SELLERS BEWARE...Sellers are unaware of the confusing array of recourse options lenders can persue...
RENO GAZETTE-JOURNAL
Sunday Business
Sunday, June 27, 2010
By Jason Hidalgo
jhildago@rgj.com
SELLERS BEWARE, short sales are on the rise in Northern Nevada, but many sellers
are unaware of the confusing array of recourse options lenders can
pursue following the closure of the transaction.
Lenders can demand remainder of original mortgage even after owner
short-sells or walks away from underwater home.
Christopher Torres' home woes started in 2008 following a divorce.
The loss of his ex-wife's income meant that Torres could no longer afford the $1,700 monthly payment for his mortgage. Compounding Torres' woes was the fact that the Reno home was purchased at the real estate bubble's peak. With his $250,000 home having lost $150,000 in value, selling the property wasn't an option.
After exhausting his options for a loan modification, Torres thought a short sale was the best course of action to minimize damage to his credit.
"I would've had to come up with that money up front if I sold the house," Torres said. "So I decided on a short sale instead. I thought it was the best-case scenario out of a bunch of bad options. I also felt that I had the responsibility to do something and not just walk away."
Torres said he hired a short sale specialist and completed the transaction earlier this year. At that point, he thought his problems with the lenders were over.
But the ink was barely dry on Torres' paperwork when he got a call from the second servicer on his mortgage. MInnesota-based Green Tree told Torres he still owed them the difference for the money they did not recoup from the short sale.
"They asked me for $40,000," Torres said. "I wasn't aware that they could still come after you after your short sale is finalized. I just felt betrayed and lied to. No one told me they could still do that."
Short sales are viewed as a less serious hit to credit than a foreclosure, and they are growing in popularity in Washoe County.
The number of short sales in the Reno-Sparks metro area jumped to 454 in the first quarter of 2010 compared to 147 during the same period last year, according to data from the Northern Nevada Regional MLS. Short sales also accounted for 32 percent of sales during the first three months of this year, up from 14 percent in the first quarter of 2009.
Nevada had the nation's highest rate of foreclosure-related filings for the 40th straight month in April, and so Torres has plenty of company across the Silver State.
But Nevadans might not be aware of rules that allow lenders to seek payment from homeowners who decide to short-sell or even walk away from their homes.
"In states such as California, lenders are told, 'You took the house as collateral and that's your sole recourse,'" said Ken Amundson, President of the Reno/Sparks Association of Realtors. "But Nevada is a deficiency state. So if there's a shortage of money to pay off a mortgage that goes into default, then the lender or owner of that note has a choice to come after the person to collect it."
The fact that some distressed homeowners are mistaking deficiency laws with current IRS exceptions only adds to the confusion, Amundson said. Typically the IRS taxes write-offs from short sales -- which is based on the difference between the remaining principal and what an upside down home actually sells for -- as extra income. But the IRS has waived that policy through the end of this year due to the large number of distressed properties that have entered the market after the real estate meltdown.
Deficiency laws can be difficult for the lay person to understand. Rules are different depending on whether a lender is the first or second mortgage holder and when a home either has a home equity line of credit or has been refinanced.
Making sense of lenders' collections policies also can be mind-boggling, even for the professionals that deal with them on a frequent basis, said Jennifer Capurro, a broker-realtor with RE/MAX realty Affiliates in Reno who regularly works on short sales.
Consumer Recourse
In 2009, 11,037 properties in Reno-Sparks received either a notice of default, trustee sale or foreclosure, according to national foreclosure tracker RealtyTrac. That's a rate of one in 16 properties -- nearly three times the average rate and 14th highest among more than 200 metro areas surveyed nationwide.
The greater Las Vegas area, which posted a foreclosure related activity rate of one in eight, took the top spot. An estimated 94,862 of its properties received a foreclosure-related notice last year.
With Nevada struggling under the brunt of distressed properties, the Nevada Legislation passed AB471, which took effect on October 1, 2009. The law was designed to protect homeowners from deficiency judgments when they opt for a short sale.
But AB471 comes with key caveats.
The biggest caveat is that the law is not retroactive. This essentially makes the law useless for homeowners who now need it most, said bankruptcy lawyer John White of White Law Chartered in Reno.
"It does not apply unless the mortgage was made after October 1, 2009," White said. "So it is no help."
Lenders, who lobbied against making the law retroactive, defended the decision.
"These mortgages were priced based on a certain set of expectations," said William Uffelman, president and chief executive officer of the Nevada Bankers Association. "You can't just have someone come in and change the rules after the fact."
Another caveat is that the law only applies to lenders who hold the first or primary mortgage on a home -- also known as "purchase money mortgage." That means the holder of a second mortgage is exempt and can pursue a deficiency for up to six years.
Even among first mortgage holders, there are exceptions.
The "no deficiency" provision only applies to first mortgage holders defined as "financial institutions" under Nevada Revised Statutes 363A. This means the law does not apply to lenders such as credit unions organized under the Federal Credit Union Act, and entities that Nevada isn't allowed to tax by law.
Mortgages that have been refinanced or have a home equity line of credit attached to them also doesn't get protection from deficiency judgments. Exempting borrowers who refinanced or took out a line of credit is necessary to make sure that borrowers don't get rewarded for risky behavior, said Assemblyman Marcus Conklin, D-Clark County, who spearheaded the bill.
"If you bought a home for $300,000 and took out a $200,000 home equity line of credit to buy a new car or boat or put it down as a down payment on a secondary property, then you won't get the same protection as someone who did everything the right way," Conklin said.
A legal minefield
Given all the legal pitfalls, anyone considering a short sale should get legal help, say housing industry insiders.
It's especially important to have lenders agree in writing that they won't be pursuing a deficiency judgment following a short sale. But experts familiar with such transactions acknowledge getting lenders to agree to such terms is easier said than done. This makes opting for a foreclosure the better choice in some cases -- even with the bigger hit on one's credit rating, said White, the bankruptcy lawyer.
"Unless the bank releases the homeowners from a deficiency, short sales are generally a bad idea," White said. "If the homeowner just lets the home foreclose, the bank has to sue for the deficiency within six months of the foreclosure sale. If, on the other hand, the homeowner does a short sale and agrees that the bank can still sue for the deficiency, the bank gets years to make up its mind."
Opting for a short sale also means that borrowers give up their right to state-mandated mediation, White added.
Another wrench for distressed homeowners involve the 2005 amendments by congress to eliminate "fresh-start" bankruptcy, White said.
"If the bank successfully overcomes the homeowner's defenses and gets a deficiency judgment, the homeowner has to live on a tax-cheat's budget and make payments to the bank in chapter 13 bankruptcy for, usually, five years," White said.
Such arrangements have advocates questioning the fairness of a system that bails out irresponsible lenders while making it harder for consumers to get out of their financial woes.
A new start
Despite the difficulties he went through, Torres doesn't have any bitterness toward the property he and his family called home for more than three years.
He has picked up the pieces of his life after the divorce. Torres' new wife is expecting a baby boy in October -- Torres' third child. He hopes the baby's arrival is a good omen, a sign of a new chapter in his life.
But as Torres gets ready to turn the page, he also wants to make sure he doesn't forget the lessons he learned from the past -- and make certain that he doesn't get into the sames tough situation again. Tired of the nightly collection calls and unable to pay the deficiency with Green Tree, Torres opted for bankruptcy.
"I really tried to do the right thing and not walk away," Torres said. "But it's like the lender didn't understand my situation. When I said I didn't have $40,000 or even $10,000, it just wasn't registering with them."
Requests for comment from Green Tree were not returned.
These days, Torres' priority is to make sure he can provide for his family and build up a nest egg. Although he won't be buying any big ticket items for the next few years, he says he has everything that he needs. Maybe someday, he might even give home ownership another shot.
"It'll' be a struggle for a while but my experience also taught me a lot of valuable lessons," Torres said.
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