Category Archives: Strategic Default

Mortgage Debt Forgiveness Act extended thru 2014

Both the House and the Senate finally agreed to pass an extension  of the Mortgage Debt Forgiveness Act.

It expired at the end of 2013.

But now that it is revived, those homeowners whose primary residences were foreclosed or short sold during 2014 will NOT have to pay income tax on the difference between the mortgage balance that was unpaid and the market value of the property.


RIP: Illinois short sales

The year 2014 is here and short sales are the year’s first casualty. They are dead on arrival. Gone, done. The final nails in the coffin were the expiration of the Mortgage Debt Forgiveness Act (MDFA) and the sudden increase in deficiency judgments in Illinois during late 2013.

Now, I recommend short sales to almost no one.  Three reasons you should NOT do a short sale.

  1. Deficiency Judgment may be entered. To get a short sale approved you generally have to be behind on payments. Once you stop making payments and try a short sale, there is a 50% chance that it will close. If it does not close, it will end up being foreclosed and there is a strong possibility that a personal deficiency judgment will be entered against you. Not fun.
  1. You will get a taxable 1099 EVEN if the short sale closes. Many, many short sales do not close and end up as foreclosures. If you are foreclosed upon, there will be a 1099 issued even if the property was your primary residence. The MDFA expires on December 31, 2013 and this means that tax is owed on the 1099 issued after a short sale. Why would you do a short sale if you have a huge tax bill on the back end? Due to the 1099, it makes no sense to do a short sale (unless you are insolvent.
  1. Process is too difficult. I closed a lot of short sales in 2013. We became pretty good at getting some of them approved, but we still lost quite a few. The process is even worse now. Many lenders “service release” a mortgage to a new lender in the middle of a short sale. It seems that the new lender is almost always Bayview Loan Servicing. That means you get to start the short sale over again. Bayview has a crazy process and requires that it “net” 95% of the broker price opinion (BPO) amount. Considering the real estate commission is 6%, how are they supposed to net 95%? The buyer has to agree to pay more than the BPO for the closing to happen. If they net less than that, Bayview requires that the property be listed, which is an online auction site. The chances of closing one of these is slim.

The Chicago Sun Times had a nugget yesterday that 25% of Chicago area homes are deeply underwater. What are these people supposed to do now? With the death of short sales, there are two options: Stay in the home until the value increases or file bankruptcy.


Illinois deficiency judgment update

Deficiency judgments are still being entered in Illinois. Two more clients had judgments of around $50,000.00 each entered in the last two weeks. Oddly, the mainstream media has ignored this, probably because it is a confusing topic.

Before 2013, your chances of having a deficiency judgment entered were slim to none. Half way through 2013, we started to see deficiency judgments entered frequently. My unofficial, unscientific estimate is that there is about a 50% chance of having a deficiency judgment entered against you in an Illinois foreclosure now.

What happens after the deficiency judgment is entered?

In one case, the lender sent a letter asking for payment of about 5% of the judgment amount for a full release. This was a tremendous deal and the client just paid it. I hope that we see a lot of these settlement offers. In several cases, the client has heard nothing from the lender. This does not mean the judgment will just go away.

If a client does not settle, we have to assume that the lenders will place the judgment with a collection attorney and that the client will receive a “citation to discover.” This is served by the sheriff and the client has to go to court to tell what his/her income is and what assets the client owns. The purpose of this is so that the creditor can garnish the wages or take non-exempt assets from the client to pay the judgment So far, I have not had this happen to any client after a deficiency judgment was entered, but that does NOT mean it won’t happen. A judgment is good for 7 years, so time is on the lender’s side.

Can I be arrested due to the deficiency judgment?

No, debtor’s prison, popular in merry olde England, doesn’t exist here. Charles Dickens Dad spent a long time in Marshalsea debtor’s prison, which was the basis for Little Dorrit, a great book/movie. You will not be arrested. The only way that could happen is if you don’t show up to court after you were served a “citation to discover.” The judge has the authority to issue a warrant for your arrest if you are a no-show, so be sure to appear in court.

Will bankruptcy get rid of a deficiency judgment?

Yes, in fact, most clients have filed for chapter 7 to eliminate the deficiency judgment. This knocks out the judgment altogether. The filing fee in a chapter 7 is $306 and attorney’s fees are about $1000.00 so this is a very cost-effective way to solve the problem. If the client has a high income or the assets are over the exemption amount ($4,000.00 of non-IRA assets like checking/savings is exempt, $2400 for a car is exempt) then they have to file a chapter 13, which is more expensive and requires the client to make payments back to the lender over a period of either 3 or 5 years. If payments are completed in a chapter 13, then the judgment is vaporized. Filing a chapter 13 after a deficiency judgment is more involved and expensive than a chapter 7, but it stops collection efforts by the lender and it is the last defense if chapter 7 or a settlement are not possible.

Will I still get a 1099 if a deficiency is entered?

No, you won’t get a 1099. If the lender gets a deficiency judgment, there will be no 1099 (for the difference between the value of the property and what was owed the lender). Note: There WILL be a 1099 if you settle the judgment for less than the face amount without filing bankruptcy.

Will the deficiency judgment hurt my credit?

Yes. Like any other judgment, it will drag down your credit score until it is removed by bankruptcy, payment or settlement.



Deficiency Judgments popping up everywhere in IL

A few years ago, I wrote a post about how a subdivision in Florida called Lehigh Acres  had so many deficiency judgments entered against foreclosed owners that it should be called “deficiency judgment acres.” Unfortunately, the same can now be said for the Chicago area.

Foreclosure cases are way down in Chicago. They have dropped almost 60% over since last year. But, with the slowdown, lenders are now entering deficiency judgments  against homeowners on first mortgages in droves. Deficiency judgments were rare to nonexistent for the last 5 or 6 years (although they were always allowed by law in Illinois).

A deficiency judgment is a personal judgment against the homeowner for the difference between the market value of the property at the end of a foreclosure and the amount owed to the lender. The lender can try to collect the judgment by filing a wage garnishment or taking non-exempt assets from the homeowner. The only remedy for a homeowner is to settle the judgment, or to  file a chapter 7 or chapter 13 bankruptcy.

In the last 5 years, I did not see a single deficiency judgment entered (on a normal residential mortgage). In the last 4 weeks alone I’ve seen these deficiency judgment entered:

Deutsche Bank $58,000.00 – Lake Co. condo.

Nationstar $50,000 – Chicago house

Nationstar $105,000 – Northwest suburban condo

Citimortgage- $25,000 – Northwest suburban house

Now, any time a mortgage company gets personal service on an owner in a foreclosure case (or substitute “abode” service on someone who answers the door) there is a real risk of a deficiency judgment being entered. If the lender is not able to personally serve you with the foreclosure complaint at the beginning of the case, then a deficiency judgment cannot be entered.

Why are so many deficiency judgment being entered? I don’t know the answer to this. For one thing, the volume of foreclosures is way down. Also FNMA and Freddie Mac have said that they intend to pursue strategic defaulters for deficiency judgments. Chancery court judges have clearly reversed course and now routinely enter them when they previously refused to do so.

So what does this mean to Illinois homeowners who have underwater properties?

  •  Strategic Default is dead. There used to be little to no risk in stopping payments on a first mortgage in Illinois. The 1099 issued at the end of the foreclosure was wiped out by the Mortgage Debt Forgiveness Act. That expires at the end of this year and I doubt it will be renewed. Also, the risk of deficiency judgment is now so high that it makes no sense to stop paying on a mortgage unless you plan to file bankruptcy.
  • Short sales are close to dead too. A favored strategy was to attempt a short sale, because the homeowner could get a release of deficiency from the lender.  But the Mortgage Debt Forgiveness Act is about to expire, meaning the homeowner will have to pay tax on the 1099 after the short sale closes AND if the short sales doesn’t close, the risk of deficiency judgment is way too high to try a short sale.
  • Bankruptcy’s the only route. The only sure-fire way to get rid of a deficiency judgment is to file a chapter 7 or chapter 13 bankruptcy. Chapter 7 is cleaner than Chapter 13, but there is an income limit (called the “means test”) that has to be met and an asset limit. I’ve had to file several bankruptcies for clients lately after deficiency judgments were entered. Chapter 13 bankruptcies are less desirable because the creditors have to be repaid, but the income and asset limits are very broad and most people can easily meet them.


Illinois Deficiency Judgment: Still rare, but it can happen

I had a phone conference with a client whose house in the northwest suburbs was nearing the end of a strategic default. He stopped paying the mortgage about 1 year ago due to a divorce and the fact that the property was $100k+ underwater.

The sheriff’s sale was already done and he wanted me to review the order entered in court that confirmed the sheriff’s sale.

I almost spit out my morning coffee as I read this part of it:

“That there be entered an in personam  deficiency judgment in the amount of $136,000 against the Defendants _____________,  with interest as provided in Section 1508 (e) of the Mortgage Foreclosure Act.”

This meant that the lender, Harris Bank, went through the cumbersome, seldom used process of obtaining a deficiency judgment against the owners. The chances of this happening very slim, but it is allowed by law.

Usually the order confirming the sheriff’s sale says that a deficiency judgment is entered in rem against the property. Seeing this freaks out the client, but the words in rem  are nothing to be concerned about it.  The key words in this order that make it white hot are in personam, because when you see that, it means you have been hit with a personal deficiency judgment.

The client only had a few options:

  1. Pay  the lender.
  2. File a chapter 13 bankruptcy (he didn’t qualify for a chapter 7).
  3. File a motion to vacate the judgment and try to work something out with Harris.

I’ve written before about deficiency judgments and how they are extremely rare except when the bank is a small local lender or if the loan was a commercial loan (used to by an investment property).

This does not mean that the world is ending and everyone will now have a deficiency judgment entered against them. Anyone who has a mortgage with Chase, Bank of America, Wells Fargo, US Bank, Nationstar and the rest of the herd of residential lenders has a slim chance of having a deficiency entered against them. If you have a first mortgage with Harris Bank, I would be very cautious.

To me, this reinforces a couple of things:

  1.  It is almost always a good idea to try a short sale first before moving to a strategic default. Why? Because if the short sale closes, we can usually get a full release of deficiency from the lender, cutting off all liability to the lender.
  2. Deficiency judgments can’t be entered unless the defendant is personally served with the summons at the start of the case. If you are served by publication, no deficiency judgment can be entered. Clients have to be aware of the implication of being personally served with the summons and proceed accordingly.
  3. Filing bankruptcy is your final line of defense. If you have a high income, it is likely that you will have to pay the lender back some or all of the judgment, but if you qualify for a chapter 7, you will not have to pay anything to the lender.

Deficiency judgments in Illinois are still very rare, but they are allowed by law and lightning can  strike.


Illinois cash for keys payments increasing

hopslamRecently, I went to a birthday party at a Palatine bar not known for its fine beer selection. I looked across the place expecting to see Bud Light or some other run of the mill offering, but like a distant mirage I saw  the words “Bell’s Hopslam” engraved on a tap handle. This is a world class,  high abv beer and it’s not easy to find. My main emotions were surprise, joy, elation and concern that I would spend the next morning in an iron lung recovering from this happenstance.  Mainly, it was a nice surprise and it made for one fun evening.

Those in the middle of a strategic default or foreclosure may be in for a nice surprise too.  Relocation assistance payments (more commonly known as “cash for keys“) are becoming the norm and the payments are getting larger.

In a foreclosure, the lender is entitled to possession of the property after the sheriff’s sale is confirmed in court. But it  became common practice for the lender to pay the occupant between $1000 and $2000 for the keys to the property. This was done so that the property is delivered to the lender in good, clean condition. The lender would rather not physically evict the occupant because the property may be stripped or damaged by the owner.

Here is what is new in the cash for keys arena:

1. Payments higher. The last two cash for keys arrangements that I worked on were $7800 and $4000 respectively. These required possession in 30 days and a check was given when the keys were delivered. It seems like $3000-4000 is obtainable now, whereas $1000-$2000 used to be about the max payment.

2. Don’t expect an offer until after sheriff’s sale confirmation. Clients sometimes want me to ask for relocation assistance during the middle of a foreclosure. I tell them it’s not possible. The only time a lender will offer cash for keys is after the sheriff’s sale has finished AND the motion to confirm the sale in court has been heard and entered.

3. Real estate agent will leave calling card. I have had little to no luck calling the foreclosure attorney to initiate a cash for keys. They always say “call the lender” which is pretty much a fruitless exercise. Have your ever tried to just ring up B of A or Wells Fargo with no contact person? Not fun. Here is what I see most of the time:  After the confirmation of the sheriff’s sale, the REO real estate agent hired by the lender will put a card or flyer under your door with his or her phone number. They are very responsive when called because they want you out of there so they can sell the property and earn a commission.

4. Most checks are given when keys are delivered. I prefer that the agent give the owner a check at the appointment when the keys are delivered. Most of the time this is was happens. Sometimes the agent says that the check will be mailed. No one likes this. I try to speficy in the cash for keys agreement that the check will be delivered in exchange for the keys and will not be mailed afterward.

5. Can’t always get what you want. About 20-30% of the time the lender will not offer a cash for keys. Often, the REO real estate agent initially will say that no relocation assistance is offered and then will come back a week or two later and offer it. So hang in there and wait a few weeks.

6. House has to be occupied. It is best to leave curtains up at the property and some personal property there. If the house/condo is clearly and obviously vacant, the REO real estate agent may just re-key the property and you will not get a cash for keys payment. I have had 2 instances in the last year when REO agents trotted into occupied properties and changed the locks. They are not supposed to do this. In both cases, when I called them the locks were changed back and we later received cash for keys payments. If the property looks like an abandoned haunted mansion, don’t expect to get a cash for keys.

Mortgage Debt Forgiveness Act extended through 2013

As part of the fiscal cliff bill passed early this morning, the Mortgage Debt Forgiveness Act (MDFA) was extended for an additional year through 2013. It expired on 12/31/12.

As long as your short sale closes before the end of 2013, and provided the property was your primary residence, there will be no income tax due on the 1099 that is issued after closing.

The same will apply to properties foreclosed in 2013. If the foreclosure is completed in 2013 (sheriff’s sale held and confirmed by the court), then there will be no tax owed on the difference between the market value of the property and the outstanding mortgage amount. This will only help owners of properties already in foreclosure. Since foreclosure takes so long in Illinois (14-20 months), you will have to carefully examine if beginning a strategic default makes sense now makes sense or not, because the law will likely expire again before the foreclosure is completed. And who knows if it will be extended again.




Illinois foreclosures speeding up (imho)

The Chicago Tribune reported that the average time for a foreclosure in Cook County was 682 days. That’s about 22 months and it sure seems like a long, long time to me. Plus, that’s the average, so many cases took much longer.

I hate to be a contrarian, but lately my experience is that foreclosures are going faster, not slower.  My own purely unscientific guess is that 14 months is about the norm in most cases.

There are two factors that are at work in determining the length of a foreclosure:

1.) When the bank obtains the Judgment of Foreclosure.

2.) How fast a Sheriff’s Sale can be set up in your county.

I should back up a minute and say that I am only talking about uncontested foreclosures here, meaning that you or your attorney did not file an appearance in the case and you are not actively defending the foreclosure. If you file an appearance in the case, show up to plead your case and/or file contested motions, the case can stretch on for many moons. In Lake County, IL it takes about 8 months to get a hearing date for a contested motion. By the time the parties get to court, no one even remembers what the issue was.

Let’s take a look at the two factors that affect the length of a foreclosure:

1.) When the bank obtains the Judgment of Foreclosure.

The faster that the bank gets a “judgment of foreclosure,” the faster the case will move. The pic below shows a fast moving case. (As you can see, my dream is to be a graphic artist.)

Here the bank gets its judgment of foreclosure before the redemption period expires. The redemption period (the owner’s right to sell the property even though they are behind on payments) has to expire before the sheriff’s sale can be held and the owner officially loses the property.

This pic shows a slow moving case. It’s slow because the bank dinks around and waits until after the 7 month redemption period is over to get the judgment of foreclosure. Doing this extends the redemption period another 3 months and slows the case down. (The redemption period is 7 months from service of summons or 3 months from the entry of judgment of foreclosure, whichever is later.)


2.) What county you live in.

In Cook County, the sheriff’s sales are handled by many outside companies, not the sheriff, so the sales are scheduled within 30 days of the redemption period expiring. Like clockwork, your Cook County sheriff’s sale will follow within 30 days of the redemption period expiring, so it is by far the fastest county in that regard. This company seems to handle a large share of the Cook County cases.

Will, Lake and Kane Counties are slow because the sheriff handles the sales and they are still overrun with cases, so it can take 4-6 months to schedule the sheriff’s sale.

So most Cook County cases are on the express track these days, while the collar counties are by and large slower.

GMAC: My short sale BFF

I just closed a short sale with GMAC Mortgage and it only took 3 months to close from the date of the contract. In the normally slow moving short sale world, that’s blindingly fast. So GMAC is my short sale best friend forever. Closing one of these makes up for the many death march short sales I’ve endured with the likes of Citibank and B of A.

My clients bought their home in Pingree Grove in 2006 and paid $250,000. They listed it for a short sale and got an offer for $150,000.00. GMAC short sales are initiated on the online Equator system and they quickly ordered the broker price opinion (BPO) and asked the buyer to raise the price by $5k. The buyer agreed to this and the short sale was approved in about 45 days. GMAC did not ask for a seller “contribution” despite the fact that the married couple selling were both employed and had good incomes. GMAC shorties also include a waiver of deficiency, so the seller is released from liability on the note (which is one of the main reasons to do a short sale in the first place).

When the buyer applied for his new loan, the property appraised $4,000 under the agreed short sale price after the increase. GMAC agreed to reduce the price back down to the appraised price, which was a minor miracle. Appraisal problems are everywhere now and a week does not pass without a property under-appraising, but that’s a post for another day.

GMAC also agreed to extend the initial short sale approval while the buyer finished his loan approval. For some reason, when lenders approve a short sale they put a very short wick on the time for closing, often less than 30 days. In this market, it takes a buyer a minimum of 30 days to obtain financing, so a short sale extension is often needed. Extending short sale approvals can be a mess. I am working on another short sale and the lender did a new BPO when asked to extend the short sale approval and increased the price $10,000 in mid-stream. That was not fun.

GMAC has a simple, final approval process for closing. The final HUD-1 closing statement is uploaded 48 hours before closing and, in this case, it was approved in about 1 hour. The final approval is fast and easy and not the extended nightmare of say, a Wells Fargo short sale.

So if you have an underwater home with a GMAC mortgage, you might consider a short sale. My unscientific guess is that you have an 85% or better chance of closing your short sale quickly and with a full release.

Stripping foreclosed home can lead to a lawsuit

A client called to say that he just moved out of his home in foreclosure and, on the way out,  he took the following:  Stove, refrigerator, washer and dryer.  Not satisfied with taking just these items, he disconnected and hauled away the exterior air conditioning  and put that big whopper in a storage locker. He had moved all the way across the country, so he really had no use for any of this stuff and it struck me as kind of excessive. His lender thought so too.

The reason for the client’s call to me was that his lender had called demanding  the  a.c.  be returned and threatening to file an insurance claim on his homeowner’s policy if it wasn’t returned. I told him to return the a.c.

Increasingly, lenders  will file claims against an owner’s homeowner’s policy if a home in foreclosure is stripped of fixtures. The lender is an additional insured on the insurance policy and is entitled to payment.  Homeowners need to be careful about this because after the insurance company pays the claim, the insurance company will sue the homeowner for the money it paid out.

Generally, it’s okay to take appliances like washer, dryer, refrigerator or stove. When I arrange “cash for keys” agreements for clients at the end of foreclosures, the lender will usually allow the owner to take these appliances along. But taking a furnace, a.c. unit or kitchen cabinets from a home in foreclosure is crossing the line and should not be done unless you want to be lit up with a lawsuit later.