Yearly Archives: 2011

Cash-for-keys is alive and well

Many clients think that if they miss one mortgage payment, the bank will immediately come by, change the locks and repossess their home. Nothing could be further from the truth.

Foreclosures take more than 1 year in Illinois. During that time, the owner, not the bank,  is entitled to possession of the property.  Near the end of the foreclosure, the sheriff’s sale is held, at which the bank becomes the new owner of a house in a foreclosure. The sheriff’s sale  is about 1 year after the foreclosure is filed.  The bank finally gets “possession”  of the house about 60 days after the sheriff’s sale.

Even after the bank gets an order of possession, the bank has to file the order with the sheriff’s office for a physical eviction. That will take anywhere from  3 weeks to 2 months depending on the time of the year.  In Cook County, physical evictions are halted around the holidays and are also stopped if the temperature drops below 15 degrees. So if you are a foreclosing bank all I can say is good luck evicting someone between December and February, because it will take forever.

“Cash-for-keys”  is a humane alternative to physical eviction after a foreclosure that has become fairly routine.  The foreclosing bank pays the owner to leave the property by a certain date, thus ending all the drama, worry and delay inherent in changes of possession after a foreclosure.

So how does one work out a cash-for-keys arrangement?

1. Contact the real estate agent for the bank after the sheriff’s sale. After the sheriff’s sale, the attorney for the bank usually will know the name of the real estate agent who is handling the resale of the property for the bank. Contact that agent and say you would be interested in receiving “relocation assistance” which is the formal legal buzzword for cash-for-keys.  Generally, the agent will check with the bank and will call back with an offer.

2. How much will I get? The payment varies but it’s usually between $1000 to $2000. Some agreements pay you less the longer you stay in the property. Most agreements pay a a flat fee to leave by a certain date.

3. How much time will I get in the property? That varies, but it is usually about 30 to 60 days from the time the agreement is reached with the agent.

4. Will I get a check upfront? Sorry, no. Most agreements call for payment when the property is vacant and in broom clean condition. The agent meets you at the property,  inspects it and gives you a check on the spot.

5.  Do I have to sign an agreement? Yes, you will have to sign an agreement that says the property will be delivered in good condition and the agreement will release the bank from any liability.

So if you are nearing the end of a foreclosure I would highly suggest  working out a cash-for-keys deal with the lender.  The bank will pay you to leave and that’s good for both parties.

What to do if the Mortgage Debt Forgiveness Act expires?

After suffering through a foreclosure or short sale, there’s a final kick in the teeth. It comes in the form of a 1099 from your ornery mule of a lender.

For the last few years, with foreclosures in high gear, many homeowners were able to avoid paying tax on the 1099 issued after short sales and foreclosures because of the Mortgage Debt Forgiveness Act. The Mortgage Debt Forgiveness Act says that if a homeowner short sells his primary residence or is foreclosed on his primary residence then no tax is owed. This expires at the end of 2012.

What if they don’t extend this? There a few other ways to go as shown below.

First a little background:  A foreclosure or short sale creates what it is called cancellation of debt income.
Income tax has to be paid on cancellation of debt income. For a short sale, the amount that’s taxable is the difference between the amount owned under the mortgage and the amount actually paid back to the lender. For foreclosures, it’s the difference between the market value of the property and the amount due on the mortgage.

If you owned your home for any 2 of the last 5 years before the foreclosure or short sale, then no tax is due on the 1099 because of the Mortgage Debt Forgiveness Act. If you rented the home out temporarily, you will still qualify as long as you meet the any 2 of the last 5 years test. If the property was never your primary residence, then you can’t use the Mortgage Debt Forgiveness Act and tax will be owed on the 1099.
If the Mortgage Debt Forgiveness Act expires, (or if you had an investment property foreclosed or that was sold short) , there are only two ways to avoid paying tax on the lender’s 1099:

1. Claim Insolvency on form 982.
2. File Bankruptcy before the 1099 is issued.

Insolvency. Insolvency means that your debts exceeded your assets on the day that debt was forgiven. This worksheet explains how to calculate insolvency.  Notice that IRA and 401k accounts ARE included as assets. Overall, this seems like a simple calculation but it’s kind of tricky and anyone hanging their hat on insolvency should discuss it with their accountant well in advance of April 15. The insolvency worksheet should be filled out, form 982 is filed and then because you are insolvent no tax is owed on the 1099.

Bankruptcy. If a bankruptcy is filed before the 1099 is issued, then no tax is owed on the 1099. On your tax return, you file form 982 to show that you filed a chapter 7 or chapter 13 and that wipes out the income tax from the 1099

Foreclosures don’t seem to be slowing down and my bet is that the Mortgage Debt Forgiveness Act will be extended again.

Short sales & credit score: Real life story

A well-traveled internet myth is that short sales are “better” on your credit than foreclosures.  It’s not really true that short sales are softer on your credit than foreclosures.  A short sale can be nearly as bad as a foreclosure on ones credit, depending on the circumstances.

After  a short sale closing I had last month, my client suffered what I consider to be minimal credit damage.  We closed on the short sale of the client’s condo in Arlington Heights and he was three months behind on his mortgage payments. His credit was 780 before the short sale.

Last week, after the short sale, he checked his credit again and it was 680. So, it dropped 100 points, which isn’t too bad.

There was no foreclosure filed in this case and the short sale included a release of deficiency, so it was really close to the best of all circumstances (except that he was three month behind on the mortgage). His credit score was eerily close to the credit score predicted in this post for “Consumer C”  which leads me to believe that the information in the chart shown there is pretty close to reality.

The client will be prohibited from getting a mortgage for at least two years, but with a 680 credit score he can get an FHA 3.5% down mortgage easily after the two years pass.

Spooky deficiency judgment story in WSJ

This morning, I read with interest a story in the Wall St. Journal called “House is Gone But the Debt Lives On.” When I finished reading the story, my first thought was…this is going to freak out a lot of people unnecessarily.

(Aside: I read this on my Ipad and I highly recommend the WSJ tablet edition. It’s beautifully designed and very easy to read. It has a monthly fee, but it’s cheaper than the print edition).

The story covers how there has been an increase in deficiency judgments entered this year in a Florida community. A deficiency judgment is a court judgment entered against the owner after a foreclosure for the difference between the mortgage balance and the market value of the property.

The community is Lehigh Acres, an overbuilt central Florida boom town. It’s so bad down there that they could rename it “Deficiency Judgment Acres.”  In the first 7 months of 2011, there have been 42 deficiency judgments entered against foreclosed owners in this subdivision alone for more than $7 million.  Most of these judgments will be uncollectible, I would guess.

Here are the main points of the story:

1. Deficiency judgments are increasing in Florida.

2. Deficiency judgments elsewhere are still rare, unless the foreclosing bank is small bank or a credit union.

3. Down the line, debt collectors may buy foreclosed mortgages for two cents on the dollar and then may try to collect against foreclosed owners.

How does this apply to Illinois? Deficiency judgments are still rare in Cook County, so there is really no comparison to what is happening in Lehigh Acres.

It is always possible that foreclosed first mortgage debt could be dumped to debt collectors. I haven’t seen that happen yet, but you never know.




Senior exemption: MIA on Cook tax bills next week

For years and years, the Cook County senior exemption for real estate taxes, which reduces the tax bill of those over 65 years old by about $250, did not  require an annual application.

Now it does.

Surprise, it’s all messed up because no one realizes that they have to file the application.

It appears that one in five seniors did not file the new application for the senior exemption. So when tax bills are mailed next week, seniors across Chicagoland will hit the roof when they see they did not get their senior exemption. Or they will just pay the higher tax bill, thinking they already got the exemption.

This can be cured after the tax bill is received by filing for a certificate of error before the tax bill is paid. Tell your senior friends to check their tax bills, because there’s a good chance the exemption will not be there.


Buyers’ title charges getting out of control

When it comes to real estate closings, Sellers and Buyers agree on almost nothing, except maybe one thing: They both hate paying  for title insurance. Clients on both sides react to paying for title insurance like they are being forced to pay for a minority interest in a strip mine in Nevada or a timeshare in Biloxi.

Typically, the seller pays for the owner’s title insurance policy for the buyer. The buyer pays for a lender’s title policy and also pays the closing fee.  In the past, the seller’s title bill is more than the buyer’s title charges. Not any more. The Buyer pays more than the Seller now. Way more.

I recently did a condo closing in Chicago and I was shocked at how high buyer’s title insurance has climbed. Below are the charges from this closing:

The reason for this is that the “closing fee” paid for by the buyer has climbed.

Also, title companies now pack every imaginable up charge known to man onto the buyer’s side of the title. Take a look at this list of extras from this same closing.





Most egregious here is the “chain of title” fee. All lenders request a 24 month chain of title. This is to verify that the title history of the property for the past two years. All the title company does is photocopy the title search and send it to the lender. Charging $250 for this is insane.

The biggest rip-off charge of all is the “inflation enhancement endorsement.” One title company, that will go unnamed, loves this one and adds it to the Buyer’s bill on all files. Supposedly this endorsement, which costs $150, will increase the amount of the title insurance as the property value rises. Just what everyone needs more title insurance coverage while home values are sinking by the day. I always ask to remove this one, because it’s a joke.

Title insurance is a necessity. But all these add-on charges are getting out of control. I know I’m supposed to have a nifty summary of what to do about this, but I really don’t . Just don’t pay for the inflation endorsement and budget accordingly if you are a Buyer.

Can I rent out my house if it’s in foreclosure?

I’m always surprised that so many owners in foreclosure (including those who  strategically default) decide to move out of the property early in the foreclosure process. I’d say at least half leave the house as soon as they stop making mortgage payments.

In Illinois, foreclosure takes about 16 months (from the first missed payment) and the owner can live in the property and does not have to make payments during the foreclosure. So it makes economic sense to stay in the property as long as possible. But, many say they just want to “move on” or that they literally hate the property and can’t bear to stay there anymore.

Lately, I’ve seen an increase in the number of owners who move out of the property and then rent it out during the foreclosure process.  Is this legal? As our former Alaska governor would say, “You betcha”

There are some legal and tax consequences to renting the property and one should be aware of these before trying this.

  1. Do I have to tell my mortgage company that I am renting the home? No.Can my mortgage company try to take the rent from me? No, not unless you signed an “assignment of rents” which is pretty rare.
  2. How much rent should I charge? Most landlords charge slightly below market rent.  The  rental market is very hot these days. There’s usually no problem finding a tenant.
  3. Should I do a credit check on the tenant? Yes, even though the property is in foreclosure, I would run a credit check on the tenant so that you don’t put Jack the Ripper in the house.
  4. If I rent my house during a foreclosure, doesn’t that convert it to an investment property? Not necessarily. The definition of primary residence is pretty broad as detailed below.
  5. Can I still call the house my primary residence if I rent it? The Mortgage Debt Forgiveness Act says that there is no tax due on the 1099 issued after a foreclosure if the property is your primary residence.  After a foreclosure, the owner gets a 1099 for the difference between the mortgage amount and value of the property.  The definition of primary residence is this: The owner used the property as his or her main residence for any two of the last five years. So, you can rent out the property for a few years and it will still qualify as your primary residence and there will be no tax owed from the 1099.
  6. Should I tell the tenant the property is in foreclosure? Absolutely. You should be fair and honest about it and disclose to the tenant that the property is in foreclosure.
  7. How long can I rent it out? In Cook County, you can rent out a property in foreclosure for about 14 to 16 months. It depends on what county the case is in and how fast the bank’s attorney moves the case along.
  8. What about homeowner’s insurance? You should change tell your agent that you are renting the property and change your insurance accordingly. There are no contents to insure so the premium may go down. If you leave your homeowner’s insurance in effect and don’t tell your agent you are renting it, and later make a claim, it will be denied since you were not occupying the property.
  9. Will the tenant be served with the foreclosure summons? Usually the tenant is not served with the summons. I has happened a few times lately. That’s one reason you should tell the tenant it’s in foreclosure.
  10. How long can I collect rent? You can collect rent until the sheriff’s sale of the property which is at the end of the foreclosure. You don’t own it anymore after the sheriff’s sale.
  11. Will the tenant be kicked out by the sheriff? The foreclosing bank gets an order of possession about 60 days after the sheriff’s sale (the sheriff’s sale  is about  12-14 months into the process). An order of possession can be placed with the sheriff and the tenant could be evicted.
  12. Do I have to pay income tax on the rent I get? Yes.


Short sales: Ask for release early and often

Last week, I emailed the negotiator for a particularly pesky and difficult short sale lender and asked him, not so politely, to release my client.  This was the fourth time I had asked him to release the deficiency (difference between what the lender was to receive and what the lender was actually owed).

The first three times that I asked him for a release, I felt like a cotton candy salesman in the Wrigley Field bleachers. He ignored me every time .

Fed up, I emailed him that “we might as well put a stake in this one unless you are willing to release any and all deficiency.” Finally, he agreed to release the deficiency.

It is possible to get a release of deficiency on the short sale of a first mortgage, and some lenders will just offer this up, which is awesome, but rare. Most short sale lenders ignore the issue and have to be hammered over the head with requests for it.

Most times, you will only get a release of deficiency if you are willing to pay something. This is called a “contribution.” In this case, the negotiator asked for $20,000 contribution from my client. We went back and forth a few times and ended up with a $7000 contribution and a full release of deficiency.  The client was happy with the result.

Too many times, attorneys and agents negotiating a short sale don’t ask for a release of deficiency until it’s way too late. You have to ask for a release early and often and you need to know the exact release language that will be in the short sale approval letter. The release usually reads something like this: “Lender agrees to release owner from any and all liability and any deficiency under the note and mortgage in consideration of the payment of $____.”

I have seen quite a few short sales where the eagerness to collect a commission and/or attorney’s fees was so great  that no one even discussed the issue of a release of deficiency with the seller and no one bother to even as the lender for a release. That is not good, but it happens a lot.

Here are some things to be aware of in getting a release in your short sale:

  • A short sale with release of deficiency is better on the credit of the seller.
  • Most first mortgage holders will not pursue the seller after a short sale. Try explaining that to the seller. Finality is good. Not having to look over your shoulder for 10 years is valuable. What if the  lender dumps all its short sale and foreclosure notes to a debt collector and tries to collect the deficiencies. What then?
  • Unless you are very lucky or a master negotiator, you won’t get a release of deficiency on a second mortgage in a short sale. That begs the question of why you are even doing a short sale with a second mortgage. I am not a fan of short sales involving second mortgages. Illinois needs to pass a law like the California law just passed that erases liability on second mortgages in a short sale. We need that to speed up and encourage short sales.
  • The release of deficiency is put in the short sale approval letter and is not a separate document.


Illinois power of attorney law changed July 1

On July 1, 2011, Illinois redid its laws regarding power of attorneys (POAs) for health care and property.

POAs for property are used to control property outside of a living trust in the event of a disability. A POA for health care designates who makes health decisions if one is incapacitated.

The changes are not gigantic or earth-shattering. But it would be a wise idea for clients to update their poas just to be safe. This excellent article describes the changes in detail.

To summarize, the new law does the following:

1. Sets out new “standard” forms with supposedly simpler, more direct language.

2.  Includes a notice to the agent (the person who uses the poa) to describe better his or her duties as agent.

3.  Limits who can act as agent (no relatives, doctors or agents).

4.  Updates the POA for health care to make it easier to understand and includes some HIPAA provisions.

It would be wise to update your POAs to comply with the new law.  Most clients never have to use their POA. But if they do need it, they want the bannk or health care provider to accept it and not hassle them to death, right? Banks and health care providers can be reluctant to accept POAs that don’t look like the most recent form set out in the statute.  So why not play along and update your POAs.

Since the witnessing and notarizing are kind of confusing,  I think it’s better to have an attorney handle it for you. If you are a do-it-yourselfer (or just curious), examples of the new forms are here.

Real estate and the Illinois Civil Union Act

It  used to be that only married couples could hold title to their primary residence as tenants by the entirety. The advantage of this form of ownership is that the property is protected from creditors if one spouse is sued or files bankruptcy (it’s not protected if both spouses get sued or file for bankruptcy).

Now,  under the new Illinois Civil Union Act, couples can hold title to their residence as tenants by the entirety, just like married couples. So what is the best way to hold title to real estate for couples united  under the new civil union act?

There are at least two options:

1. Tenants by the Entirety. This means that if one dies it snaps to the other avoiding probate. On the second death, however, a probate will be necessary to transfer title unless the property is transferred to a trust in between. The property is protected from creditors. I like this form of ownership if the couple has an existing mortgage or plans to refinance down the line.

2. A living trust as tenants by entirety. The law now allows a couple to hold title to their primary residence in a trust (or trusts)  as tenants by the entirety. So the couple gets the probate avoidance of the trust and the asset protection of tenancy by the entirety. The trust/tenancy by entirety law is new as of January 1, 2011.  I like this form of ownership for properties that  have no mortgage and where there are asset protection concerns or a high liability job.