I waited my whole life to buy a home. Not what I expected.Â Longest sinking of a ship.
Countrywide Home Loans, whom I now consider a predatory lender, talked me into buying a home with an Adjustable Rate Morgtage loan.Â I was told by the loan expert that I could refinance even if the value dropped.
Based on this false information, I agreed to the terms and purchased my first home.
Now I’m paying the price:Â destruction of my excellent credit, a year of stress and, soon, a foreclosure.
My home’s value fell from $300K to $150K in 3 years.
Countrywide turned down the first short sale offer a year ago. They turned down the Deed in Lieu option. Shortly after that, based on what one of their representative told me, I stopped paying.Â Â Despite several requests, and no payments for a year, they would not foreclose.Â Now, finally, the end is in sight.
Read on if you find yourself in the same boat or if you are just curious.
I knew when my adjustable rate adjustedÂ a year later, I could not afford the payments. Meanwhile, Bank of America bought Countrywide.
What has happened? I’ve had many calls asking me when I will make a payment and one man came to my door to verify that I lived there. My credit cards have cut my limits.
I’ve been through three or four loan modification negotiation attempts. I have a short sale offer pending right now for $150K and B of A is taking about 3 months to say yes or no.
Last Friday I got a “Debt Validation Notice” and a “Notice of Default/Election to Sell Under Deed of Trust” from “Recontrust Company, N.A.” in Richardson TX. It says, “If your property is in foreclosure because you are behind in your payments, it may be sold without any court action, … No sale date may be set until three months from the date of the date of this notice of default may be recorded. ”
A sale without court action is a non-judicial sale.
As I read this, I have three months from 6/29/2009 until I have a foreclosure sale date.Â What happens then?
I expect I’ll get another month or two to find a place and move.
Can they take my retirement savings? It seems not.
One of the great questions that homeowners have while battling foreclosure is what the bank may be able to take from them even after they have taken the house. Many foreclosure victims fear deficiency judgments, believing that they may lose a second home, car, or even their bank accounts and retirement funds. This is a reflection of the general lack of knowledge of how foreclosure works, since the possibility of the bank going after any of these assets is very small.
During the entire foreclosure process, only the house used as collateral can be taken by the bank. Since the homeowners pledged the property as collateral for the loan when they originally applied for the mortgage, the lender will sue for the forced sale of that home to pay off the loan. They can not sue for anything else to be sold to satisfy the loan because nothing else was pledged as collateral, and they can not pursue any deficiency judgment unless a deficiency is created by the county sheriff sale. If the homeowners find some other way to stop foreclosure before the auction, then the bank can not sue for a deficiency, even if the homeowners use a short sale, where the bank takes less than what is owed, or a deed in lieu of foreclosure, where the bank takes the property instead of any payment.
In terms of a deficiency judgment after foreclosure, the bank may be able to go after other assets, but any retirement funds the former homeowners have are generally protected. Especially if they invest their retirement savings in an IRA or through work in a 401(k), 403(b), or similar program, then the bank can not try to seize any of these savings. However, if their retirement funds are “invested” in a second home or a prize race horse, then the bank may be able to to go after those other assets. That is because specifically designated retirement accounts are protected from creditors, while assets simply invested in for the purpose of saving for retirement without the special designation are not protected.
What about taxes? Will I get a 1099 form and have to pay debt forgiveness tax on $150,000? I think not. It seems I’ll be able to walk away losing only the home according to the IRS:
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
- Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
- Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
- Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
- Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
- Non-recourse loans: A non-recourse loan is a loan for which the lenderâ€™s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
These exceptions are discussed in detail in Publication 4681.
What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.
What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
My primary home loan in California must be a non-recourse loan according to (Cal. Code Civ. Proc. Â§ 580b.)
Under California law, a debt is considered â€œnonrecourseâ€ when a loan is made under either one of the following two circumstances:(1)Â When the loan is made to purchase a one-to-four unit property and the borrower intends to occupy at least one of the units, or
(2)Â When the seller carries back financing for all or a portion of the purchase price of any real property.
There are other protections in California as well:
California has â€œanti-deficiency statutesâ€ that protect certain borrowers from deficiency judgments. Under those circumstances, a lender would opt for a trusteeâ€™s sale foreclosure which is quicker and less expensive than a judicial foreclosure. A trusteeâ€™s sale foreclosure does not involve the courts. Generally, there are five situations in which a deficiency judgment is prohibited:
1) Purchase Money. If the loan is obtained to purchase a residential 1-4 unit dwelling all or part of which is owner occupied and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to “purchase money” protection. (Cal. Code Civ. Proc. Â§ 580b.) Note, however, that should the buyer refinance the home, the new loan is no longer â€œpurchase money.â€ Thus, the buyer would lose the protection against a deficiency judgment in the event of a default.
2) Seller Carryback. If the purchase money loan for any type of real property is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower/buyer. (Cal. Code Civ. Proc. Â§ 580b.)
3) Trusteeâ€™s Sale. A lender may not pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trusteeâ€™s sale foreclosure (a non-judicial action). (Cal. Code Civ. Proc. Â§ 580d.)
4) 3 Month Time Limit. An action for a deficiency judgment must be brought within 3 months from the time of judicially-ordered sale. (Cal. Code Civ. Proc. Â§ 580a.)
5) Fair Value Limitations. A deficiency judgment is limited by the difference between the amount of the indebtedness and the fair market value of the property, unless the actual sale price exceeds that value. (Cal. Code Civ. Proc. Â§Â§ 580a, 726 (b).)
When a deficiency judgment is permitted, the lender may obtain one only following a judicial foreclosure, or when the security has become valueless (such as when security for a second trust deed loan is wiped out when the first trust deed lender completes its foreclosure). Holders of a junior deed of trust (second, third, etc.) should note that if the “wiped-out” junior lien is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be personally liable. (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963).) – hba
It looks like I’ll just have to move, that they will take the home, and that will be that. If you have been through a foreclosure with Bank of America in California, I’d love to hear about any unexpected things I should watch out for…
Should I stop paying my HOA dues for the next two or three months? Keep paying the HOA dues because, unlike the bank, the HOA can go after more than just the home:
An HOA hasthe right to seek unpaid assessments and all of the reasonable costs that accrue with regard to the collection matter from the individuals who owned the property during the period of unpaid assessments when it was foreclosed by the lender. In fact, an HOA is entitled to pursue more than one avenue of recovery (such as foreclosure and a personal debt recovery action) until the debt is paid. If a home is foreclosed by the HOA, and sold at a sale arranged by the HOA, then the debt is would be considered satisfied, but if the bank forecloses and there is not enough money to pay the outstanding HOA debt, the HOA may take measures to recover the losses from the owner who suffered the foreclosure. – ca.net
What about taking the inside of the house with you? Selling everything you can? Careful… such action could land you in jail.
Just because the house-gutting occurrence is common doesn’t mean it’s legal. A house is collateral on a mortgage, and a kitchen sink is intrinsic in that value, as is a working toilet and a stove.
“If you can detach it from the property without damaging the structure, and you put it in in the first place, then it’s a removable fixture,” said local real estate attorney William Markham of the firm Maldanado & Markham. Counted among permanent installations are things like granite countertops and wood floors. The dishwasher: “A closer call.” – vos
They can go after you if you damage the property:
… Waste (Evans v. California Trailer Court, Inc. (1994) 28 Cal. App. 4th 540). Â If … waste was committed on the property (the homeowner in anger over foreclosure proceedings damaged the property, removed out plumbing, appliances, lighting, granite, flooring, etc) then the Lender can still sue the homeowner in Court for damages, even after a non-judicial or judicial sale on a purchase money loan.Â – mln.com
What if you get a 1099 form?
1099s that are received SHOULD NOT BE IGNORED.Â Ignoring a 1099 in such a situation will only trigger a tax liability!Â Instead, you simply need to fill out IRS form 982.Â Technically, sending a 1099 after discharge may also be unlawful and subject the creditor to damages.Â In the past, we have sued and recovered against creditors for this very conduct, so if you receive other correspondance (phone calls, bills, etc) in addition to the 1099 after your bankruptcy, let us know immediately, as you may possibly have a case!Â For more information on 1099s on debt forgiveness, please click here.
Finally, a word of caution.Â If the debt was forgiven and 1099 issued prior to filing bankruptcy,Â your ability to use IRS form 982 then becomes limited to theÂ â€insolvencyâ€ or â€œprincipal residenceâ€ exceptions on IRS form 982.Â So its very important to file your case PRIOR TO FORECLOSURE, CHARGE OFF, etc, so that you can simply claim the bankruptcy exemption under 1(a) of the form, instead of relying on insolvency under 1(b) or principal residence under 1(e). – dlaw
Most recently, the B of A representative said there are no legal fees I’ll have to pay. This differs from the threat I had from a Countrywide rep.
But should I get my own lawyer? Not sure yet.
Can the HELOC (2nd mortgage) come after you after the foreclosure? My HELOC was set up at purchase time, but this has me worried:
… had a refinance been involved or had the second been taken out after the purchase, such as the case in most HELOC loans, then the 580b exception does not apply and both would be able to sue on its $100,000 deficiency, but only in the context of a judicial sale per below, or if the lender was a â€œsold out juniorâ€ (first forecloses, thus selling out the junior lien, who then still has recourse against the debtor).
I took nothing out of the HELOC. Perhaps I should have taken the $60K and had a party, but I didn’t need the money.Â It seems Countrwide/B of A may try to go after you on the HELOC, but you can fight it and win:
My first loan foreclosered on April this year. There is no money left for the second. The second became unsecured debt after the first foreclosed.
Countrywide did not forgive the amount but based on California law. Civil Code 580b stated that if it is purchase money loan they cannot go after you for the money even if it is a HELOC. Basically it is non recourse. …
I emailed a bunch of people from countrywide and finally get a call from Escalation Customer Service department. They finally said they they will stop the collection. – loansafe.org
I can’t wait to be 7 years down the road in a great little house with a garden … and a trap door under my livingroom rug leading to the Great Underground Empire.Â Life is a game, enjoy it all.