Short sale (real estate)

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Short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's Loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Most Short Sales leave a deficiency balance for which the Mortgagor / Borrower is still liable. The State of Arizona has 2 “Anti-Deficiency Statues” that help protect the Mortgagor/Borrower from the Lender in this situation. The Mortgage Debt Relief Act has also been put into place by the government to protect the Mortgagor/Borrower from the Lender.

Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower's financial situation.

A short sale typically is executed to prevent a home foreclosure. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset, businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults.

Negotiations

Lenders have a department (typically called "loss mitigation") that processes potential short sale transactions. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located.

Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. Multiple levels of approvals and conditions are very common with short sales. Junior liens - such as second mortgages, HELOC lenders, and HOA (special assessment liens) - may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even when unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender's loss in the short sale.

Mortgage Forgiveness Debt Relief Act of 2007

From Wikipedia, the free encyclopedia

The Mortgage Forgiveness Debt Relief Act was introduced in Congress on September 25, 2007, and became law on December 20, 2007. This act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years, applying to debts discharged in calendar year 2007 through 2009. (With the Emergency Economic Stabilization Act of 2008, this tax relief was extended another three years, covering debts discharged through calendar year 2012.)

Normally in US law when a lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.

However, after the signing of the Mortgage Forgiveness Act, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences -- rental properties are ineligible for relief -- so consultation with a tax advisor is necessary to ensure that a borrower qualifies. The amount of forgiven mortgage debt allowed to be excluded from income tax is limited to $2 million per year.

More recent legislation provides for a specialized type of refinancing option, available for mortgages made after 2006, for owner-occupied homes. Under this program a debtor provides information similar to that necessary for a short-sale but rather than selling the house to a third-party an FHA guaranteed loan at a fixed-rate is available if the original lender is willing to write-off all but 85-percent of outstanding of the debtor's obligations (including principal, interest, late-fees, prepayment penalties, and all other fees). FHA-backed refinance packages are available beginning October, 2008, and carry a fee equal to 1.5% of the value of the house. Debtors who exercise this option must sacrifice 50-100 percent of equity that builds in a house, and may not participate in home equity loan programs. This program is only available to owner-occupied residences. This program requires consent from a lender: consent is not automatic and may be freely withheld, though withholding consent can result in a foreclosure with adverse financial results.