Category Archives: foreclosures-shortsales

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.


Why your BofA Short Sale to an LLC may be DOA

If you are trying to short sell your home and have a mortgage with Bank of America (BofA) there is a pretty good chance that you will get an offer from an investor doing business as a Limited Liability Company (LLC).  Large, well-funded LLCs are everywhere now and they are buying up properties quickly and paying cash.

A couple of LLCs that buy a lot of properties in Illinois are Waypoint LLC and IH2 Property Illinois.

If you are doing a short sale with BofA, I would not suggest accepting an offer from one of these LLCs because you will not be able to close. BofA will reject the LLC as a buyer and spike your short sale. Why would BofA do this? I was told that it’s …. cough, cough … “company policy” which means someone just made it up, and there really is no reason for this restriction.

BofA’s short sale rules are as follows:

1. LLC Buyer. If you have an LLC buyer you have to submit the articles of organization for the LLC and the operating agreement for the LLC. Most of the LLCs will give you this.

2. Members of LLC must be individuals. BofA will allow an LLC as a Buyer,  but only if the operating agreement of the LLC shows that an individual or individuals, and no entities, as members of the LLC– they will not approve a short sale where a trust, corporation or another LLC is the member of the LLC. The problem is that with large LLCs like those named above, there are no individual members. The members of the main LLC are always other LLCs or corporations. BofA will kill your short sale when they see an entity buyer within the LLC.

This only applies to BofA short sales, not to short sales in general. So don’t panic if you have a short sale lender other than BofA. Wisely, none of the other lenders look inside the Buyer’s LLC.

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.


Buying a FNMA foreclosure gets a little more expensive

If you buy a FNMA foreclosure, watch out for the fine print.  There’s a new paragraph recently added to the infamous foreclosure rider that could cost you some money.

I’ve written before about how FNMA buys are quirky and about what to watch for when buying one.

Starting in December 2012, the FNMA foreclosure rider that’s required was amended to include this more-than-a-little-overbroad statement:

Par. 10 (e) “Regardless of local custom, requirement or practice the Purchaser shall pay all costs and fees incurred in the transfer of the property, including all lender related costs and recording costs, except as expresly assumed by the Seller in this Addendum.”

This paragraph was not in prior versions of the rider and I don’t know how far FNMA will go  to collect from the buyer.

FNMA has to pay for title insurance, pay the real estate commission and give a tax credit under the rider, so those costs are “expressly assumed,” but that’s about it.  In the closing I handled,  the Seller used Par. 10 to charge  my client for state and county transfer stamps and for the $400 cost of obtaining the paid assessment letter from the association. Both of these costs are normally paid by FNMA. But, due to the brand new rider clause my client was stuck paying them.

There is not much that can done to prevent this, except to change the rider under the attorney approval clause (good luck with that). So all of you FNMA buyers out there, please beware that you might be stuck with some extra costs at closing.

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.

Masochists guide to buying a HUD foreclosure

Everyone and their brother is buying real estate to rent to a tenant now because prices are low and the rental market is red hot. Most investors pay cash and buy low priced condos. More and more, I see well-meaning folks choosing to buy HUD foreclosures that are $100,000.00 or less. These are properties that had FHA mortgages, were foreclosed and HUD is reselling them after the foreclosure.

Buying a HUD foreclosure is a quirky mess and much harder than buying a Fannie Mae or Freddie Mac foreclosure, which I wrote about here.

In fact, you pretty much have to be a total masochist to put yourself through buying one of these. I don’t recommend buying one of these as your primary residence. Many of the properties are a wreck and you will have problems with the appraisal (see number 2 below). Only seasoned investors should buy these, and even they should be aware that they are marching into a swamp and should proceed with caution.

Here’s why HUD buys are so painful:

1. Earnest money will be gone if you cancel. I often tell clients that there is no way they will lose any earnest money on a purchase because I watch the date deadlines carefully and I know how to get the earnest back. Scratch that on a HUD buy. It is VERY LIKELY that you will lose your earnest money if you cancel a HUD purchase after the home inspection or later. Generally, the earnest money is only $500 to $1000, but who wants to flush that down the drain? HUD is terrible about returning deposits and if you cancel, the earnest money is toast and most likely you will never see it again.

2. Watch out for the appraisal if you get a mortgage. If you try to get a mortgage to buy a HUD property, most likely the appraiser will find problems with the property and will require that these things be repaired before closing. I recently had a Buyer try to purchase a HUD and the appraiser wanted a structural engineer to check the foundation and required thousand in repairs. That deal was dead on arrival. The problem is that you can’t make the repairs since you don’t own the property and HUD will refuse to make them.  There is a type of FHA mortgage called a 203k loan that you can get to make repairs on the property, but getting a 203k loan is like scaling Mt. Everest barefoot.

3. No attorney approval clause. Your attorney can’t make any changes to the HUD contract. You are stuck with it. It is an “as is” sale. You can’t cancel the contract 5 business days after signing it, like a traditional contract.

4. No title insurance from seller. HUD does not pay for title insurance, so you will have to pay $1500 to $2000 for an owner’s title insurance policy. Normally, the seller does buy title insurance, but HUD buys are different and the buyer has to pop for it.

5. With a condo, you will get stuck with 6 months of the foreclosed owners dues (plus attorney’s fees). Illinois law allows condo associations to charge the buyer for 6 months of the foreclosed owner’s condo dues, plus attorney’s fees. Usually, the seller will pay this (about 65% of the time) but not on a HUD buy. You will get sacked with this extra cost which ranges from $900 to $4000. Freaked out about buying a HUD yet? I don’t mean to be so negative, but I speak the truth here and it is not pretty.

6. You pay for extensions even if it’s the seller’s fault. This is perhaps the most annoying facet of buying a HUD. HUDs often close late, mainly due to the seller’s delay in ordering the paid assessment letter from the condo association if the property is a condo. If the closing does not happen in 45 days,the Buyer has to sign an extension form AND pay for the extension. The payment depends on the sales price and is about $200. The buyer has to do this even if the delay is the seller’s fault. The selling real agent has to handle this chore. If the agent doesn’t ask for an extension, the property goes back on the market and you lose your earnest money.

7. Waiting on the RESPA at closing. Assuming you finally get to closing, you have to sit at closing and wait until HUD signs the RESPA form that has all of the closing figures on it. They will not let you sign it until HUD signs it. Make sure you have three books fired up on your Kindle because you will be waiting for some time my friend.

8. Buyer pays for local transfer taxes. If you buy a property in a town that has a local transfer tax (that the seller would normally pay) like Elk Grove or Schaumburg, you Mr. Buyer will have to pay for and obtain the transfer tax stamp before closing. The seller will not pay for it or go get it.

You are far better off buying a Fannie Mae or Freddie Mac foreclosure (although they have their own quirks), but please be careful with HUD buys.

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.