Foreclosures and Bankruptcy

Jan. 5, 2009

Transcript:

Ted Simons:
Well, thank you for helping clean up a little bit of the mess for us, Mark, appreciate it. Arizona has one of the highest foreclosure rates in the country and it's likely now to get worse. Many adjustable rate mortgages will start resetting soon and the break that lenders gave on foreclosures before the holidays are over. Job losses are mounting. All those troubles could lead to bankruptcies. Although bankruptcy filings fell in Arizona in November, they're up quite a bit from the year before. I'll talk to a attorney that specializes in bankruptcy and real estate and the ramifications regarding both issues. First, here's a recap from the housing market from economist Elliott Pollack. He made the statements last month.

Elliott Pollack:
The long and the short of it is Phoenix like other bubble markets, housing market is still in disarray. And it appears commercial markets aren't far behind. We paying the piper for the overbuilding that occurred between 2003 and 2006. It's exacerbated by a recession, credit markets that are in disarray and the resulting slowdown in population that will push out the recovery time and I agree with Lee, until we get things back to normal, it's 2012 or 2013. Doesn't mean you can't be recovery in the interim but it's long, painful haul. There are too many houses -- well, there are roughly by our calculations 30,000 to 50,000 too many homes in greater Phoenix right now in a market that's absorbing considerably fewer than that. Indeed, in a normal market, you have 35,000 to 40,000 new units. This year, you'll end up with less than 13,000. R.L. Brown came out yesterday and his data from November shows there was a whopping 251 units built permitted in Maricopa County last month. They're down this year roughly 85% from the peak. It'll be worse next year. Next year will probably be the bottom in permits and the second half will see a recovery only because the comparisons will be so easy. Not because there's anything really vibrant going on in the economy. You add to that tougher loan standards, 75% of banks report tougher loan standards on prime loans. 100% report tougher loan standards on subprime loans and you have the real problem. In the last year, 50% of homes sold in greater Phoenix were sold at a loss. 38% were in foreclosures, 42% had negative equity. That's amazing because you consider a lot of people paid cash for their homes or put a large down payment. For 42% of the people that purchased homes in the last five years had negative equity is just amazing.

Ted Simons:
Here now to talk about real estate, foreclosures and bankruptcy is attorney Diane Drain who focuses on both real estate and bankruptcy. She's a member of the board of directors of the state bar of Arizona. Good to have you here, welcome to "Horizon."

Diane Drain:
Thank you for inviting me.

Ted Simons:
Concerns when working out a foreclosure and bankruptcy. What should folks be aware of?

Diane Drain:
Well certainly from the foreclosure side, you need to know the consequences of a lender not receiving the full amount they're owed. Once a foreclosure is completed, there's a credit hit because there's foreclosure on their credit there could be an opportunity for the lender to sue the borrower for losses that the lender suffered. If not that, that's called a deficiency. If not that, there could be tax consequences called forgiveness of debt that roll out of a foreclosure or a short sale.

Ted Simons:
There also has to be concerned with the lender as well, because lenders promise things but sometimes either the promises don't happen or happen in a far distant future that a lot of things happen in between.

Diane Drain:
Well unfortunately, the lenders have been taken by surprise the number of files that are in default. They're under trained and overwhelmed as far as the number of loans -- what's called the loss mitigation department is being asked to review. So they've really done, they've taken a position they're dealing only with the hottest flames that are out there meaning those that are closest to losing in foreclosure. They're ignoring the ones that they could save if only they'd work on them earlier. So it's taken between six weeks and six months to get a response out of a lender whether or not they'll work with the borrower.

Ted Simons:
And people have to be aware of that because a lot could happen six months to a year regarding your loan.

Diane Drain:
Exactly.

Ted Simons:
Short sales. Talk to us about the ramifications there.

Diane Drain:
A short sale is where a lender doesn't receive what he's owed. So again, the consequences could be taxes, forgiveness of debt. The lender may ask the borrower to sign a promissory note for the difference between what the lender is receiving for a short sale. The borrower needs to be aware he's legally obligated to pay that back or he could be sued. The problem there is that he may have not -- the promissory note is a legal obligation outside of our Arizona statutes, what's called the antideficiency statute. Had he not signed the promissory note, he might have been protected. Once he signed it he's now exposed.

Ted Simons:
So in terms of taxes, see if I got this right now --

Diane Drain:
Ok.

Ted Simons: --
You sign for the loan. You sign the promissory note. You can't pay the loan. That's considered income until you sign the note. When you sign the note, that's not considered income. But if you can't pay it, then all of a sudden it comes back to you as income you're liable for?

Diane Drain:
Right, it's called phantom income, because you never really got a dollar bill in your pocket. But it is deemed income. The internal revenue code requires the -- that the lender file a 1099 showing you did have income. There has been some relief. The mortgage forgiveness act of 07 says if it was your principle residence for two of the last five years and you borrowed the money to buy the house or borrow money to improve the house, that there's a particular form, a 982 form you file with the IRS showing this should not be deemed income.

Ted Simons:
Debt forgiveness act of '07, that's been extended, has at any time?

Diane Drain:
It has been. I believe going to 12 now.

Ted Simons:
And as far as that is concerned, um, what are the ramifications there? What -- how -- not ramifications -- what are the requirements there for someone to be helped?

Diane Drain:
You can't have a secondary residence. This has to be your only residence. You had to have borrowed the money prior to January 1, 2008. Your income has to be such you're 31% of -- I don't have my cheat sheet with me unfortunately -- but basically you can't afford the loan is what it comes down to. The result will be if at first place it's an FHA program so your lender has the discretion whether or not to agree to the -- to modifying the loan. If they modify the loan, then they are to make it a 30-year fixed, standard, you know, current interest rate. And there are some programs for first-time home buyers. There's $7,500 up front down payment kind of a grace period -- grace loan but it will be a loan. You'll have to pay it back.

Ted Simons:
But in general from what we're talking about here, I guess the lesson learned is if you can, don't walk away?

Diane Drain:
Right, don't walk away without knowing what it is that could happen. What consequences will be if you walk away? It may be ultimately you decide to walk away any way because you can't afford to keep taking whatever money in savings and pay it into a black hole. So understand the deficiency issues. Understand the tax issues. You've got to see a certified tax specialist. Don't use the standard CPA who doesn't understand taxes. I'm sorry, forgiveness of debt. So have the big picture in mind before you decide to walk away.

Ted Simons:
Great information there, Diane. Thank you so much for joining us. We appreciate it.

Diane Drain:
Thank you.