcy court to remove the automatic stay for other reasons, such as failure to maintain insurance on the property or pay property taxes.

Postponing foreclosure with a bankruptcy is most helpful to a homeowner who intends to continue living in the house and will be able to make ongoing payments. A lawyer may be able to persuade the lender to undertake a voluntary loan modification, making payments more affordable, and can also explain the terms of any modification offered by the lender.  Some lender’s plans are too costly in the long run or too temporary to be of any real benefit.

Congress unfortunately rejected foreclosure prevention legislation known as Senate Bill 61 that would have given a bankruptcy court the authority to require lenders to accept changes to home loans, including reducing interest rates and reducing the principal balance on the loan to the current market value of the property.

If you owe substantially more on your house than it would currently sell for, this would have been a tremendous benefit. Other recently-enacted legislation increases the options available to homeowners battling foreclosure and provides Federal subsidies under limited circumstances.  A homeowner attempting to navigate a maze of overlapping workout options would be well-advised to seek advice from an experienced lawyer.

If you decide to allow the foreclosure to proceed, you may still need a lawyer. Under some circumstances, foreclosure can trigger a large cancellation of debt income tax liability from foreclosure.  Depending on the laws in your state, the type of foreclosure process (judicial or non-judicial), and whether the property is your primary residence, you may remain liable for the deficiency if the home sells for less than the outstanding debt.

Advance planning will minimize the risk of unexpected tax debt.

The mediator has no powers to force the lenders to make any offers to modify mortgages in default, but the  case cannot proceed to a final judgment of foreclosure without a report filed by the mediator.  There are also cases where a modification or reinstatement has been worked out through mediation, but the lender later disavows any knowledge or agreement to a deal.  Connecticut Superior Court Rules do allow a Judge to send the case back to mediation to resolve any differences that could arise.

The purpose of the mediation program is to facilitate communication between the homeowner and the lender or servicer when rpevious communication seened impossible.

On paper at least, both programs seem to have features providing real relief from abusive mortgage terms and unaffordable payments.  As an alternative to bankruptcy or as part of a Chapter 13 plan, HAMP could provide the homeowner with protections roughly comparable to those under the proposed Helping Families Save their Homes in Bankruptcy Act under some sets of circumstances, but not under others.  The primary difference between judicial modification in bankruptcy and the Obama plan is the requirement of voluntary lender participation.

The HARP program is limited in scope. It releases Federal funds to refinance existing mortgages that are current in repayment and do not exceed the market value of the house. It is aimed at homeowners who would have been able to take advantage of current lower interest rates if the fall in property values had not eroded their equity.  Refinancing under HARP does not affect the total amount due on the mortgage, it only provides more favorable loan terms.

Savings to the homeowner with these programs are modest. As long as interest rates remain low and the homeowners do not default, there is no significant cost to the taxpayer.  However, when one eliminates those people whose homes are seriously under water, those whose incomes will not support the modified payments, and those who would not realize enough savings to make refinancing worthwhile, the pool of potential HARP applicants is much curtailed.

HAMP has more potential benefits but there are many potential roadblocks to relief for the homeowner.  Under this program, homeowners faced with foreclosure or unaffordable payments due to income reduction can modify a mortgage with their existing lender, provided the lender agrees to the modification.

Key features of HAMP are a provision to put a portion of the principal into forbearance to reduce payments, a payment target of 31% Debt to Income ratio (DTI) regardless of balance, and direct government subsidies to both lenders and homeowners.

These programs show considerable overlap with the Hope for Homeowners Act, a foreclosure prevention tool that went into effect October 1, 2008, and has found few applicants (fewer than 100 as of January, 2009).  HAMP applicants are required to consider the HOPE program, and it is not clear which program applies if a person is eligible for both.

For the lender, participation in HAMP is optional, but required as a condition of receiving future bailout funds. Once enrolled, a lender must consider all borrowers who request it.  However, an enrolled lender is required to modify the mortgage only if allowed by the applicable pooling and servicing agreement, and only if the net present value (NPV) after modification exceeds the pre-modification NPV. This creates additional loopholes.

As of March 27 2009, more than a month into the program, no lender had enrolled.  However, administrative difficulties with the program may be responsible for this poor showing.  Given the uncertainties about implementation, timing, and eligibility, a homeowner who has received a foreclosure notice would be well-advised to consider filing for Chapter 13 bankruptcy to stop a pending foreclosure, anticipating that it may well be possible to either  incorporate or substitute HAMP (or an as-yet unimplemented change in the laws) during the course of the plan.

The cost to the government, and ultimately the taxpayer, is potentially large if many people qualify for subsidies. There are also concerns about how the program would operate if continuing high employment produces a rash of defaults on the modified mortgages, or if the economy enters an inflationary phase and home values start to rise again.

Mr. Blumenthal issued written requests to Freddie Mac, Fannie Mac and Lender Processing Services looking for information on the criteria and terms under which the law firms were chosen to represent over 1000 lenders in foreclosure cases.  The Attorney General is also looking for an itemized accounting of all fees earned by the firms and copies of all retinaer agreements specifying fee schedules.

Two of the law firms, Hunt, Liebert and Bendett & McHugh are the only Connecticut members of the U.S. Foreclosure Network, a national association of firms specializing in foreclosures.