Short sale, pre-foreclosure, happens when the homeowner owes more money than what the house is worth. This is such an 'unfortunate' thing for those who bought houses at the peak of the market and have mortgages with "payment shock." Variation of mortgages that can give you a 'payment shock': 2/28 and 3/27 mortgages, interest-only mortgages, payment option adjustable rate mortgages. And features like a 'teaser rate,' option to pay less than the full interest due every month, etc.
On the local market, we've seen the number of homes that falls under the category rising, especially true for condo market and outer suburbs like Prince William, Loudoun counties more than affecting the inner suburbs. There are 140 properties marked short-sale, REO, or pre-foreclosure for the inner burbs (Arlington, Fairfax, Alexandria), 14 properties in the District vs. 297 properties. Some of these properties already owned by the lenders.
The other day, Washington Post had an write up on high foreclosure rates nationwide. According to Mortgage Bankers Association, foreclosures are on the rise in California, Florida, Nevada, and Arizona. Fortunately, DC is not on the list. But, foreclosure will be the last resort for a seller who is short-on-the-money. There's a process before the property gets auctioned on the steps of courthouse.
If a homeowner is having problems paying mortgages, there are options available. :
- Repayment Plan
- Forebearance
- Modification: Reduction of interest rate, extension of the loan period, reamortization with capitalization of arrears (negative amortization), and reduction of the principal balance.
If the above options don't work in your case, available alternatives:
- Short sales/ pre-foreclosure sales
- Deed in Lieu of Foreclosure
- Assumptions
via flyer by Beau Brincefield
Let's face it: No one wants to lose their home! Understand that lenders don't want to foreclosed your home either. It'll cost them more money. I heard it's somewhere in the neighborhood of $75,000 a pop. So, from the cost benefit analysis -- it will be cheaper (and less headaches, probably) for the lender to 'work out' a deal with the homeowner. Lenders will also look at if you have some other form of assets (stocks, bonds, etc.) for consideration. A short sale is the best option to the lender, because lender don't want to carry out a property and dealing with headaches of down market that sellers have to deal with and have their assets in the non-performing category. Not good if banks have high non-performing loans/ assets in their portfolios, especially for public companies.
A good place to start if you're having problems -- is to seek counseling. Try to talk to professionals (Realtor, real estate lawyer, etc.) who can then help you sorting out options. You want talk to your lender, too. A more complex situation is if your mortgages have been "securitized," that means your mortgages owned by several players. It won't be as easy as if you only have to deal with 1 or 2 lenders. You will need more time to get everybody (read:all the lenders) on board.
Tax Liabilities
Uncle Sam wants to have a share on the money that you didn't pay to the lender. In other words, the forgiven part of your mortgage is taxable even though .. you never received the money. Lenders are required to submit a Form 1099 stating the forgiven amount. If you meet the definition of IRS insolvency, then you will not have to pay taxes on the forgiven amount. [Note: There is a bill working through Congress on its taxability]
Resources & links:
> Working together with Center for Responsible Lending, NAR has recently published an educational flyer, "Learn How to Avoid Foreclosure and Keep Your Home."
> "Foreclosure Prevention Counseling," by National Consumer Law Center.
Image: Urban Outfitters
