California Second Mortgage Foreclosure
- HAFA provides incentives for borrowers and servicers to avoid foreclosure.
I cannot afford my California home. Should I worry about taxes on forgiven mortgage debt? What are my foreclosure alternatives?
Bill, I am a 100% disabled Vet and my wife is now the main bread winner. She was transferred to CA 5 years ago and we purchased a home at the top of the curve for $270k. We were transferred to AZ two years ago and tried to sell the house for 7 months with the market declining faster than we could reduce the price. I rented it for the payments and kept it afloat for the last year, but the renter moved out and rent would now be $800. below payment. We decided to do a short sale with my reestablishing residency to protect the property. The house has been on the market for 45 days and started at $180k was dropped after no offers to $170k and the agent now requested to drop it another $10k to try to get an offer. My bank is for a short sale and I have filled all the paperwork for this but the bank will take no action nor assign the case to an officer until they receive an offer. I am making the determinations on dropping the price based on the real estate agent's recommendation. There is no mention of "recourse" in the contract and I understand CA is a non-recourse state??? We stopped making the payment 2 months ago as the rent was used for payments. We are strapped and will not be able to pay much if any to resolve the difference in amt owed and selling price as we maxed everything out during the 7 months I tried to sell the house last year and continue to borrow to stay in residence now. The Credit union we have this with will not allow a "Deed in Lieu" until the process is 90 days in effect. But at the 90 day mark I have been told they will begin foreclosure so both days will come at once. I have been told that they will attempt to have me sigh a note for the FULL amount of difference at the current mortgage rate once a short sale goes through. If I could afford this amount ea month I wouldn't need to sell the property to begin with. Should I continue with a short sale, then go to Deed in lieu and if this doesn't work allow foreclosure? Being the house is now my primary residence again, do I have to worry about the 1099C for about $100k as a gift from the Credit Union and taxes?
Your situation has a lot of complicated factors involved. I see three primary issues you need to focus your attention on:
- What are your options if you cannot afford the mortgage payments on a California home?
- Is the mortgage a recourse or non-recourse loan?
- If the deficiency on the mortgage is forgiven, are you liable for the taxes?
I discuss each of these issues below, and conclude with recommendations.
Home Affordable Foreclosure Alternatives Program (HAFA)
The Bills.com article on the guidelines for HAFA provides information on the federal government programs and discusses the differences between short-sales and deed-in-lieu foreclosure. If your servicer (financial institution who loaned the mortgage) participates in the federal program, then the servicer must follow the guidelines and deadlines set out. Also, you, as the borrower, must also be eligible for the Home Affordable Modification Program (HAMP) as set out in the program guidelines.
Many servicers do not have a specific person to handle an individual case until an offer is received. However, with the new guidelines, deadlines, and streamlined forms, a borrower has more options and the servicer has more incentives to avoid foreclosure. One provision is that the servicer must provide information to the borrower pertaining to the sale price and why an offer is refused.
Foreclosure
Foreclosure is the legal process through which a lender (most typically a mortgage lender) claims an asset from the consumer borrower who has defaulted on their mortgage payments. Because foreclosure is expensive and usually results in a poor return, lenders do not like foreclosure any more than homeowners do. Accordingly, learn more about the Home Affordable Foreclosure Alternatives (HAFA) program, which is a federal program that offers financial incentives to lenders and homeowners to avoid foreclosure.
Recourse or Non-recourse Loan in California
To answer your question on recourse loan in California, read the article Is My HELOC a Recourse or Non-Recourse Loan in California?. This article defines the differences between recourse and non-recourse loans. It also includes information on Mortgage Forgiveness Debt Relief Act.
You mention you reside in California in the property in question. Because you do not state whether the mortgage on the California property was refinanced, I cannot state for certain whether it is recourse or non-recourse. Also, to the best of my knowledge, the question of exactly how much a person must reside in their home for it to qualify for California's non-recourse rules has not been litigated, which leaves that something of an unknown. Let us assume for the sake of argument that your residency at the start of the loan and now qualifies you. However, as mentioned, it is impossible for me to even guess if your mortgage is recourse or not based on the information you provided.
For the benefit of readers residing in other states, see the Bills.com resources on mortgage foreclosure in Georgia, Illinois, Michigan, Nevada, and Virginia.
Mortgage Forgiveness Debt Relief Act
Consult with a tax professional if you receive a 1099-C so that you calculate what if anything you owe in taxes correctly, and to ensure that you take advantage of all available exemptions. See the Bills.com resource on the Mortgage Forgiveness Debt Relief Act to learn if you qualify to have your 1099-C tax liability waived.
Recommendation
Read the articles on HAFA and recourse loans. The purpose of HAFA is to provide incentives for borrowers and servicers to avoid foreclosure. There are options for short sales and deed-in-lieu of foreclosure. If your servicer is not participating in the federal program, there is still time for you to participate and benefit by this program. It is to the servicer's benefit to participate and most do. However, if the servicer chooses not to, you can still ask to participate in the servicer's own deed in lieu of foreclosure or short sale program.
Since you do not state whether your mortgage was refinanced, I am unable to comment on the recourse question and if you face a deficiency balance if you default and there is a foreclosure. Consult with a California attorney to discuss bankruptcy as means to handle the deficiency balance if the servicer forecloses on the property.
Keep open dialog with your servicer, and take notes of any telephone conversation, including name of the customer service representative you spoke with, the time, date, and items discussed.
I hope this information helps you Find. Learn & Save.
Best,
Bill