Wendy Cutrufelli, Contra Costa Realtor

Calling all mortgage lenders! In the new world of appraisals - in which you are no longer allowed to actually speak to the appraiser - what is the procedure for challenging erroneous information or erroneous values?

As if mortgage lending wasn't crazy enough in today's market, here we are dealing with another flawed law to address lenders and appraisers who "conspired" to inflate values. Loan officers and their managers are no longer allowed to have direct contact with appraisers in order to prevent any "undue influence" on the appraised value. While protecting consumers is unquestionably important, the question of the day is what is the procedure to challenge a clearly erroneous appraisal - erroneous in the information or the market value? Let me provide a recent example:

A property was on the market for less than 10 days and received multiple offers. Multiple, multiple offers. The lowest offer was $725k and the highest offer was $750k. The lender for the accepted buyer ordered the appraisal through their centralized appraisal system as required. The appraised value of the property per the out-of-area appraiser was $600k. Seriously, if you were an idiot and did nothing but search the MLS by square footage, bedroom and bathroom count - completely ignoring location and amenities - it would be impossible to derive a value less than $715k. When the lender was contacted, the response was, "We're sorry and terribly frustrated too."

What is the procedure allowed by the current law to challenge inaccurate appraisals?

I read the entire California Foreclosure Prevention Act, every section, paragraph and sub-paragraph. Who will this really help?

Existing California law requires mortgage lenders to file a Notice of Default as the first step in the foreclosure process. After the Notice of Default has been filed and a time period of not less than 3 months has elapsed, the mortgage lender may post a Notice of Sale specifying the time and place of the foreclosure sale.

The California Foreclosure Prevention Act adds an additional 90 days to the timeframe between Notice of Default and Notice of Sale....

If the loan:

• is a first mortgage
• was recorded between January 1, 2003 and January 1, 2008
• is serviced by a loan servicer that has not implemented a "comprehensive loan modification program"
• is not made, purchased or serviced by a California state, or local public housing agency or authority and the loan is not collatreral for securities purchased by any such agency

and If the borrower:

• occuppied the property as their principal residence at the time the loan became delinquent
• has not surrendered the property as evidenced by a letter confirming the surrender or the delivery of the keys to the lender
• is willing and able to pay under the modification agreement
• is not currently in bankruptcy (court mandated foreclosure delays apply in the case of bankruptcy)
• has not contracted with "an organization, person or entity whose primary business is advising people who have decided to leave their homes regarding how to extend the foreclosure process and avoid their contractual obligations to mortgagees or beneficiaries."

and If the 90 day moratorium won't "require a servicer to violate contractual agreements for investor-owned loans."

So what are the significant loopholes that I see?

The first loophole is that the loan is not serviced by a lender offering a "comprehensive loan modification program" defined as one that includes some combination of the following features:

• An interest rate reduction for a fixed term of at least 5 years
• An extension of the amortized period for the loan term, to no more than 40 years from the original date of the loan
• Deferral of some portion of the principal amount of the unpaid balance until maturity of the loan
• Reduction of principal
• Compliance with a federally mandated loan modification program

Most lenders are currently offering note modifications to homeowners in distress that meet the "combination of features" requirement. They provide an interest rate reduction for a fixed period of 5 years with an extension of the amortization period (from 30 to 35 years, for instance). I have yet to see a lender offer a principal reduction but they aren't required to if they offer the combination of the first two items. While encouraging these note modifications is the entire intent of the law, does this combination of features really help California homeowners or just delay the pain?

Since many homes have lost 40% - 50% of their value, it would require an appreciation rate of more than 10% per year starting immediately to have viable options to refinance or sell in 5 years when the modified payment ends. Given the fact historical appreciation is 8% per year, it is fairly clear that the 5 year fixed period for the payment reduction simply delays the pain in many cases.

The second loophole is that the 90 day moratorium won't be enforced if it requires a servicer to violate contractual agreements for investor-owned loans. Perhaps it is my lending background that made this particular item jump off the page for me. A large percentage of California mortgages were securitized and sold to investors with the originating company/bank acting only as the Servicer (i.e. they are paid for the accounting functions on the mortgage such as collecting the monthly payments and paying the property taxes from impound accounts).

The Servicers ability to offer note modifications on those loans is limited by the contractual agreement with the investor. Some investor contracts prohibit note modifications and some allow note modifications only to a certain percentage of the loans sold with that specific "pool" of mortgages. Even if the Servicer wants to offer a note modification, they are often limited or prohibited by their contractual agreement.


And then there is an important item that isn't even addressed.............

Extending the timeframe from 3 months to 6 months between the Notice of Default to Notice of Sale doesn't guarantee a modification. During that time, the homeowner is increasing the balance on which they could ultimately pay State and Federal income taxes unless they qualify for the Mortgage Forgiveness Debt Relief Act or are Insolvent per IRS guidelines.


To answer my original question "Who will this Act help?". In my opinion, the Act will help homeowners who have:

• A lender that retained the mortgage in their portfolio versus selling it in a pool to investors
• Been struggling to reach the Note Modification department to no avail OR
• Submitted their Note Modification paperwork and have been waiting for an answer
• Willingness and ability to pay the monthly mortgage payment at 38% of their Gross Income
• Current property value that has declined 20% or less

A link to the Foreclosure Prevention Act in its entirety can be found on my website.

If you are from out of the area and would like to view a visual tour of our wonderful Clayton community, click here.

Events in The Grove park and Downtown

Saturday, June 6:
Farmers Market, 8:00 a.m - noon

Saturday, June 13:
Farmers Market, 8:00 a.m. - noon
Concert In The Grove, 6:00 p.m. - 8:00 p.m.
Mamaluke: Classic Rock Dance Band
This is a FREE community concert!

Saturday, June 20:
Farmers Market, 8:00 a.m. - noon

Saturday, June 27:
Farmers Market, 8:00 a.m. - noon
Concert In The Grove, 6:00 p.m. - 8:00 p.m.
The Sun Kings: Beatles songs
This is a FREE community concert!

Events at the Clayton Community Library

Monday, June 8 (through August 17):
Summer Reading Program

Thursday, June 11, 11:00 - 12:00 p.m.:
Z-Man's Paper Airplane Workshop
Ages 6 and up, please sign up in advance

Thursday, June 18:
Father's Day Stories and Crafts
Ages 3 - 8, please sign up in advance

Thursday, June 25, 11:00 a.m. (through August 13):
Picture Book Time! Ages 3 - 5 years
Child may attend without caregiver

Saturday, June 27

Tip a Cop Fundraiser to benefit
Special Olympics!

Location: Ed's Mudville Grill

City of Clayon Events

Tuesday, June 2, 7:00 - 10:00:
City Council meeting, Clayton Community Library

Tuesday, June 9, 7:00 - 10:00:
Planning Commission meeting, Clayton
Community Library

Tuesday, June 16, 7:00 - 10:00:
City Council meeting, Clayton Community Library

Friday, June 19 - Monday, June 22:
Fourth of July Parade Entries are due!
The Parade Entry Forms must be postmarked
by June 19th or faxed by June 22nd.

Tuesday, June 23, 7:00 - 10:00:
Planning Commission meeting, Clayton
Community Library

Clayton, California is a small but wonderful city located just 7.5 miles east of Walnut Creek. Please enjoy this visual tour of Clayton which also includes several additional community links.

Note: This blog pertains to the state of California. Lending laws and regulations may differ in other states.

Many sellers proceed with a short-sale prior to consulting a CPA and attorney. Don't make this mistake! There is a significant amount of erroneous information about short-sales and the ultimate impact on you, the seller.

There are three major items to consider before listing your home as a short-sale:

• Recourse or Non-Recourse mortgage(s)
• Income Tax Liability
• Personal Liability after the sale

Recourse or Non-Recourse mortgage -

Recourse is the lender's right to collect the mortgage deficiency for up to four years. If your current mortgage(s) were the loans obtained when you purchased your home, then it is a Non-Recourse mortgage. If you refinanced your original loan (even if you didn't take cash-out) or obtained a 2nd mortgage / Home Equity line of credit after the purchase, they are now Recourse loans.

Let me walk you through an example -

Mr. and Mrs. Seller purchased their home with a $600,000 original mortgage. They later refinanced the mortgage and obtained a Home Equity Line of Credit for $150,000. Total combined finanncing = $750,000. The current fair market value of the home is $525,000.

In a typical short-sale transaction, the 1st lender pays the 2nd lender 10% of the 2nd lender's balance to release the lien and allow the sale to close.

Sales Price: $525,000
Selling costs: $ 32,970
Payoff to 1st lender: $477,030 ($122,970 short)
Payoff to 2nd lender: $15,000 ($135,000 short)

Since these are not the purchase loans, both lenders have the right to Recourse (the right to collect on the unpaid balance) for up to four years unless they waive that right.

Potential outcome #1: Both lenders waive their right to Recourse

Each lender will send you a Form 1099 (Miscl Income) for the portion of the mortgage that was "forgiven" (i.e. unpaid). In this case, the sellers will have an additional $257,970 "income" on which they will have to pay State and Federal income taxes. Assume they are in a 25% effective Federal tax bracket, this will represent an additional Federal income tax bill of $64,500 +/- plus an additional State tax bill of $23,00- +/- for a total additional income tax liability of $87,500.

Important note: the requirement for lenders to issue Form 1099 for the forgiven debt occurs whether the home is a short-sale or a foreclosure, but in the case of foreclosure the seller has no control over the price and ultimate loss.

I know of two methods allowed by the IRS (there could be more) to legally avoid paying Federal income tax on the forgiven debt: if you are Insolvent at the time of the sale OR if you qualify under the Mortgage Forgiveness Debt Relief Act. It is important to discuss your potential personal income tax liability with your CPA in advance.

Potential outcome #2: The 1st lender waives their right to Recourse but the 2nd lender doesn't.

The 1st lender will issue Form 1099 for $122,970. Using the same effective tax bracket as the previous example, this will result in additional Federal taxes of $31,000 +/- plus an additional $11,000 +/- State taxes for a total additional tax liability of $42,000.

The 2nd lender retains their right to collect on the balance due of $120,000 ($135,000 less $15,000 paid from the short-sale). Remember, unless the lender waivees their right to recourse, they retain that right and typically utlize the services of a collection agency or a deficiency judgment.

When faced with the potential post-sale Recourse, sellers have said, "If they try to collect the balance, I will file bankrutpcy." BUT due to changes in the bankruptcy laws, sellers may not have the option to file a Chapter 7 bankruptcy after selling the home because they no longer pass the "means test" and will be forced in to a Chapter 13 bankruptcy (5 year repayment plan).

There are numerous other "potential outcomes" but, in the end, this is the truth: Regardless of our "short-sale expertise", Realtors' are not attorneys. For some sellers already dealing with a serious financial hardship, a bankruptcy or foreclosure may be the better option than a short-sale. The only individual qualified to help you evaluate your options is an attorney who specializes in Bankruptcy, Short-Sales and Foreclosures. Many attorneys offer a free half-hour consultation.

Please, take the time to meet with a CPA and attorney. Learn your options and potential ramifications in order to make educated decisions for your future.