Strategic Default in Illinois: Q&A

June 16, 2010foreclosures-shortsales, Strategic Default, Uncategorizedtsammons

One client had no problem deciding to strategically default on his Chicago condo due to a triple-witching hour of crime, an abandoned condo complex and a declining market that left the unit worth one-third what he originally paid. For most people, though, the decision to walk away from a property is not easy. Here are some common questions about the process:

What will happen to my credit score and when will I be able to buy another house?

Your FICO score will drop to about 520 when you miss about three mortgage payments. You can get an FHA mortgage with a score of about 650 and over 720 is considered “good” credit. How quickly you rehab your credit is up to you. It will take a minimum of two years to be able to get another mortgage and it may take as long as five years.

Do I apply for a loan modification first?

You can certainly try to apply for a loan modification under HAMP. It is unlikely that your loan modification will be approved and I pretty much consider it a waste time. Some say that HAMP is basically dead, a failed program. Loan modifications are for people who want to stay in their homes.

Should I try a short sale first?

Some owners try a short sale first. Most short sellers are behind on the payments already and are near or in foreclosure. If the property is an investment property, you absolutely should try a short sale first because it will lessen the tax impact. Many owners can’t stand the thought of the many delays inherit in a short sale. I think it is smart to at least try a short sale first in most cases.

Once I quit paying the mortgage, when will a foreclosure be filed?

Usually, the foreclosure case is filed about 4 months after the first payment is missed.

Do I have to accept the summons and will they serve me at work?

For the owner, the day the sheriff serves the summons and complaint is a very dark one. The abstract becomes real and owners get very upset by this. A plain-clothes officer will ring the doorbell and ask if you are you. Then the officer hands you the summons and complaint and walks away. Generally, the sheriff will try to serve the summons for about two weeks and then they quit trying. After they quit trying to serve you personally, they will serve you by publication (meaning a notice is published in a legal newspaper). Owners are not supposed to evade service of process by refusing to answer the door (many do). In general, most process servers don’t try very hard to serve the summons. I find that lenders usually will NOT try to serve you with the summons at your work.

Do I have to respond to the complaint and file an appearance after the sheriff serves me?

In most cases, it is not necessary to file an “appearance” with the court or to appear in court. In fact, filing an appearance submits you to the court’s jurisdiction and will allow the lender to get a deficiency judgment against you. Ninety percent or more of foreclosure cases are “default judgments” where the defendant does not appear.

Do I have to go to court?

For some reason, owners want to go to court to explain the case to the judge. This is not necessary and not productive. The judge is overwhelmed with cases. There is no reason to go to court in 99% of strategic default foreclosures.

How long can I stay in the home without paying?

In most cases, an owner can stay in the house without making payments for one year from service of summons. It can be as short as ten months or as long as two years, but one year is about average.

When do I have to hand over the keys?

Some lenders actually call you early in the process to “make arrangements to pick up the keys.” This amazes me, since they have no authority to ask for or to take the keys. They are hoping that you will just turn the keys over. Generally, possession is given to the lender after the sheriff’s sale is confirmed by the court. This takes about one year from the time you are served with the summons. Most owners leave much earlier in the process because they find it too hard to continue to live in the house. You will have to leave the house once the order of possession is entered. If you don’t leave then the lender can file the order with the sheriff and have you evicted, which is a very unpleasant thing that I would not wish on anyone.

Do I have to keep paying the homeowner’s insurance and taxes?

If you are still living in the house, you should keep the homeowner’s insurance in effect since it covers all of your personal property. Once you leave the house, there is no reason to continue paying for homeowner’s insurance. Most owners stop paying the real estate taxes (if there is no escrow) once they stop paying the mortgage. It takes about three years to lose a home for unpaid real estate taxes.

Do I have to pay for utilities?

Yes, all utilities are personal bills and the utility will file suit against you if you don’t pay.

Does it matter if I am served personally or by publication?

Yes, if you are served personally the lender can get a deficiency judgment against you. If you are served by publication, the lender can’t get a deficiency judgment. For more about deficiency judgments, see here.

Does it make any difference if I own a condo?

Yes, it does. If you are planning a strategic default on a condo, the condo association will file a separate lawsuit against you for the unpaid condo dues. So you may have to settle that case or continue to pay the dues until the condo foreclosure is final.

Can the lender sue me for deficiency judgment?

Most foreclosure complaints ask for deficiency judgments. This means that if the lender sells the property at the sheriff’s sale for less than you owe, the lender can try to collect this deficiency from you. Most lenders in Illinois are not seeking deficiency judgments. More information on deficiency judgments is here. The lender can get a deficiency judgment against you AND 1099 you for the forgiveness of debt, but this is pretty rare. Most lenders 1099 you for the forgiveness of debt and leave it at that. However, if you have a second mortgage it is possible that the lender will file a collection case against you. In my opinion, this is a much greater threat than a deficiency judgment.

Will the lender take my other assets or file a wage garnishment after the foreclosure?

Yes, they could, but it’s rare. If a lender gets a deficiency judgment, the lender could garnish your wages or try to take other property from you. The lender cannot take IRAs, 401ks or life insurance. I have never seen this happen.

Will I get a 1099 after the foreclosure?

Yes, lenders are required to send a 1099 for forgiveness of debt after a foreclosure. Read more about the 1099 issue here. If the property foreclosed was your primary residence then you file form 982 and this makes the income from the 1099 nontaxable.

Will I get 1099’d if I walk away from an investment property?

If the property was an investment property, then you will get 1099’d. Unfortunately, you have to claim the 1099 as income, unless you filed bankruptcy BEFORE the 1099 was issued or unless you can show you are insolvent. Walking away from an investment property has severe tax consequences and you should do everything possible to avoid doing so.

Will I need to file for bankruptcy?

Most likely you will not need to file bankruptcy. Generally, you file a chapter 13 bankruptcy to keep your house, not after a strategic default. You file a chapter 7 bankruptcy to get rid of credit card debt and other personal bills. The only reason to file bankruptcy after a strategic default would be in the unlikely event that the lender got a deficiency judgment against you, if a second mortgage holder filed a collection action against you or if you defaulted on an investment property. The chapter 7 bankruptcy would be needed after a strategic default on an investment property, and the case must be filed prior to a 1099 being issued for forgiveness of debt. Filing bankruptcy after a 1099 is issued will not work. A chapter 13 bankruptcy can be useful if a homeowner has a high income or other assets that he or she wants to protect. The homeowner files the chapter 13, “surrenders” the home in full satisfaction of the debt and gets rid of any deficiency judgment and tax consequences that way. There will be some payments that have to be made to the bankruptcy trustee but those depend on income, assets and other debts.

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Strategic Default in Illinois – Last man out of a dead condo complex

June 12, 2010foreclosures-shortsales, Strategic Defaulttsammons

I get many calls and emails from my blog, mostly from people near or in foreclosure.

This week, I spoke with a guy who bought a condo in the city in 2006 (generally considered the market peak). Then, and now, he had a good job, but the Chicago neighborhood where he lives is overrun with foreclosures. The neighborhood was “up and coming” in 2006, but now it’s downright dangerous, he said.

In fact, he is now the only owner left in the 4-unit condo building, the other three owners having been foreclosed upon and the units standing vacant with no offers.

His mortgage amount: $275,000.00. He was current in the mortgage payments. The biggest problem (among several) was that the other foreclosed units in the building were now on the market for $99,000.00! His unit was hopelessly “underwater” and it might take three lifetimes for him to get back to the price he paid in 2006.

We talked about the options and he admitted that he already decided on a “strategic default.” A strategic default is when an owner quits paying on a mortgage when he or she otherwise could afford to pay and just walks away. Most of the questions I get now are from people considering, or in, strategic defaults.

He decided to quit paying the mortgage in June and was going to move out right away, due to the unsafe neighborhood. What are the consequences of walking away from this unit?

Since this was his primary residence, the main effect of his coming default will be that his credit will drop to about 520 (FICO) and he will not be able to get another mortgage for at least two years (probably more like 5 years or longer).
He will get a 1099 for the forgiveness of debt from the lender after the foreclosure, but since it is his primary residence there will be no tax due.
We discussed that there is the possibility of the lender getting a deficiency judgment, but it was not likely. Illinois allows deficiency judgments, but few lenders are pursuing them. Most just issue 1099s and leave it at that.
Walking away from a condo can be problematic because the condo association will file suit against you for the unpaid assessments (and will tack on their attorney’s fees). But, in this case, there was no condo association left to pursue him, so that was not an issue.

Strategic defaults are everywhere now (just take a look at the 400 plus comments in this WSJ story on Strategic Default). There are forums online for homeowners to discuss with each other the many aspects of a foreclosure.

I am especially surprised at the number of senior citizens considering strategic defaults. Many seniors on tight incomes maxed out home equity lines and are walking away from their homes (to rent) because market values dropped like a stone (but that’s another story).

In the next few posts, we will take a look at what homeowners in Illinois have to consider before going down the strategic default path? I am not encouraging strategic defaults and I think that this should be done as a last resort.

There is a debate on the morality of strategic defaults. Some say that strategic defaults are immoral and will drag down our system. I agree with Professor Brent White that in some cases a strategic default is not only morally acceptable, but the right thing to do.

Next: Q&A on Strategic Default in Illinois.

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Buddha says: Seller should pre-inspect home

June 5, 2010Real Estate-Purchasestsammons

My client was able to snag a buyer for his home in Schaumburg after the tax credit expired, which was no easy feat.

With my usual downer tone, I warned him that buyers can be brutal on home inspections and to expect the worst. When the inspection letter came, it had only three minor items.

“That’s because I had the home pre-inspected, and did all of the repairs beforehand,” the client said, with Buddha-like serenity.

In reality, very few sellers are going to do pre-inspections. Most sellers think their homes are in perfect shape (not true). And they also think that the buyer will not raise many issues because the seller cut the price so much in negotiations (Also no true.) Here’s a Trulia thread on the pros and cons of preinspections.

My wise client prevented a 30-item inspection letter by doing the pre-inspection and saved himself a lot of agony.

I think that in this market, which has dropped like a stone since the tax credit expired on April 30, it is a very wise move for the seller to pre-inspect his home and make the repairs in the report. Doing so will remove the huge stress-ball (the home inspection) from the closing process.

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New law: Home title can be protected from creditors in living trust

May 25, 2010Estate Planning, Living Truststsammons

Most married couples hold title to their home in “tenancy by the entirety.” Married couples quit holding title as joint tenants when tenancy by the entirety was allowed in the mid 90’s in Illinois.

This means that if one dies, the house snaps to the other avoiding probate. Also, the house is protected from creditors. So if there is a court case against one spouse, the winner of the court case cannot enforce the judgment against the house. If the court case is against both spouses, the creditor can try to take the house.

Until recently, if the married couple had a living trust, and chose to deed the house to their trust, the couple lost the protection of tenancy by the entirety. A new law just passed that allows a married couple to hold title to their home (it only applies to a primary residence) in a living trust and keep the protection of tenancy by the entirety. (To be honest, I’ve never understood why the legislature allows married couples to protect their assets from creditors, but not single, divorced or widowed folks?)

The deed will convey title to the living trust, but will also state that title is being held as tenants by the entirety. Both spouses have to be trustees of the trust and the trust has to be for their benefit.

This is all brand new and was just passed last month.

Many living trusts that I review have only one trustee. From what I see, the trust will have to be amended to add both spouses as co-trustees. I almost always put both spouses on as co-trustees so changing title to the new tenants by entirety/living trust hybrid will be pretty easy for me.

I like the new tenancy by entirety/living trust form of ownership and suggest that clients take advantage of this (almost) free form of asset protection.

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Is HAMP loan modification program dying?

May 20, 2010foreclosures-shortsalestsammons

This is a well-written post on HAMP, the loan modification program. It talks about how HAMP appears to be dying due to “strategic defaults” (a person whose home is worth less than the mortgage just quits paying, without trying to sell it or modify the loan) and an overly complicated approval process. Fewer and fewer people are making application for loan modifications and of those who do apply, many are shot down for lack of income.

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Speaking of septic, mold, radon and structural engineers…

May 13, 2010Real Estate-Purchasestsammons

There are many sub-specialties in real estate. I want to highlight some folks who do a nice job in some of these areas.

Well & Septic Testing

There are only a few sanitarians who deal with well and septic testing. Brian Sheehan of WS Inspectional in Buffalo Grove , 847-721-8615, does a nice job on well and septic inspections and doesn’t make a mountain out of a Wisconsin Mound… if you know what I mean.

Radon

Eliot and Associates 630-325-8005 does radon testing and remediation. I like their website: http://www.radonillinois.com/ They’ve done 10,000 radon mitigation systems (literally), so I often refer clients to them.

Structural Engineer

When you hear the words “structural engineer,” used in the context of a pending real estate transaction, it does not bode well for its future. You can usually bet the deal is going down in flames. Recently, two separate clients hired Stuart Jacobsen & Associates of Northbrook 847 480-8899, http://www.skja-engrs.com/ to prepare structural engineering reports for homes during pending deals. The company charges reasonably and both transactions closed, which was a minor miracle.

Mold

Curt Mankoff of Mold Inspection Specialists in Lincolnshire, 847-774-6653, http://www.moldinspectionspecialists.com/index.html is an industrial hygienist and has done thousands of mold inspections. He does the mold inspection (usually after the home inspector finds mold), not the mold removal/ remediation, which is done by yet another party.

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How to protest Cook Co. real estate taxes now

May 3, 2010Real estate taxtsammons

Real estate taxes have remained level or increased while home prices have tanked. With lower home values, clients reasonably expect that they will be able to lower their real estate taxes to reflect the lower home prices. Cook County real estate taxes can be protested at two levels, the Cook County Assessor and the Board of Review. The Board of Review is now open in many Cook County townships and it may be worth filing a petition to lower your taxes. Here’s some background on how to undertake such a venture:

Can I protest taxes myself?

Yes, you can file a lack of uniformity complaint yourself with the Board of Review. The website is here and the forms and decent explanations are on the site. A lack of uniformity complaint means that you are claiming that you are not taxed uniformly with your neighbors.

How do I know when it is time to protest my taxes?

The Board of Review is currently accepting tax complaints. It opens by township. Palatine, Wheeling and Elk Grove townships are open right now, but won’t be for long. If your township is “closed” it is too late and you will have to wait until next year.

Do you handle real estate tax assessment cases?

No, I don’t. This is a specialty area of the law. I usually hire an attorney of my own to try to reduce the taxes on my house in Palatine. In my case, two out of three times, the tax bill was reduced and I was happy to pay someone to take care of the case for me.

What attorney should I hire to protest my taxes?

Most attorneys who handle real estate tax protests send mailings to homeowners when the assessor and board or review is accepting complaints. Some clients think that because the attorney sent a mailing then the attorney is somehow suspect, but that is not the case. All tax protest attorneys send mailings. Most times you sign a retainer agreement and send it in with no or a small payment of $50.00. The fee agreement pays the attorney 50% of the first year’s tax savings. This is a contingency fee agreement, so if the taxes are not reduced, you pay nothing. Richard Shapiro in Evanston, (847) 869-8686, and Christopher Walsh in Chicago, 312-372-1155, are two attorneys I have referred clients to in the past. You will not meet with or talk to the attorney in most cases. The case is all handled through the mail.

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Living trust funding: Whose job is it?

April 26, 2010Estate Planning, Living Truststsammons

At home, I received a newsletter from a northwest suburban lawyer who prepares a lot of living trusts. This attorney does a lot of seminars and I must be in his direct mail target market now that I am old enough to be in the AARP army. I scanned the newsletter expecting the usual boilerplate, but one story left me amazed.

It was about how the attorney was experiencing a rash of probate estates that had to be opened for clients with living trusts. (Spoiler alert: You’re not supposed to have a probate with a living trust.)

The story pointed out that the clients simply were not “funding” their trusts correctly, which is the process of changing beneficiaries and the titles of accounts to the living trust. A trust has to be properly funded to avoid probate. If any asset valued at more than $100,000.00 is left in the client’s own name (not jointly or in the trust) a probate will be necessary. Avoiding probate is one of the reasons to use a living trust over a will, so the newsletter story pointed out that this was huge failure. Rather than blaming himself for this, the attorney laid responsibility for this problem squarely where it belonged —on all of his misguided, wayward clients.

After all, he gave the client a letter telling them exactly how to fund their living trust. Why couldn’t the client simply follow his instructions? This attorney is part of the “go in peace my son and fund the trust yourself” school of attorneys. Oddly, when attorneys refuse to participate in funding of trusts, the cost of the trust is usually pretty high. But many attorneys consider trust funding to be beneath them.

I believe that attorneys who draft living trusts have an obligation to help the client fund the trust. I have drafted thousands of living trusts for clients and my clients are intelligent people. They are also very busy and have a million demands and obligations. They do not have the time or the interest to learn how to fund their living trust. Nor should they have to.

I have tried every imaginable combination of methods for funding trusts and after 20 plus years, I’m convinced that, for me, there is only one way to handle trust funding that works. Both the attorney and client have to be involved:

1. It is too much to sign the trust and other documents AND fund the trust in one meeting, unless the trust funding is really simple. I usually sign the trust in one meeting and fund the trust in a second meeting.

2. At the trust signing I set up an appointment for two weeks down the line with the client for a trust funding meeting. If I don’t schedule an appointment at the trust signing, there is about a 60% chance the client will never get back to me and the trust will be left unfunded.

3. At the trust signing, I make a list of the forms that the client must obtain. The client calls for the forms and the forms are mailed or faxed to the client. Many institutions will not send the forms to me, so the client has to undertake this step. I have many of the common forms on file for Fidelity, Vanguard, Schwab and some of the more common companies.

4. From trial and error I have developed one unwavering rule: All beneficiaries must be changed on life insurance and IRA accounts. Many clients say “Oh don’t worry I know my spouse is primary and kids are secondary.” I always change the beneficiary designation for all IRAs and life insurance, even if the trust is not the beneficiary and no matter what the client says. I would estimate that about 75% of the current beneficiary designations are screwed up, missing or wrong.

5. Once all of the forms are obtained by the client, we have the trust funding meeting with the client in my office. I tell the client it will be the most boring 30 minutes of his or her life. I sort through the forms and fill them out for the client. The client signs them. I scan the forms into pdfs and we mail in the originals.

6. The trust funding meeting is essential. Sometimes the client will say “I’ll just drop off the forms and you can fill them in when you have time.” This does not work. First, the client will usually forget to drop off the forms. Second, I will never have the time to complete them. The trust funding meeting forces the client and me to finish the job.

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Will HAFA help speed up short sales?

April 21, 2010foreclosures-shortsalestsammons

It remains to be seem if the new HAFA program for short sales, which started April 5, 2010, will speed up short sales. Short sales were already speeding up a little on their own because lenders finally seemed to realize that with home prices nosediving, out of sheer self-interest, it was best to be less rigid on the prices they accept for a short sale.

Some key points of the new HAFA short sale program:

1. Bad: The short sale seller must first apply for a loan modification under HAMP (that alone may stop many owners from using the new program).

2. Good: If approved for a HAFA short sale, there can be no deficiency claim against the seller.

My prediction is that the HAFA program will do little to speed up short sales due to the fact that short sale sellers will not want to march through the HAMP loan modification swamp first.

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More buyers taking job loss insurance

April 13, 2010Real Estate-Purchasestsammons

At my last three closings, the buyers got job loss insurance. It’s been around for years, but I’ve never run into it. Before last week, not one buyer purchased it….ever.

It’s generally called “mortgage protection insurance” or “job loss protection” and the insurance company pays your mortgage directly to your lender in the event of job loss.

My first client signed up for it because it was free for one year through their lender, Bank of America. Thereafter, it was pretty expensive at $66 per month. Life a never-ending magazine contract, it will automatically renew unless canceled. So they opted to take it, but will cancel it before it’s not free. The second client was buying new construction and the builder included the policy free for two years. The third client bought mortgage protection insurance on his own from this place.

A typical policy will have a 30 day waiting period after a job loss and then will pay your entire monthly mortgage payment (including escrows) for 6 months directly to your lender.

If the policy is free, it makes sense to accept the policy and then cancel it before premiums become too expensive. In the end, it’s probably just another marketing tool, but if it makes a buyer feel more comfortable with their purchase then what’s the harm.

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Law News

Estate planning and real estate in the Land of Lincoln

Strategic Default in Illinois: Q&A

Strategic Default in Illinois – Last man out of a dead condo complex

Buddha says: Seller should pre-inspect home

New law: Home title can be protected from creditors in living trust

Is HAMP loan modification program dying?

Speaking of septic, mold, radon and structural engineers…

How to protest Cook Co. real estate taxes now

Living trust funding: Whose job is it?

Will HAFA help speed up short sales?

More buyers taking job loss insurance