The first installment of 2010 taxes will be mailed any day in Cook Co.
The tax bill is normally due 30 days after mailing.
However, this year the tax bill will be due April 1, 2011, which is an extra 30 days.
High earners & strategic default
Masochism alert: If you want to get good and depressed, look up your house on zillow this month.Type your address into www.zillow.com. When your property pops up, click on your address, above where it says “zestimate.” The next screen will show the 30-day price change. This showed my house down $35,000.00, not for the year, just for January.
Wowser, that’s one wicked drop.
There has to be a bottom coming for real estate values, but it is not here yet. The seemingly never-ending slide of real estate values is also causing high income earners, who can otherwise afford their mortgage, to strategically default on their homes (and second homes) because they have lost hope that the market will rebound in their lifetime.
This excellent post on Dr. Housing Bubble points out that strategic defaults increase greatly once a home is underwater by more than $100,000.00. Also, if the neighbors start walking away the chances are others will do the same. Those with large mortgages and high credit scores are more likely to strategically default on their mortgages than those with small mortgages and low credit scores.
I do telephone consultations with clients almost daily and many of these clients earn $100,000.00 or more and can pay their mortgages, but several factors are pushing them toward strategic default:
1. They can rent a house that is much bigger and in better shape than the one they own for less than they are paying on their mortgage.
2. They are $100,000.00 or more underwater and have lost hope that the home’s value will rebound in a reasonable time. With each big drop on zillow, more people go sub-$100k and the likelihood of their strategic default increases.
3. They view the only negative of strategic default as being the hit to their credit score.
These clients are well-educated and they look into a strategic default carefully before actually doing it. Most tell me that they have talked to several attorneys about the process. I have to say that it seems to me that most have already made up their minds to quit paying on their mortgage and I have a hard time convincing them otherwise. Supposedly, all the high earners walking away from their mortgages frees up cash that’s spent on other things and gets the economy rolling (this is kind of a stretch).
There are many negatives to consider for a high earner before walking away from an existing mortgage. Some of these are:
1. Constant phone calls from the lender. Receiving several calls per day for more than 1 year can wear people out. This is the biggest complaint that I hear from clients who are in the foreclosure process.
2. Getting served with the summons by the sheriff. This is a terrible day for all but the most tough-skinned. Worse is being served at work by the sheriff (this rarely happens).
3. Trashing of credit score. Credit will go to 520 and stay there for awhile.
4. Association must be paid and will pursue you vigorously. If there are dues owed to a condo or townhouse association, these have to be paid until the foreclosure is over.
5. Second mortgage must be paid or settled. Second mortgage companies will file collection actions against clients. I highly suggest that no one quit paying a second mortgage unless they are ready to file a bankruptcy, because the second lender will be like a hell hound on your trail. I just filed a bankruptcy for a client who quit paying on a house that had a second mortgage. Two years after the foreclosure, the second mortgage company sued, got a judgment for $40k and was about to garnish his wages. So, a strategic default that involves a second mortgage is a very real financial threat and should not be done unless you are willing to pay the second mortgage or file banktuptcy.
6. First mortgages are not pursuing deficiency judgments, but this could change. Right now there are really no deficiency judgments being taken in Illinois and no collection actions being filed by first mortgage holders. What if this changes and the foreclosing lender dumps the foreclosed notes to a debt collector in the future? What if lenders start to seek deficiency judgments in Illinois? Things can always change, although I think this is unlikely.
5. Biggest worry of high earners: That the foreclosing bank will get a deficiency judgment and take other assets from the client. Clients are absolutely obsessed with this. First, the likelihood of a deficiency judgment on a first mortgage is slim. Right now, the only time this can happen is with a second mortgage, as discussed above. But clients wring their hands about this and worry that the lender will creep up on them down the line and take their cash or a new home bought in their spouse’s name. This is not likely to happen.
This post titled Not Walking Away is For Suckers and For People Who Aren’t Rich, kind of sums the high earner/strategic default issue, better than I could.
Hammer time: 1099s coming soon for 2010 foreclosures
The first week of February 2011 will be bleak for those that went through a foreclosure in 2010. That’s because lenders are required to issue form 1099 after a foreclosure and the 1099s are usually received that week.
Some ignore the 1099 and don’t claim it as income and have problems with IRS for years to come. If there’s one piece of advice I can offer to those who were foreclosed in 2010 (and there were many of you) it’s this: Don’t ignore the 1099. For most, the foreclosure was of their primary residence, and luckily there is an exception for primary residences through 2012 that makes the foreclosure tax free, but that doesn’t mean you can ignore the 1099.
For those who had an investment property foreclosed, or a property that was not their primary residence, it is truly hammer time and all I can suggest is please, please get some good tax advice asap.
Here’s how the whole 1099-after-a-foreclosure thing works. The lender must issued form 1099-C which is titled “Cancellation of Debt” after the foreclosure. This does not mean the mortgage debt is cancelled. It means that the lender is reporting to IRS that the debt was cancelled. Cancelled debt is taxable. Fortunately, you will not owe income tax on the entire amount of the 1099, just a portion of it.
Here’s how cancellation of debt is calculated:
Step 1: Take the total amount of the debt at the time of the foreclosure. If your mortgage was $200,000 and there was an additional $10,000 in interest and attorneys fees, the total, for example would be $210,000.00.
Step 2. Subtract the fair market value of the property as shown on the 1099C. Usually the lender reports this on the 1099, but if not, you will have to determine the value. Let’s assume the value of the property was $150,000.00
Step 3. The result is $60,000.00 that is taxable to the foreclosed owner in 2010.
Fortunately, there are three ways to completely knock the 1099 out of the tax picture and make it totally nontaxable. That is where form 982 comes in. The 1099 is shown as income on your tax return, but then it is subtracted by filing form 982, so the net effect is no additional tax. Here are the three ways to avoid paying taxes on the 1099 and these are shown on form 982:
1. Taxpayer filed bankruptcy. If a chapter 7 was filed before the 1099 was issued no tax is due. One cannot wait until after the 1099 is issued to file bankruptcy, it is too late then. The case has to be filed before the 1099 comes out.
2. Insolvency. The taxpayer is insolvent, in other words, the debts exceed the assets. I want to caution that this is not as easy as it sounds and you absolutely, positively have to talk to a tax professional about this well in advance of receiving the 1099.
3. Primary residence. If a primary residence was foreclosed, then no tax is due on the 1099. This exception only runs through 2012. A primary residence is a property used as your primary home for any 2 of the last 5 years.
So those whose primary residences were foreclosed will be fine, but those who had investment properties foreclosed are left with only two remedies: File bankruptcy before the 1099 hits or claim to be insolvent.
The fact that you received a 1099 does not mean that you the lender has given up getting a deficiency judgment against you. In most cases, the lender will not pursue you for a deficiency judgment if a first mortgage was foreclosed and the lender issued the 1099 to you. Technically, the lender could still pursue you for deficiency judgment even after a 1099 was issued, but I am seeing no deficiency judgments for first mortgages here in Illinois.
Do you need foreclosure defense?
I laughed when I read about the woman who was able to stretch out her foreclosure for 25 years and continued to live in her home the whole time making no payments. She appealed the case seven times and the bank’s foreclosure attorney is terrified of her. She’s the Alonzo Mourning of foreclosure defense.
She deserves the litigant of the year award (not intended as a compliment), but she’s also learned to be a more-than-competent foreclosure defense attorney. Many attorneys have jumped into the new sub-specialty called foreclosure defense. Very few homeowners in foreclosure hire attorneys to defend them. Most cases, probably more than 90%, proceed unopposed. Basically, a foreclosure defense attorney will file an “appearance,” that costs about $200.00, on your behalf and will act as your attorney against the bank. At a minimum, the attorney should file an answer and affirmative defenses for you.
There are a number of defenses that can be raised, the most common of which is “show me the note.” Many lenders are not the actual owners of the foreclosed mortgage because an assignment of mortgage was not filed correctly by the bank. I have seen quite a few foreclosures dismissed because the wrong mortgage company filed the foreclosure suit.
Does everyone in foreclosure need an attorney? No, most don’t.
If you want to delay the process (which already takes over one year as it is) then it is wise to hire a foreclosure defense attorney. I spoke with a Chicago condo owner recently who hired a foreclosure defense attorney. She did this because she did not understand the process. However, the attorney was charging her almost $1000.00 per month, even if no work was done. That’s a pretty heavy, monthly price tag. Reviewing the case online, I saw that the attorney had filed an appearance, but done nothing else. And the poor client was left in the dark and didn’t know what was going on.
Most times you will not need a foreclosure defense attorney. If you do, expect to pay $250-$350/hour. The attorney should be able to explain how a 1099 works after a foreclosure, if a bankruptcy will help you, how the foreclosure process works and many other issues.
Time to protest Palatine taxes is now
I live in Palatine. Yesterday, in the mail (and about as welcome as a jury summons to 26th and Cal, an IRS love note or a bounced check) came the reassessment notice for my real estate taxes.
My tax assessment went up 5%, which I don’t consider too bad.
This is the triennial reassessment, meaning that I will be stuck with this assessment for 2010, 2011 and 2012.
Rather than being afraid of this paper bullet, I look at is as an opportunity to reduce my real estate taxes and so should you.
I will file a protest of the assessment. I have no idea how to do this and I always hire someone to do it for me. I wrote here about how to file a tax protest and who to hire.
This is a good opportunity to keep your real estate tax down if you live in Palatine Township, but remember you only have 30 days to file a protest. So don’t fear your reassessment notice and take some action. Trust me, no one wants to listen to you complain about real estate taxes for the next three years.
Getting a mortgage after bk, short sale or foreclosure
It is possible to get a new mortgage after a short sale, bankruptcy or foreclosure, but it takes awhile.
The chart above tells how long it takes, after each of these events occurs, to get a new mortgage.
The first column labeled FNMA is a standard Fannie Mae, conventional mortgage, and this generally requires a 10% downpayment. The second column labeled FNMA 20% is a mortgage with 20% down. The third column is an FHA mortgage, which requires only 3.5% down, and is the current favorite these days with first-time buyers, because it requires credit of about 610 FICO and is otherwise easier to qualify for compared to conventional financing.
Most clients get FHA mortgages after a bankruptcy, which is only a 2 year wait.
The waiting periods are one thing to consider when deciding how to handle a underwater real estate and whether a strategic default is worth it or not.
Cook Co. tax bills mailed yesterday
The Cook County second installment of 2009 tax bills were mailed yesterday and are due 12/13/10 (a nice pre-Christmas present).
You can check the amount of your tax bill here.
Please double check that your homeowner’s exemption is on the tax bill. If not, you can apply for a certificate of error at the Cook County Assessor’s office or your township assessor’s office. If the homeowner’s exemption is missed, you can still pay the lower amount (with the homeowner’s exemption subtracted) if you act quickly and file for the certificate of error immediately.
Strategic default in the news
Strategic default is not funny.
But the video below from “The Daily Show” talks about how the Mortgage Bankers Association strategically defaulted on its own building, yet instructs everyone else to stay put.
Also interesting in today’s Wall Street Journal is “The Great Mortgage Mystery” that starts with this rather eye-opening lead:
“The big question from the mortgage meltdown isn’t why so many distressed homeowners are defaulting on their loans. It’s why any of them are still making payments.”
The story also uses the term “zombie homeowners,” that is borrowed from the Japanese “zombie banks,” to define underwater homeowners.
Read or browse the 150 plus comments to the WSJ story. Because strategic default is such a volatile topic, the comments are as good, if not better than than story.
| The Daily Show With Jon Stewart | Mon – Thurs 11p / 10c | |||
| Mortgage Bankers Association Strategic Default | ||||
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Monster in the closet: Collection agency or deficiency judgment?
When it comes to foreclosures and strategic default, clients are very afraid of deficiency judgments. Deficiency judgments are like the monster in the closet — unseen, but scary as hell. Homeowners in or near foreclosure are terrified of these things, but there is no reason to be afraid because in the cold light of day deficiency judgments shouldn’t be feared since they are so rare. I have yet to talk with a client against whom a deficiency judgment was entered in Illinois.
In reality, it may be that collection agencies are a much bigger threat to those thinking about strategic default or in foreclosure now. Channel 5 reported on this last summer, but it seems to be increasing since then.
I have had two cases recently in which lenders assigned their foreclosed mortgages to collection agencies. The collection agency starts calling and sending letters and finally files a lawsuit for “Breach of Contract” against the owner. A breach of contract case can be filed because the owner signed a promissory note at closing. The liability on the note survives the foreclosure. The statute of limitations on cases like these is a hefty 10 years.
Mostly this is happening on second mortgages, not first mortgages, but it is still possible on a first mortgage. Citibank seems to be very active in sending its delinquent second mortgages to collection.
Case 1: In the first case, the client had been foreclosed 5 years ago. Then, suddenly the client started getting letters and calls from a collection agency. This agency specializes in “seriously delinquent and defaulted loan portfolios.” I don’t know for sure, but most likely they agree to a contingent fee based on whatever they can collect from the foreclosed loans a lender assigns to them. Most likely the client will have to put up with a series of calls and letters and then a lawsuit will be filed. When a judgment is entered the client will have to file bankruptcy to get rid of the judgment.
Case 2: The client owns a Chicago condo that is currently in foreclosure and, before the foreclosure was even completed, Citibank filed a breach of contract case against the owner based on the client signing the note for a second mortgage. When this happens a whole separate lawsuit is filed. This is not part of the foreclosure case and it is not a deficiency judgment. A local law firm that is a well-known debt collector filed the case. The client will have no alternative except to file bankruptcy after the judgment is entered.
(Update 10/20/10: Wells Fargo is also filing collection actions on second mortgages. A McHenry County client was served with a $40,000.00 breach of contract case.)
I think that it’s very likely that lenders will continue to hand over their foreclosed loans to collection agencies in the hope of at least getting something back on delinquent loans. This is another reason to carefully weigh whether a strategic default is worth the cost, since you will have to look over your shoulder for 10 years until the statute of limitations expires. Ultimately, a chapter 7 bankruptcy will be the only way to eliminate the collection agency from the picture.
FHA mortgages get more expensive
On October 4, FHA mortgages get a little less expensive upfront, but a lot more expensive in the long-run.
FHA mortgages are the only game in town for first-time buyers. Most first-time buyers obtain FHA mortgages.
Until now the FHA premium (called MIP) paid by the buyer at closing was 2.25% of the loan amount. From here forward, it will be reduced to 1%. That’s good and will reduce initial closing costs.
With an FHA mortgage, in addition to the upfront MIP payment, the buyer also pays a monthly MIP premium that’s included in the monthly payment. This payment will increase.
It used to be .55% of the loan amount (this is the yearly amount, divide by 12 for the monthly payment). Now it will be .9%, almost twice as much.
Buyers should not automatically assume an FHA is best. This increased FHA expense means that buyers should carefully examine FHA vs. conventional mortgages because a 5% down conventional mortgage will be much cheaper than an FHA.