Monday Morning Coffee – Short Sale Traps

Monday Morning Coffee

Short Sale Scams and Traps

Monday Morning Coffee – Short Sales and Income Tax Witholding

Monday Morning Coffee

Short Sale Income Tax Witholding Implications

Good morning,

I hope you had a nice weekend.  We have been victimized by the kid-back-to-school-bringing-every-virus-collected-over-summer-by-every-child-in-his-class illness at the house.  So, no  interesting stories about the great week we had!

The market continues to limp along.  We are still behind last year’s pace for closings this month and listings are increasing.  Both of these were expected, and neither is happening in such a rate as to be surprising. (more…)

San Diego June Home Sales Numbers

San Diego Home Inventory Rises – Sales Fall

*Note that this data is from the SANDICOR MLS as of July 5, 2009 and does not include homes sold by builders that were not sold through the MLS (New Construction) nor homes sold at Trustee Sale (Foreclosures).

Current numbers shown for June 2010 San Diego Home Sales indicate both a rise in supply and a drop in demand.  The combined affect is an increase inventory (as measured by months required to sell the existing homes for sale at the sales rate of the past year) of 19% over 12 months ago (although at 4.3 months, it is still not at a level that can be considered high).  The specific numbers are:

• There were 3,004 homes sold in June of 2010 as compared to 3,288 a year ago and 3,219 in May of 2010.
  • After last month’s drop in homes that were in escrow, this was to be expected.  Although, it is still dissappointing in that we all hoped the tax credit would help keep demand going through June.
• At the end of the month there were 12,175 homes on the market as opposed to 9,443 a year ago and 11,257 at the end of May, 2010.
  • This was caused by a combination of fewer homes going into escrow (lower demand) and the normal increase in inventory we see over the summer.  Both are expected as the tax credit expiring removed the urgency to purchase for a lot of first time home buyers (similar to when Cash for Clunkers expired for cars, we will likely see an extended period of below average demand for houses now that the tax credit has expired).
• Homes in escrow dropped to 4,961 from 6,862 a year ago and 5,546 in May of 2010. 
  • In the last two  months, the number of homes in escrow has dropped 23%, which points to continued slowness.
• Homes that are “Contingent” fell by 5% in June.  This is  a designation most commonly used for short sale homes that are awaiting bank approval of an offer and might mean that the banks are in fact getting better an processing short sales in a timely fashion.

Treasury Department Foreclosure Report

Foreclosure and Mortgage Deliquencies

Q4 2009

I finally finished the OCC and OTS Mmortgage Metrics Report for the fourth quarter of 2009 (I know you’re jealous at how much fun I get to have).   The report looks at all first liens held by most of the largest mortgage servicers.  It covers almost 34 million loans totaling almost $6 trillion.  It is the raw data before it gets spun by the press or politicians.  Here are some highlights and lowlights from the report:

Delinquent Mortgages

• Mortgage performance declined for the seventh consecutive quarter.  Delinquent mortgages and mortgages in foreclosure rose to 13.6% of all mortgages (once again, just talking about first mortgages).

• The percentage of mortages 30-59 days late stayed stable, most of the increase was in seriously delinquent mortgages.  This may be a positive as it is showing that the pace of new delinquencies is not picking up, and that loans are staying seriously delinquent longer which is an indication that banks are working longer to modify before moving to foreclosure.

• Option Arms continue to be the worst performing loans with only 662% current.

• There was a large increase in the number of seriously delinquent prime loans as the number jumped fro 838k to 976k in one quarter.  Almost 1 in 25 prime borrowers is more than 60 days late on the mortgage.

• Overall, 7.1% of all mortgages are seriously delinquent (60+ days late) and an additional 3.4% are 30-59 days late.

• Although the Sub-Prime and Alt-A loans have the highest percentage of delinquencies, the Prime loans have the highest number – this is important as if the percentage of prime loans going bad keeps rising it has a real chance of bringing the market down again.  However, these are also the borrowers that have the best chance of recovering if employment and the economy continue to recover after the stimulus expires.

Home Retention Actions

• The number of home retention actions slipped by 19.1% compared to the third quarter.  This is probably likely to the fact that HAMP received so much publicity in the third quarter that most people who were eligible applied then. 
• Discouraging number on the HAMP program was that although 349k people had entered the 3 month trial period in the second and third quarters, only 21k of those received permanent modifications during the fourth quarter.  That’s about a 6% conversion rate (it’s too early to have data to see how many re-default).  If that is an accurate number (it is possible that many were delayed past 3 months by paperwork issues, etc.) then the program is really a failure.  Let’s hope the numbers get better.
• More than 50% of HAMP trial plans and modifications are for prime borrowers
• There were almost twice as many home retentions started as foreclosures (this would also explain the increase in seriously delinquent mortgages as they stay delinquent until fully modified).
• The percentage of loans modified that had principal reductions fell to 6.8%.  Rate reduction and capitalization (adding your late payments back to the loan) were the most common modifications.
• HAMP modifications only included principal reduction 0.1% of the time, but they did utilize principal deferral 26.8% of the time.
• 42% of all modifications decreased payments by 20% or more – this is important to the  borrower being able to keep up with payments on the modified mortgage.
• 82% of HAMP modifications decreased payments by 20% or more.

Modified Loan Performance

•  The performance of modifications continues to improve over time:
  • Only 33.5% of loans done in the second quarter of 2009 were 60+ days late six months later compared to 42.7% of loans in the first quarter.
  • Only 14.7% of loans modified in the third quarter were 60+ days late 90 days later as compared to 30.8% of the loans done in the first quarter of 2009.
• Loans 30+ days late were obviously a higher percentage; 47.5% after 6 months for loans modified in the second quarter and 29.8% after 3 months for loans modified in the third quarter.  Both of these are significantly better than they were prior to the second quarter.
• The highest Re-Default rate is for Government-Guaranteed loans (FHA, VA, etc.)  with 67.8% 60% days late a year after modification (these are obviously reflecting pre-HAMP modifications as none have been modified for a year yet).
• One reason to be a little more positive about HAMP modifications (if more get completed) is that they seem to be reducing payments by 20% or more, and historically loans that have payments reduced by 20% or more have a re-default rate of only 39.8% a year later (as opposed to 67% if the payments are unchanged).

Foreclosures

• Newly initiated foreclosures declined in the 4th quarter as homes are staying in the seriously delinquent phase longer as lenders are working harder on modifications.
• Completed foreclosures increased by 8.6% over the previous quarter and 35.7% higher than a year ago. 
• There are almost 4x as many foreclosures as short sales and Deed-in-Lieu actions, although short sales are up 96.8% over a year ago.
• 7.8% of all subprime mortgages are in foreclosure while only 2.3% of prime mortgages are in foreclosure (however since there are more prime mortgages, there are actually more total prime loans in foreclosure than subprime).

A couple of key numbers to look at next quarter will be:

• How many of the HAMP trial periods get converted to permanent modifications.
• If the loans that are seriously delinquent transfer into the foreclosed or modified category.
• If loans modified in the third quarter of 2009 and later continue to have a lower re-delinquency rate.

I expect that the data for the first quarter will continue to improve and the real questions will come with the second and third quarter data as that data will reflect the market after the stimulus has expired.

Monday Morning Coffee – Short Sell and Keep Your Home

Monday Morning Coffee

Short Sale Alternative

February 8, 2010

Good morning.  I hope you had a nice weekend and enjoyed the Super Bowl (in which case you don’t live in Indianapolis).  We had a busy week which included both a positive and a negative short sale experience.  Banks are starting to be more aggressive in seeking additional funds from sellers trying to short sell houses if they think they can get it and they are also less willing to delay foreclosure if they think foreclosing is in their best interests.   Details are long and probably of little interest to most of you, but if you are considering a short sale, let me know and I will fill you in.

Speaking of short sales, I have an exciting alternative for those of you who might be stuck in a situation where you could lose your home.  I have an investor who is willing to either buy your home in a short sale and rent it back to you for 3 years until you can buy it back from him (at the same price he paid) or, help you buy a different home after you short sell yours.  I met with him two weeks ago on this program and while it will not work for everyone, it will work for some.  His goal is cash flow, so the way the program works is that you pay all his loan costs, taxes, maintenance, etc. (once he buys the home, he doesn’t put any more into it) plus a monthly fee to him.  The numbers are somewhat complicated, but if you are in a home that is worth about 35-40% less than what you owe and have a good income, he might be able to help you.  If so, shoot me an email and I will get back to you.

We have one new home this week.  It is a short sale in the Gianni complex at 4S Ranch.  It is a 3 bedroom condo with very nice upgrades.  The seller is asking $399k.

That’s it, enjoy the Coffee!

Have a Great Week!

Scott Voak

Monday Morning Coffee – Silent Short Sale

Monday Morning Coffee

Good morning!

 I hope you had a nice weekend.  Ours was busy as we mixed family time in with a lot of showings and appointments.  The market is staying heated with buyers trying to beat the expiration of the tax credit (which will be extended).  I wanted to address two items before we get to the Coffee this week:

Last week, I talked about a new Loan Re-Write program as an option to foreclosure.  This week, I want to talk about another option.  Many people are turning to a short sale to help lessen the impact on their credit and allow them back into the market in two years (instead of five with a foreclosure).  The problem with a short sale, is that they can take a long time and your home is advertised as a short sale so all your neighbors know you are going through the foreclosure process.  Furthermore, most agents are using a strategy of pricing the home low to drive traffic – which is not only very disruptive to a family, but often results in an offer too low for the bank to take seriously.  So, the house gets opened back up for another parade of showings.  Only this time, it has been on the market for 90 days and buyers start to think there is something wrong with the house or that it is going to be too hard to get closed.  We have come up wi th a better way (for the homeowner) to do a short sale.  We are going to call it the Silent Short Sale.  If you or someone you know are considering a short sale, please check in with me prior to starting an overly disruptive process that can be done much more effectively.

 Quickly looking at September’s numbers shows a continuation of the trend we have been seeing.  Inventory is down considerably over last year and continues to fall a little every month.  Closings are up a couple of points over last year and look to be fairly even with August.  I expect October to stay strong and then November to start to tail off for the holidays.

 We will be putting one new home on the market this week.  It is a 3 bedroom 2,344 sf home in the Cedar Creek development at 4S Ranch.  It is a very nice home and Cedar Creek has some of the lowest Mello-Roos in 4S.  It will be priced in the low $600k range and I will have photos for you next week.  If you want an early peak, let me know.

 That’s it for this week – Enjoy the Coffee!

ATTITUDE IS EVERYTHING

 By Francie Baltazar-Schwartz

 Jerry was the kind of guy you love to hate. He was always in a good mood and always had something positive to say. When someone would ask him how he was doing, he would reply, “If I were any better, I would be twins!”

 He was a unique manager because he had several waiters who had followed him around from restaurant to restaurant. The reason the waiters followed Jerry was because of his attitude. He was a natural motivator. If an employee was having a bad day, Jerry was there telling the employee how to look on the positive side of the situation.

 Seeing this style really made me curious, so one day I went up to Jerry and asked him, “I don’t get it! You can’t be a positive person all of the time. How do you do it?”

 Jerry replied, “Each morning I wake up and say to myself, ‘Jerry, you have two choices today. You can choose to be in a good mood or you can choose to be in a bad mood.’ I choose to be in a good mood. Each time something bad happens, I can choose to be a victim or I can choose to learn from it. I choose to learn from it. Every time someone comes to me complaining, I can choose to accept their complaining or I can point out the positive side of life. I choose the positive side of life.”

 ”Yeah, right, it’s not that easy,” I protested.

 ”Yes, it is,” Jerry said. “Life is all about choices. When you cut way all the junk, every situation is a choice. You choose how you react to situations. You choose how people will affect your mood. You choose to be in a good mood or bad mood. The bottom line: It’s your choice how you live life.”

 I reflected on what Jerry said. Soon thereafter, I left the restaurant industry to start my own business. We lost touch, but I often thought about him when I made a choice about life instead of reacting to it.

 Several years later, I heard that Jerry did something you are never supposed to do in a restaurant business: he left the back door open one morning and was held up at gunpoint by three armed robbers. While trying to open the safe, his hand, shaking from nervousness, slipped off the combination. The robbers panicked and shot him. Luckily, Jerry was found relatively quickly and rushed to the local trauma center.

 After 18 hours of surgery and weeks of intensive care, Jerry was released from the hospital with fragments of the bullets still in his body.

 I saw Jerry about six months after the accident. When I asked him how he was, he replied, “If I were any better, I’d be twins. Wanna see my scars?”

 I declined to see his wounds, but did ask him what had gone through his mind as the robbery took place. “The first thing that went through my mind was that I should have locked the back door,” Jerry replied. “Then, as I lay on the floor, I remembered that I had two choices: I could choose to live, or I could choose to die. I chose to live.”

 ”Weren’t you scared? Did you lose consciousness?” I asked.

 Jerry continued, “The paramedics were great. They kept telling me I was going to be fine. But when they wheeled me into the emergency room and I saw the expressions on the faces of the doctors and nurses, I got really scared. In their eyes, I read, ‘He’s a dead man.’

 ”I knew I needed to take action.”

 ”What did you do?” I asked.

 ”Well, there was a big, burly nurse shouting questions at me,” said Jerry. “She asked if I was allergic to anything. ‘Yes,’ I replied. The doctors and nurses stopped working as they waited for my reply. I took a deep breathe and yelled, ‘Bullets!’ Over their laughter, I told them. ‘I am choosing to live. Operate on me as if I am alive, not dead.”

 Jerry lived thanks to the skill of his doctors, but also because of his amazing attitude. I learned from him that every day we have the choice to live fully. Attitude, after all, is everything.

 Have a Great Week!

Scott

Is the sky really going to fall?

The banks have been telling all their agents that there is an increase in foreclosures coming.  On the other hand, inventory is very tight as long as you are near fha loan limits ($687,500).  I am curious to know if the expected increase in inventory will be large enough to meet the demand that is out there and cause another slump of sorts or if there is enough demand to handle the coming inventory.

I took a small section of the market that I think extrapolates very well to the San Diego market as a whole.  I looked at 4S Ranch for a number of reasons (for those of you who live here, I am including Bernardo Springs, Bernardo Point, Santa Fe Valley and La Vina with 4S):

• The first home was sold in 2002 and a large number of homes have been built and sold since 2005.  Therefore there are a lot of people with questionable loans and no equity – the recipe for disaster.
• It is a desireable area located within the Poway school district and was designed to be almost a self-contained community with schools, parks, shopping and jobs all within close proximity.
• I am very familiar with the area as it is where I live, the area I sell the most homes, and where I do most of my foreclosure counseling, so I have a pretty good understanding of what is going on in the market.
• The neighborhood has 1 bedroom condos on the low end, and $2M+ homes on the high end, so the full breadth of the market is present and there are 4,000+ homes so the sample size is good.

There are currently 29 homes on the market, 40 in escrow, 37 listed as contingent (short sales waiting for approval) and 60 that have closed in the last 90 days.  This is consistent with the rest of the San Diego market as the number of homes on the market is actually less than the number in escrow (I am going to ignore the contingent listings as it is hard to predict how many will get approved vs go to foreclosure, it is enough to know that if they do not sell now, they will be back on the market as foreclosures).

It is also important to note that several of the builders still marketing homes had slowed or stopped construction in the previous year and are now starting to ramp back up (one builder lost about 15 lots to foreclosure and another has several in default, so these will need to be sold off before building continues on them).
Here is how foreclosures fit into the above numbers:

Total Number               Foreclosures
Active Listings                       29                                  2
Homes in Escrow                   40                                  5
Sold in last 90 days               60                                  5

The total number of foreclosures in the market is running about 10%.

There are currently a total of 17 foreclosed homes (not including the lots above) in 4S Ranch.  Ten of those have not yet hit the market.  Considering that only 12 foreclosures have been sold in 90 days or are currently on the market another 10 is a significant increase over recent levels.  However, it would only represent 2 weeks of sales, so would be unlikely to have a significant impact on the market.

It gets a little more dicey when you look at homes that are currently scheduled for Trustee Sale Auction.  Many of these homes are in the process of loan modification or have been covered by the various moratoriums and have thereby had there sale dates postponed numerous time.  That said, there are 44 homes facing Trustee Sale in the next 30 days within 4S Ranch (data from Realist).   This is a significant number of homes.  If all were to be foreclosed on and put on the market in the next 60 days along with the 10 that are already bank owned, that would be almost three months of inventory added to the market as the we start to slow for the holiday season (only 6 of the 44 homes are currently on the market as Contingent sales).

Stepping back one step farther and looking at homes that have a recorded default against them and that total is 75 (in addition to those facing trustee sale).  This is another three months of inventory.

So, there is the potential for another five months of inventory to hit the market in the next three to six months just from foreclosure activity if the current owners cannot find a way to modify, Re-Write or otherwise stop the foreclosure process.  This is in addition to the inventory that the builders are currently constructing (probably  another 20 – 30 homes over six months) and the normal sales we see in the market.

While I don’t see this as a crisis yet, it is definitely worth watching.  There is a wild-card as also in the market that relates to demand.  The federal first time home buyer credit ($8k) is set to expire at the end of the year.  That has definitely contributed to the pace of purchases over the summer and will contribute to a slow down in demand when it expires.

Taking all of this information together, a few recommendations:

• If you are a small time investor, be careful.  Falling rents combined with what may be another downward turn in the market could be a double whammy (that’s a highly technical term) in the coming year.
• If you are a seller, be aggressive.  With the end of the summer selling season, the expiration of the tax credit and the coming foreclosure inventory, you are likely to get your highest price right now.  Even if it isn’t the price you would like, you might not see it again for 2-4 years if we do take another turn downward.  You have to decide if holding out for an extra $5-$10k is worth the risk of another losing more equity this winter and holding on for another few years.

No, the sky is not falling, but it could resume raining pretty hard for an extended period.

Foreclosure Alternatives – Short Sale vs Foreclosure

My team and I have been working on an area of our business that I think is extremely important right now; foreclosure alternatives.  The interesting thing is that the most desirable result is one in which we do not make any money – loan modifications.   We don’t make any money from them because I don’t do them and I will not accept a referral fee from people who do.  I want my clients to know that I am sending them to the most qualified people, not the ones who are paying me the most.  Now, I am not doing charity work. I explain to everyone I meet with that if I introduce them to the company that helps save their home, then I hope they will call me in 10 years when they want to sell – and in the meantime tell all their friends about me.  It’s an arrangement that I hope will work well.
However, through this process there is an attitude I am noticing that is detrimental to everyone and I want to let clients as well as other agents know why.  The attitude is, “If the bank won’t approve my loan modification then screw them, I’m going to let them foreclose.”  The problem with this is that it harms the owner more than the bank.
The first obvious reason this is detrimental is that a foreclosure will hit your credit harder than a short sale.  But the second reason is more important.  On June 25, 2008, FNMA (Fannie Mae) put published Announcement 8-16 which amended guidelines for loan approval.  The key point in this document for our purposes is that if a borrower completes a short sale, they cannot purchase a home using a FNMA guaranteed loan (which will be the large majority of loans going forward) for two years after the completion of the short sale.  However, if the borrower goes through a foreclosure, they cannot purchase a home for five years.
Nobody has a crystal ball and can tell you when the housing market will hit bottom and start to rebound.  Nor can anyone say with certainty how far it will fall and how fast it will come back.  There are a lot of people that think we will hit the bottom sometime in the next year or two and then start to come back.  If this is true and a borrower does a short sale today, he or she will be eligible to purchase again at or very near the bottom of the market.  If the borrower instead allows the foreclosure to happen, he or she will have to watch from the sidelines as the market rises.
Short sales are not fun, but there is a way to do them right and to time them so they work best for the borrower.  While a year ago, only 10% of short sales were getting approved, we are now working with a company that is getting 80% of them approved.  It takes more effort than allowing the bank to foreclose and the rewards are not anything the borrower sees immediately.  However, if the borrower can focus on what will put him or her in the best position five years from now it is clear that a short sale is much preferred to letting the bank foreclose – even if all they want to do now is screw the bank.

Loan Modification Trap

I was talking with a client of mine who is doing a loan modification on her own and she told me that the bank was giving her a forebearance.  After we hung up, I thought through what she told me and realized that they are giving her the shaft.  Here is what they told her:

They can’t qualify her for a loan modification now, and they have to file the Notice of Default.  But, if she makes her next three payments they will talk to her about the loan modification then.

Here is what it really means (most likely):

We don’t think you qualify for a loan modification.  The State of California requires that we wait three months after filing a Notice of Default before we can file a Notice of Trustee Sale.  We would rather you pay us the mortgage for those three months.  If you do, we promise to look at your file again at that time (if you don’t qualify now, you probably won’t qualify then) and then decide if we will foreclose.  Bottom line is she pays 3 more months of mortgage and still loses her home.

I have seen this happen a couple of times.  The owner gets to the end of the three month period, does not qualify for a loan modification and only has three weeks to try and sell the home to avoid the foreclosure.  Inevitably, the bank forecloses and the owner now has a foreclosure on their record which makes it next to impossible to purchase a home for five years whereas if we had done a short sale, they could re-purchase in two years (about the time most experts think we will hit the bottom of the market).

When you call a bank as a homeowner, you need to understand that the bank is not required to modify your loan.  They are encouraged by the government to do it, but that encouragement is only about $6,000.  While that might be a nice amount on a loan in South Dakota, it doesn’t do much to offest losses the banks are seeing in San Diego.   So the government is not helping our local situation much. The bank is going to look at your loan modification as a straight business decision with the following factors considered:

• Can you make the new payment?
• At the level of the new payment, how large would the loan be?
• Is the value of the home more than the above loan size (if so, foreclose)

Each bank has its own criteria on which loans it will modify and the calculations are fairly complex.  Understand that although this is emotional for you,  it is just business for the bank.  Most likely, the person you are talking to is new to the industry and doesn’t really know what they are doing.  They have about 500 files on their desk and are emotionally detached from your situation.  Either your file has to fit into a very precise formula, or you had better know how to get past this person and into the department with working calculators and a manager that can make a decision other than what the computer screen tells her.

If you are serious about saving your home and your credit, you should work with someone who has experience modifying loans.  There are two types of people who can modify loans in California:  Lawyers and Real Estate Brokers (I do not modify loans, nor do I accept referrals from people who do – I will refer clients to the best people I know and hope that in exchange they will call me in five years when they want to sell).  If you are talking with a lawyer about a loan modification, make sure they have a background in Real Estate.  A lawyer will likely charge you about $5k to do a loan mod – make sure you do not pay everything up front unless you get several references first.  If you are not a lawyer, California law requires you to have a real estate license to modify loans for other people.  In addition, if an agent is going to collect an advance fee (they all do) for the service, that agent has to get special authorization from the state to do so.  You can look this information up on the California Department of Real Estate web site.  Real Estate professionals will typically charge $2,500 – $3,000 to do a loan modification, but have to put the money in a trust and can only withdraw funds as certain milestones are hit – you get money back if they are unsuccessful (unlike with most lawyers).

It might be attractive to try this yourself, but if you do, be sure you have all the information on your rights and responsibilities so that you don’t use up all your time counting on the bank’s good intentions.

Mortgage Foregiveness – May Work in More Situations

I spent several hours Friday on the phone with the IRS and reading through various sections of the Internal Revenue Code and think that I may have found a loophole for people who need to do a short sale or are being foreclosed on a rental property that used to be their primary residence.
Before I go into details let me once again state that I am NOT AN ACCOUNTANT or TAX LAWYER.  Please, use the information I will provide below and do your own research or hand it to your accountant to research.  DO NOT DEPEND ON THIS TO DO YOUR TAXES or SET YOUR FINANCIAL PLAN.

On Dec. 20, 2007, President Bush signed H.R. 3648, the Mortgage Foregiveness Debt Relief Act of 2007.  There are two portions of this law which are important for this discussion:

Section2.(a) which modifies Paragraph 1 of section 108(a) of the Internal Revenue Code of 1986 by adding subparagraph (E) “the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.”

and

Section 2.(b) which adds, among other things, to the end of Section 108 of the Code section h of which paragraph 2 reads, “(2) QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS. – For the purposes of this section, the term ‘qualified principal residence indebtedness’ means acquisition indebtedness (within the meaning of section 163(h)(3)(B), …”

The result of both these paragraphs are well known.  The first says that if your bank receives less money than you owe them during either the sale or foreclosure of your home, while the bank will still send you a 1099 for the “debt relief gain” (the amount you did not pay back), the Federal Government will not tax you on that gain if the sale or foreclosure is completed before January 1, 2010.   The second says that this holeds for Acquisition Indebtedness (the loan you took out to purchase your home).
There are two points to dig for a little deeper:  What if you re-financed your home, and what if it was your primary but is not any longer (you moved out prior to the sale)?

To look at the question of re-financed loans, I looked at section 163(h)(3)(B) which is below:

(B) Acquisition indebtedness

(i) In general The term “acquisition indebtedness” means any indebtedness which—

(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and 

(II) is secured by such residence.

 Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

 

What does it mean?
This means (once again, my opinion only) that if you have re-financed your home, you are still covered.  If you pulled money out of the home and used it to improve the home, that money is covered also.  However, if you pulled money out of the home to buy toys or take vacations, that is not covered and you will be taxed on that portion.  For example:

Purchased home for $500k with 100% financing.
Re-financed pulling out $200k.
Put $100k into the yard.
Put $100k in Enron stock which is now gone.
Sell the house and the bank gets $550k back with $700k in loans so they lose $150k.
You will get a 1099 for $150k in gain (the amount the bank lost).
You cannot write off the $100k you used for Enron stock but you can write off the $50k of the loss that was put into improving your home.
Hopefully, you can show that all the money from your re-finances went back into the home.

Now, the second question is more interesting.  What if you didn’t live in the house at the time it sold?  The reason this is important is what if you had rented out your home when you purchased your current home and then have to short sell or foreclose on your current rental (former primary).  My reason for pursing this is that if you sell a home and have a capital gain (wouldn’t that be nice), you can exclude $250k of that gain ($500k for a married couple) if you lived in the home two of the previous five years.  Can we use the same rule here?

Well, Section 2 of H.R. 3648 also adds Section 108(h)(5) to the IRS Code that reads:

(5) PRINCIPAL RESIDENCE. – For the purposes of this subsection, the term ‘principal residence’ has the same meaning as when used in section 121.

Ok, back to the revenue code looking for section 121 (I know, get a life).  There it is.  Section 121(a):

(a) EXCLUSION
Gross income shall not include gain from the sale or exchange of the property if, during the 5-year peiod ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregatin 2 years or more.

What it means:

If you rented out your previous primary residence for a period of time once you purchased your current home, and you have to do a short sale or foreclosure on that home, if you lived in it 2 of the previous 5 years (based on the close date of the sale or foreclosure transaction), the home qualifies as a primary residence and you can exclude the “debt foregiveness gain” from your taxes.  Yes!

Summary

Many of you are learning to jump straight to the end as I spell things out in great detail.  The main points here are:

• I need a hobby
• Your may be able to exclude the debt foregiveness gain on your home even if you have re-financed, but only up to the amount that the refinance was used to absorb your purchase price and add any improvements, but not any funds used for anything other than your home.
• You may be able to exclude the debt foregiveness gain on a prior primary residence if you lived in that home 2 of the previous 5 years.
• However, what I suspect, and is the case with the client I did the research for, is many people refinanced their first home and used the extra money to purchase the second home.  The extra money used to purchase the second home is not eligible for foregiveness, you will still be taxed on that portion of the debt foregiveness gain.
• This says nothing about the right of the bank to pursue you for a deficiency.  If you have refinanced your home and the bank accepts less that full payment in a sale or foreclosure, they can pursue you for the balance.  That is why if you are doing a short sale, be sure to use someone who has experience (like the guy who needs a hobby) so that they can try and negotiate with the bank to give up their deficiency rights.