The Foreclosure Crisis: Not What It Appears to Be

Regardless of industry trends showing a decline in foreclosure starts, each month thousands of Americans are still facing a scenario that could mean the loss of their home. The foreclosure crisis is not fully behind us yet.

While an improving economy combined with government intervention and lender workouts has significantly reduced the number of homeowners in mortgage default since the height of the recession in 2008, the problem persists. Thousands of Notices of Default are still being issued each month in spite of the current optimism of a complete housing recovery touted in the press.

Two factors contribute to the discrepancy between prevailing sentiment and the actual facts regarding foreclosures. First, industry data consistently aggregates information on foreclosures, providing a broad averaging of foreclosure activity, whereas review of the actual data on a state-by state basis shows a different picture. According to RealtyTrac, Foreclosure activity in 2012 decreased from 2011 in 12 out of the nation’s 20 largest metro areas, led by Phoenix (down 37 %), San Francisco (down 30 %), Detroit (down 26 %), Los Angeles (down 24 %), and San Diego (down 24 %). But 2012 foreclosure activity increased in eight of the 20 largest metros, led by Tampa (80 % %), Miami (36 t %), Baltimore (34 %), Chicago (30 %), and New York (28 %).

Newly enacted foreclosure laws at the state level over the past two years have caused a contributing factor in the drop of default filings. California, Florida and Nevada arguably had the highest foreclosures rates in the nation. Yet recent statistics show a relationship between various state legislative actions and a slowdown in foreclosures, including Nevada requiring lenders to prove their rights to foreclose in 2011 and California’s Homeowner’s Bill of Rights enacted in 2013. So while these laws inevitably contributed to a dramatic decrease in completed foreclosures which is reflected in lower default-filing statistics, in reality, there are still eight to ten million units that comprise a substantial ‘shadow inventory’ of housing supply still subject to foreclosure. California and Nevada follow non-judicial procedures for filings. Judicial states, are still coping with pending cases simply caught in the court system. Foreclosure inventory in judicial states is still three times higher than that of non-judicial states, according to Lender Processing Services (LPS).

Second, industry data on distressed assets reports historically, typically analyzing activity 60 – 90 days prior to the actual reporting date. While real-time foreclosure data would be difficult to obtain and verify, default servicing specialists are as active as ever these days processing foreclosures. This trend is confirmed by two Peak Corporate Network executives. Kelli Espinoza is Executive Vice President overseeing operations at Peak Foreclosure Services, Inc., which serves as the primary Peak entity specializing in a wide range of default servicing solutions catering to banks, credit unions, and small investors nationwide. She characterizes current activity as “brisk.” Peak’s foreclosure unit is currently processing a steady flow of files generated by private equity and investment firms in the distressed asset sector. While prevailing housing analysis reporting on past distressed performance have indicated a decline in defaults, there are still a significant number of foreclosures making their way through the pipeline. Espinoza states that“While we’ve been able to facilitate many workouts on the borrower’s behalf to avoid a default situation, I’m pretty confident in saying that we’ll be processing foreclosures for clients for some time to come.”

Raffi Tal, Executive Vice President of I Short Sale, Inc., one of the Peak entities working exclusively with distressed homeowners, affirms that there’s still a “clear and present danger of Americans losing their homes. We are still heavily involved in negotiating workout solutions on behalf of homeowners that have no other alternative.”

It is important to note that regardless of industry trends showing a decline in foreclosure starts, each month thousands of Americans are still losing their homes at a rapid pace. The real estate industry cannot and should not become complacent in aggressively pursuing ways to help homeowners retain their most valuable asset. While the battle to stem the tide of foreclosures seems to be tipping in the favor of distressed homeowners, it would be a grave mistake to assume the crisis is over.

 

To Be or Not to Be: The Mortgage Forgiveness Debt Relief Act Extension Beyond December 31, 2012

The Mortgage Forgiveness Debt Relief Act is set to expire December 31, 2012, and there are early indications on Capitol Hill that it might not make the cut. The law, first enacted in 2007, allows homeowners who have received principal reductions on their mortgages as the result of loan modifications, short sales or foreclosures to avoid income taxation on the amounts forgiven.

Prior to 2007, all cancellations of debt by creditors — whether on auto loans, personal loans or mortgages — were treated as taxable events under the federal tax code. If a person owed, say, $200,000, but paid off only $150,000 through an agreement with the lender, the $50,000 difference would be ordinary income, taxable at regular rates. Thanks to the Mortgage Forgiveness Debt Relief Act, however, that $50,000 difference would not be taxable.

Under the debt relief law for qualified home owners, taxation can be avoided on forgiven mortgage amounts up to $2 million (married filing jointly) and $1 million for single filers. To be eligible, the debt must be canceled by a lender in connection with a mortgage restructuring, short sale, deed-in-lieu of foreclosure or foreclosure. The transaction must be completed no later than December 31, 2012.

Having a foreclosure on one’s credit report will impact a credit score much more than will a short sale. If one is successful in completing a short sale, in many cases, he or she may qualify for a mortgage much sooner than with a foreclosure. Not surprisingly, short sales have thrived under the Mortgage Forgiveness Debt Relief Act. There have been 1.6 million short sales reported by the National Association of Realtors since late 2008, accounting for between 10 percent and 14 percent of home sales activity each month during that time. If the Mortgage Forgiveness Debt Relief Act is not going to be extended beyond 2012, we can expect short sales to plummet in 2013, with real estate sales in general, taking a dive. So if you’re a home owner contemplating a short sale, should you act now or hold off?

Given the huge public and private resources now being devoted to helping financially distressed home owners — including the recently announced $25 billion national mortgage settlement with five major banks — you might assume that a key federal tax law benefit underpinning these efforts would be a shoo-in for renewal.

Election-year politics and a contentious lame-duck, year-end congressional session loaded down with tax and budget issues could doom renewal of the debt relief tax legislation and put large numbers of loan modification participants deeply in the hole. Republican strategists say the cost of continuing the program — $2.7 billion for two years — is substantial enough to catch the eyes of budget-deficit hawks. Beyond that, they add, some members of Congress may be opposed to what they see as still another targeted federal benefit for people who didn’t pay their mortgages — subsidized by taxpayers and stayed current on their loans, even while underwater or facing severe financial distress. Douglas Holtz-Eakin, president of the center-right American Action Forum, former director of the Congressional Budget Office and economic adviser to Sen. John McCain’s 2008 presidential campaign, said in an interview that there is “a powerful sentiment,” especially among conservative freshman House members supported by the Tea Party, that tax code “bailouts” to delinquent and underwater home owners are fundamentally unfair.

On the one hand, only 27 Republicans voted against the original 2007 bill, which was written by Rep. Charles Rangel, D-N.Y., and handily passed the House before sweeping through the Senate with unanimous consent. On the other hand, that all happened before the Tea Party picked up steam. A look at the 2007 roll call for the original 2007 bill shows that two of the "no" votes came from GOP members who are now heavyweights on the Ways and Means Committee-through which the original bill traversed -- Rep. David Camp of Michigan, the Ways and Means Committee chairman, and Rep. Kevin Brady of Texas, the GOP deputy whip. Both Camp and Brady are on record having signed an opposition statement attached to the original legislation highlighting concerns that the temporary measure could morph into a permanent entitlement, creating "an environment where the American tax system is complicit in promoting 'risk-free' mortgages." Camp has since been unsympathetic to many home owner relief measures proposed from across the partisan divide. He voted to kill the Home Affordable Modification Program (HAMP) and to deny federal bankruptcy judges "cramdown" powers, in which they could mark down the amount owed on a mortgage to the current market value of the property.

The extension of the Mortgage Debt Forgiveness Act beyond December 31, 2012, therefore, is hardly a slam dunk. That being said, home owners contemplating whether to do a short sale now or wait until next year might be best served to take the “I’d rather be safe than sorry” stance and do their short sale before year end..