It’s the end of dual-tracking as we know it, and I feel fine.







The Consumer Financial Protection Bureau (CFPB) introduced new rules that became effective in January 2014.  Dual-tracking is a situation where a mortgage lender continues a foreclosure action against a delinquent borrower while simultaneously working with the borrower to avoid foreclosure.  The new rules originated from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The problem with dual-tracking for borrowers is that many people were foreclosed upon even though their lender told them they were being considered for a loan modification, short sale, or deed-in-lieu of foreclosure.  We have seen situations where a homeowner was told that their short sale was verbally approved and that a written approval was coming in the next few days.  However, the bank foreclosed on them shortly thereafter, having never issued a written approval as promised.  The lender’s negotiators typically take no responsibility whatsoever, claiming that they could not convince their own employer to stop the foreclosure action.

Lenders preferred to engage in dual-tracking because they could quickly foreclose on a borrower if the loan modification, forbearance, short sale, or deed-in-lieu process failed or if the process was taking too long.  However, in many instances the process was taking so long because of the lender’s bureaucracy, high staff turnover, and ever-changing policies.  So, the lender created the very situation that caused them to

The new CFPB rules do not prohibit dual-tracking entirely.  The rules do impose some limits.  The main stipulations are:

-       A lender cannot initiate a foreclosure until 120 days after a borrower falls delinquent.

-       A lender cannot start a foreclosure if a borrower has a pending application for a loan modification.

-       A lender must give borrowers who are two months behind written notice of alternatives to foreclosure and examples of those options.

-       A lender must provide delinquent borrowers with direct, easy, ongoing access to staff responsible for helping them with their application and reporting the status of an application.

-       If a borrower asks for a loan modification after the 120-day delinquency period, the lender may continue the foreclosure process.

-       A servicer must offer all foreclosure alternatives available from the investor or loan owner, and not just the option that is most financially favorable to the servicer.

-       Before interest rates adjust, lenders must provide clear mortgage statements with warnings about the upcoming adjustment.

-       Lenders must consider and respond to a borrower’s application for a loan modification if it arrives at least 37 days before a scheduled foreclosure sale.  If the lender offers an alternative to foreclosure, they must give the borrower time to accept the offer before pushing for a foreclosure judgment or a foreclosure sale.  Lenders may not foreclose on a property if the borrower and the lender have agreed to a loss mitigation agreement, as long as the borrower abides by that agreement.

-       Banks that service 5,000 or fewer loans are exempt from certain requirements.

-       Lenders must provide to the borrower advance notice and pricing on force-place insurance if the lender has reason to believe that the property is no longer insured by the borrower.

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The bank won’t stop calling me. Should I talk with them?





We believe you should communicate with your bank on a periodic basis.  If you are behind on your mortgage payment, expect up to four phone calls a day.  You will also receive a lot of mail. 

It is unwise to completely ignore the bank.  If you do not communicate at all with your lender, they will probably put you in the category of the people who refuse to pay.  That is the worst category for you, as that means they will move the foreclosure process along as fast as possible. 

You do not have to answer the phone every single time the bank calls, but it is good to communicate with your lender at least twice a month.  If you are considering a short sale, tell the representative.  Ask them to send you the bank’s short sale paperwork package. 

If you are already attempting to sell your property, then tell the person on the phone about it.  Reiterate your hardship each time you talk with your lender.  If you are still occupying the property, tell the lender so they do not send someone over to verify occupancy. 

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The National Association of REALTORS® continues to lobby for an extension of the Mortgage Forgiveness Debt Relief Act.







The 2014 President of the National Association of REALTORS®, Steve Brown, reported via his video, the number of people using the debt forgiveness exemption has increased every year.  He lobbies for Congress to extend the exemption.  Brown states that NAR’s best estimate is that Congress will pass some extension of this law in late 2014.  Watch the video for the full details of this important update.









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What’s the deal with property tax sales in Pennsylvania?

If property taxes are not paid, the property could be sold at a tax sale.  The Pennsylvania Real Estate Tax Sale Act (RETSA) holds that all lawfully levied taxes on property constitute a first lien on the property.  Delinquent taxes can be higher than the mortgage in order of priority.

Each county has a Tax Claim Bureau that collects all the property taxes.  The taxes become delinquent in the year following the year in which they were due.  The Tax Claim Bureau will send a notice of the delinquent taxes by registered or certified mail with return receipt to the owner’s address.  If the post office cannot deliver notice, then it is prominently posted on the property.

Upset Tax Sale

The first type of tax sale is the Upset Sale.  An auction is held, and the buyer takes the property subject to the claim of all recorded mortgages, liens, ground rent, claims, and tax liens from the Pennsylvania Department of Revenue.  To clear the title, the buyer must pay off the amounts outstanding against the property.  Some people foolishly bid on property at an Upset Sale, thinking that they can buy the property for just a few thousand dollars.  What they do not realize is that there are probably many other liens and claims against the property that must be satisfied before there can be clear title.  In many cases, the mortgage lender will pay the back taxes before the Upset Sale to protect their interest.

Judicial Tax Sale

If the Upset Sale cannot produce a bidder who will pay the upset price, the Tax Claim Bureau may petition the county’s Court of Common Pleas to permit a Judicial Sale.  For instance, a house may have a sizable mortgage against it, causing the bidders at the Upset Sale not to bid high enough to take ownership of the property subject to the mortgage.  The Court of Common Pleas can set a sale date.  The high bidder at a Judicial Sale takes title to the property free and clear of all mortgages, taxes, and liens.  Ground rents still remain.  In most cases, the mortgage lender will pay the back taxes to prevent a Judicial Sale.

Right of Redemption

The former owner of a property sold at a tax sale could redeem the property within one year from the date of the acknowledgment of the Sheriff’s Deed that awards ownership to the high bidder.  To buy back the property, the former owner must pay the amount bid at the tax sale plus other costs and any liens or encumbrances that were paid.  There are some exceptions.  For instance, if the property were vacant or abandoned by the former owner, then they might not have the right to redeem it.

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What are the risks in buying a short sale?









Many short sales involve sellers who are financially struggling.  That typically means the seller cut back on maintenance in recent months or years, so the property likely requires some work.  For example, the seller may not have serviced the furnace, cleaned the gutters, or fixed broken items.

In a short sale transaction, a seller typically will not or cannot pay for repairs that may be customarily expected of non-distressed sellers.  The property in most short sales is conveyed As-Is.  A seller may even have difficulty paying for a use and occupancy certificate inspection with the municipality or a resale certificate from a Homeowners Association (HOA).

The buyer of a short sale may end up being expected to pay for municipal inspections, HOA resale fees, repairs, and other costs.  In some cases, neither buyer nor seller will pay for something like a municipal inspection, with the expectation that the buyer will handle the municipal inspection later.  However, if the municipal inspection discovers violations of existing code, then the buyer takes on the cost and responsibility of correcting the violations.

In some short sales, the seller may not have the utilities turned on for the buyer’s home inspection.  The buyer may be expected to incur the cost and time of activating the utilities or de-winterizing the property.  If the buyer does not turn on the utilities, their property inspection will be limited in scope.

In the midst of winter, buyers have to be careful about damage from frozen pipes.  If the seller stops paying for heat and does not winterize the house, the pipes could freeze.  The damage could occur after the buyer’s home inspection but before the settlement.  If the utilities are off at the time of the closing, it may be worthwhile for the buyer to turn on the utilities and heat prior to the purchase.

Some short sales may involve trash or junk left behind.  The seller may not have the money or the motivation to clean out the property.

Short sales do involve the conveyance of the property with clear and marketable title.  A buyer of a short sale is strongly encouraged to pay for title insurance.  Title agencies offer enhanced title insurance, which costs only 10 percent more than standard title insurance.  We recommend that buyers of distressed property pay for enhanced title insurance.

Many short sales involve increased risk for the buyer.  Many short sales are sold below fair market value.  Therefore, buyers often pay less for a short sale in exchange for the risk they incur.

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The big question from many short sale sellers in 2014 is:  “Will I have to pay income tax on my forgiven debt now that the IRS mortgage forgiveness act is expired?”

Here’s some background:  Unless there is an exemption, the Internal Revenue Service has historically treated forgiven debt as taxable income.  That means that people with forgiven debt (such as from a mortgage, credit card, or installment loan) would pay tax as if the forgiven amount were ordinary income.  To give homeowners some relief, President George W. Bush signed the Mortgage Forgiveness Debt Relief Act (MFDRA) of 2007 into law, allowing short sale sellers of their principal residence to pay no income tax as long as they submitted IRS Form 982 with their federal tax return.  The original MFDRA was good until December 31, 2009.  President Barack Obama then extended it until December 31, 2012.  Then the MFDRA was extended one more year as part of the fiscal cliff deal.  It expired on December 31, 2013.  There are currently two bills in the House of Representatives and one bill in the Senate calling for it to be extended, but as of the date of this article none of the bills are scheduled for a vote.  And as of the end of 2013, reported that about 10.8 million U.S. homeowners have negative equity.

So, what can a person do to avoid being hit with higher taxes after a short sale? 

Thankfully, there is another way to avoid tax on debt forgiveness that applies to many short sale sellers.  Forgiven debts do not need to be counted as taxable income if the debt was canceled in a bankruptcy case, or if the person is insolvent, or if the forgiven debt was intended as a gift.  Certain business or farm property may also qualify.

The most relevant option for short sale sellers is the insolvency exception.  It applies not just to principal residences but in some cases to those with forgiven debt from investment properties and vacation homes.

To be considered insolvent, the person’s liabilities must exceed the fair market value of their assets.  The IRS code states, “A taxpayer is insolvent when his or her total liabilities exceed his or her total assets.  The forgiven debt may be excluded as income under the ‘insolvency’ exclusion.  Normally a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent.  The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness.  If you believe you qualify for any of these exceptions, see the instructions for Form 982.” 

If the seller’s debts and liabilities exceed their assets by more than the amount of debt forgiven, then they do not have to pay income tax on the forgiven amount.  Below is an example:

Susanna’s home is worth $200,000, but her mortgage debt is $300,000.  When the house is sold for $200,000, Susanna’s lender receives $175,000 and they forgive the remaining $125,000. 

$200,000         Sale price.

- $25,000         Real estate commission and closing costs.

$175,000         Amount Susanna’s bank receives on the $300,000 balance.

$125,000         Amount of debt the bank forgives.  This is sent via a 1099-C to Susanna.

At first, Susanna panics because she fears that her income will increase by $125,000, thereby pushing her into a 33% tax bracket and increasing her tax bill by over $41,000.  However, Susanna’s accountant performs some calculations to see if she qualifies for the insolvency exemption:

$225,000         Assets ($200,000 house plus $10,000 in savings and a $15,000 car)

- $350,000       Liabilities ($300,000 mortgage plus $50,000 in credit card debt)

$125,000         Insolvency amount

Susanna’s accountant states that the insolvency of $125,000 and the 1099-C of $125,000 are a wash.  They cancel each other out.  Therefore, Susanna does not owe any tax on the canceled debt.

Let’s imagine that Susanna had an insolvency amount of $100,000 instead of $125,000.  Then she would have to pay income tax on the remaining $25,000 of forgiven debt. 

This article is not intended as tax advice.  We suggest you consult with your tax advisor prior to your short sale and then after the sale.  Your tax advisor can examine your particular situation and guide you appropriately. 

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Five things buyers need to know when purchasing a short sale.

  1. Neither the seller nor the lender is likely to make repairs to the property.

    Many short sale properties have deferred maintenance, as the seller may stop paying for maintenance as money becomes tight. By the time the sale occurs, many short sale sellers are either unable or unwilling to pay for repairs. They realize that every dollar they spend on the property is a dollar they will not receive back. If a buyer wants to purchase a short sale and the property requires repairs before the buyer’s bank will lend any money, the buyer should find a way to make the repairs themselves or find a different property to buy. There is a risk to the buyer repairing a house before they purchase it or obtain a short sale approval to purchase it. If the buyer improves the house and the short sale fails or the buyer opts to walk away, then the buyer will have wasted their time and money on a house they will not own. Furthermore, few contractors will work on a property and wait to be paid at closing.

  1. If the buyer waits until after the short sale approval is granted to ask for a repair concession or lower price, it is far less likely to be approved.

    Some buyers wish to wait until after a written short sale approval is granted before they conduct their home inspection. In a regular transaction, the inspection period may be an opportunity for the buyer to request a credit or price reduction for repairs. Buyers should realize that if the seller’s lender has already approved a short sale, then it is highly unlikely that the lender will allow a price reduction or repair credit. If a buyer believes that a repair credit or price reduction may be needed, they should conduct their home inspection right after the signing of the real estate contract. It is much easier to amend the price or terms of the transaction before the seller’s lender makes a final decision. In most short sale transactions, it is better for the buyer to conduct their home inspection right away instead of waiting for a short sale approval.

  1. It may take months to receive a response from the seller’s bank. Short sales happen gradually, then suddenly.

    A buyer who must move into a home within 60 days of submitting an offer should seriously consider making an offer on a property that is not a short sale. The closing date is hard to predict early in a short sale negotiation process. Furthermore, there is a risk that a short sale may not be approved, and the buyer may not learn of this until weeks have passed. Anyone who wishes to buy a short sale should be patient and not under pressure to move in soon.

  1. If the buyer is under contract with the seller, take steps to ensure that the seller is committed to the transaction.

    The policy on how to mark a short sale listing in the Multiple Listing Service (Pending, Available with Contingency, or Available, among others) is subject to the office’s Broker of Record and perhaps the local Association of REALTORS®. Once a seller signs an offer from a buyer, some listing agents mark the listing as being under contract with no more showings as a sign that the seller is committed to that buyer. Other listing agents continue to market the property, soliciting offers that may be superior to the one that the seller already signed. If the listing agent continues to advertise the property, that could jeopardize the initial buyer’s position, as there is a distinct possibility that the listing agent and seller may seek to terminate the contract in favor of a better offer. If the buyer has already paid for inspections, an appraisal, an interest rate lock, and other costs associated with the purchase of real estate, the buyer may forfeit those costs if their contract is terminated. In some states, the policy is to have the property remain active or available in the MLS even though the seller is under contract with a buyer. Regardless, the buyer and their agent should convey their high level of commitment to the seller and elicit a high level of commitment in return.

  1. Be prepared to pay a little more at closing, as last-minute payoffs creep up that the seller and their bank may not pay.

    As the final fees and costs are tallied on the Settlement Statement, there is a possibility that someone will have to pay more than expected. A water bill that is higher than planned, a late fee added to a delinquent lien, or a property tax credit that is smaller than anticipated could increase the seller’s costs. However, the seller may not have the funds to pay the extra cost, and the bank may be unwilling to take less to cover the shortfall. That may mean the buyer has to pay a little more just to ensure that the transaction occurs. The buyer should be prepared to absorb several hundred dollars in additional costs just in case.


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How some opportunists may induce the seller and agent to commit mortgage fraud.

When a short sale is listed, some sellers and agents are besieged by unorthodox requests from seemingly helpful real estate investors or other short sale opportunists.  Of course many buyers look for a good deal, and it is the bank’s prerogative to allow a property to be sold for less than fair market value.  However, some of these investors or opportunists may entangle the agent and seller in what amounts to mortgage fraud.

One fraudulent situation is the double-close-and-flip transaction.  That occurs when an investor places the property under contract at a low price and offers to negotiate that offer with the bank.  Meanwhile, the investor tells the listing agent to continue marketing the property so they can procure a much higher offer.  The investor tells the bank that the low offer is the only one, while concealing the much higher offer from the bank.  The investor’s intention is to engineer the transaction so they can collect the difference between the low offer and the higher offer while keeping the bank unaware.  The listing agent, who has a fiduciary duty to the seller, ends up procuring a higher offer for the investor’s benefit and not the seller’s benefit.  Furthermore, the short sale fraud department within many banks may sue all the parties if they discover that a double-close-and-flip transaction occurred.

For example, the investor may go under contract with the seller at a sale price of $100,000.  The investor tells the listing agent that they will receive six percent commission, which is $6,000.  The investor tells the seller’s lender that $100,000 is the only offer received.  The investor may even have the seller sign the deed over to them, or the investor might file an option on the public records.  The deed and the option each give the investor incredible control over the transaction, and it is hard to push the investor out of the deal later.  So, while the investor is negotiating a $100,000 sale with the mortgage lender, the investor tells the listing agent to keep marketing the property.  The agent procures an offer for $135,000.  The investor instructs the buyer to give them $35,000 and says the buyer can take over their contract to buy the property for $100,000.  Or the investor convinces the buyer to give them the $135,000, and the investor uses $100,000 of that money to buy the house and even pays the agent another commission on the $135,000 sale.  Then the investor signs a deed immediately thereafter, transferring ownership to the end buyer while pocketing the difference.  The fraud occurs in the misrepresentation to the bank, who may later claim that they were defrauded of out tens of thousands of dollars.  That is the equivalent of walking into a bank branch and robbing the teller of tens of thousands of dollars.  The agent and seller may be found to be complicit in the fraud, even if they were somewhat naïve to the investor’s intentions.

Another potentially fraudulent situation involves the investor placing an option on the property or inducing the seller to turn over the deed without paying off the mortgage.  The investor creates a cloud on the title and then demands a payment from the ultimate buyer to release their option or transfer the deed.

The third type of fraudulent transaction involves a non-arms-length transaction or collusion in which the buyer allows the seller to remain in the property.  Some sellers convince a family member, often with a different last name, to buy the house at a discount.  Then the family member either rents or sells the house back to the former borrower.  The bank is defrauded out of thousands of dollars.

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Can the bank foreclose in the middle of winter?

A mortgage lender can foreclose at any time of year if they have properly followed the state’s foreclosure procedure.  A borrower in default receives notice of the foreclosure sale well in advance.  Furthermore, even after the house has been foreclosed, the occupants have some time to move out. 

In recent years, major banks have elected not to foreclose on people in December since it is close to the holidays.  It can create bad press for a lender to foreclose on a family right around the holidays.  Some lenders will delay December foreclosures until January.

Some states have laws about eviction of families with young children in the midst of winter.  Some state laws extend the time period for a family to move out during the winter months.


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Should I shut off my utilities if I vacate the house?

As the owner, you are still responsible for what happens on and to the premises.

In wintertime, the owner is responsible for preventing damage from frozen pipes.  If the owner is unable or unwilling to pay for heat, then the house should be winterized.  If the owner is unable to pay for the cost of winterization, they should notify their mortgage lender immediately.  In many cases the mortgage lender will pay to winterize a house and add the cost to the principal balance. 

If the owner shuts off the utilities, it can cause problems when the buyer conducts their home inspection.  Many real estate contracts state that the seller will have the utilities on for inspections.  If the buyer has to activate the utilities, they may be reluctant to make an offer in the first place, or they may simply make a lower offer than what they originally intended. 

Also, if the electricity is shut off, that can wreak havoc with showings, particularly showings in the evening.  If the house is dark, buyers are likely to be less interested in the home.  Keeping the electricity on makes showings run much more smoothly.

When the buyer conducts their pre-settlement walk-through inspection of the house, they will feel more comfortable if the utilities are on.  If the electricity and water are on, that could prevent any last-minute doubts or late-stage negotiation.  If financially feasible, it is wise to keep the utilities on.  At the very least, keeping the electricity and the water on can aid in the smooth sale of the property.

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