Chermack Law

Tag Archives: underwater mortgage

Fannie Mae threatens “strategic defaulters”

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Fannie Mae recently announced that it plans to punish people who strategically default on their mortgages.  This announcement was met with skepticism by some housing and lending experts.

It’s difficult to blame Fannie Mae for being nervous about people walking away from their mortgages when strategic default is being regularly reported on in the news:

Owners Stop Paying Mortgages, And Stop Fretting.

American Dream 2: Default, Then Rent

I think that it will be difficult for Fannie Mae to decide whether someone strategically defaulted. Many people have applied for the HAMP program, only to end up in foreclosure. Foreclosures are, unfortunately, rising. See More rural, suburban Minnesotans threatened with foreclosure. See also Foreclosures Are Rising.

Fannie Mae’s threats might scare a few people from walking away from their underwater mortgages, but its threats alone will not be enough to fix our nation’s housing mess. Fannie Mae’s energy could be better spent on making sure servicers are following the Making Home Affordable program guidelines in a timely manner.


CitiMortgage’s Deed in Lieu of Foreclosure Program

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The New York Times recently posted this article about CitiMortgage testing out a deed in lieu of foreclosure program in New Jersey, Texas, Florida, Illinois, Michigan, and Ohio. According to the article, this new program “is similar to one announced last fall by Fannie Mae, the government-controlled mortgage company. Fannie is allowing homeowners to return the deed to their properties, then rent them back at market rates.”

Although the program is not yet available in Minnesota, I am glad to see that more options are being made available to distressed homeowners.

Deficiency Judgments after Foreclosure in Minnesota

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As I discussed in my posts about the different options for homeowners in “underwater” mortgages, Minnesota allows for deficiency judgments in some cases. See Minn. Stat. § 582.30. CNN recently posted this article about mortgage lenders pursuing deficiency judgments. These deficiency judgments have caused people to have to file for bankruptcy, even after they thought that the nightmare of losing their homes was behind them.

If your house is going into foreclosure, or you think that you may have to short sale your house, please consult with an attorney about it. There is a lot of mixed information out there about what happens when there is a deficiency after a foreclosure or short sale. It’s imperative to have accurate information when your financial future is at stake.

Options for Homeowners in Underwater Mortgages: When You Can’t Save Your House

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If you are struggling to pay your mortgage due to a job loss or transfer, illness, or change in life circumstances (such as a divorce), you may not be able to save your house. When the housing market was in better shape, people used to be able to easily sell their houses when these situations occurred. Unfortunately, the housing market has changed, making this option unlikely for many people.

Because many homeowners are “underwater” or have negative equity, they owe more on their mortgages than their homes are worth. This post is the second of two about homeowners in underwater mortgages. In this post, I will discuss some of the options that are available for homeowners who are not able to save their homes.

Sell your house and bring cash for the difference between the sale price and the mortgage balance to the closing. Unfortunately, this is not a realistic option for many people, especially once you include closing costs and realtor fees. On occasion, sellers in this situation have been able to secure a personal loan for the difference between the sale price and the mortgage balance, but this is quite rare.

Deed in lieu of foreclosure.  Some homeowners are able to negotiate a deed in lieu of foreclosure with their lenders. In this case, the homeowner deeds the house back to the lender, in order to satisfy their mortgage and avoid foreclosure proceedings.

Short sale. If the lender agrees to accept a short sale, a homeowner can sell his house for what it is currently worth, even if that is less than what he owes on his mortgage(s). The lender may not agree to forgive the “deficiency” (the difference between what the house sold for and the amount owed on the mortgage).

Foreclosure. If you are no longer paying your mortgage, the lender will eventually begin the foreclosure process. Foreclosure is a legal process by which a bank, mortgage company, or other creditor takes a homeowner’s property in order to satisfy a debt.

In Minnesota, there are two different methods of foreclosure:

(1) Foreclosure by action. See Minn. Stat. § 581.01 et seq.

(2) Foreclosure by advertisement. See Minn. Stat. § 580.01 et seq.

Deficiency Judgment. Minnesota allows for deficiency judgments by mortgage holders (lenders) in certain cases. See Minn. Stat. § 582.30. A deficiency judgment is a judgment against a debtor (homeowner) whose foreclosure sale did not produce sufficient funds to pay the mortgage in full.

Mortgage Forgiveness Debt Relief Act and Debt Cancellation. If you have a successful short sale and your mortgage bank decides to forgive the deficiency, this would normally be a taxable event. This is also true in the case of a foreclosure or a deed in lieu of foreclosure. This is because debt forgiveness or cancelation is considered to be “income” by the IRS. The Mortgage Debt Relief Act of 2007 provides an exception for “qualified principal resident indebtedness.” According to the IRS website:

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.