Articles in the ‘Real Estate’ Category
This case is a good illustration of the court’s inherent equitable power conferring on the former wife a limited power of attorney against her former husband who was non-cooperative signing the listing agreement for the sale of the former marital home. Courboin v. Courboin, Jr., New Jersey App. Div., February 21, 2013
As part of the fiscal cliff negotiations, the Mortgage Forgiveness Debt Relief Act (HR3648) was given a one year extension through 2013. Homeowners who sell their primary residence in a short sale will not have the added burden of having to pay taxes on the uncollected debt. This extension is critical to underwater homeowners, who owe more for their home than it is worth and seek to avoid foreclosure. Eligible homeowners still report the canceled debt as income, but they also are granted exclusion to write off the income. The write off only applies to forgiven debt on primary residences and canceled debt up to $2,000,000. If you acquired a home equity line of credit (HELOC) after closing that was not used to improve the property, then forgiveness of that loan may be subject to tax.
The latest version of the federal Home Affordable Refinance Program (HARP) went into full swing on March 19, 2012. The program allows homeowners to refinance their existing high interest mortgage loans at today’s low interest rates provided the homeowner is current on payments and hold loans on which they are more than 125% underwater. The program is limited to homeowners whose loans are backed by Fannie Mae and Freddie Mac. That means no principal will be reduced, but it may be possible to get a lower interest rate and a lower payment.
To get a HARP 2.0 refinance, homeowners must have taken out their loan before June 1, 2009. The plan will be in effect until the end of 2013. If you believe you want a HARP refinance, you should act quickly. Mortgage rates are volitile and are expected to rise.
The following article by Karen Blumenthal appeared in the Wall Street Journal on line edition on February 25, 2012 addressing lenders utilizing credit agencies to assess homeowners likely to strategically elect mortgage default:
“Being underwater on your home is bad enough. But owning a home that is worth less than what you owe on your mortgage also may mean that your lender is keeping a wary eye on you.
Roughly one in five foreclosures is believed to be “strategic”—that is, the homeowner has the ability to pay the mortgage but walks away anyway—rather than as a result of economic hardship. The threat of additional strategic defaults has spread as home prices continue to fall.
Average U.S. home prices slipped again in November, back to about where they were in mid-2003, according to the latest S&P/Case-Shiller home-price indexes. While the problem has been most concentrated in the hard-hit “sand states” of Florida, California, Arizona and Nevada, home prices continue to slide in cities like Atlanta, Cleveland, Chicago and Seattle.
In a January report, the Federal Reserve estimated that more than one in five homeowners with a mortgage—about 12 million in all—are underwater on their loans.
Being underwater, of course, doesn’t mean a homeowner will walk away. Strategic defaults still are rare in some areas and may depend on when homeowners think prices will recover and whether they blame banks or themselves for the price decline, says Michael Seiler, a finance professor at Old Dominion University in Norfolk, Va., who has written extensively on the subject.
A Default Contagion
Strategic defaults can spread in communities like a contagion, Mr. Seiler says, especially if influential real-estate experts with large social networks, whom he dubs “mavens,” are advocating the practice. The more such defaults, the more a neighborhood’s prices are affected and the more likely others may feel enticed to default.
To help lenders try to curb foreclosures, Fair Isaac, the creator of the FICO credit score, offers a service intended to help identify potential strategic defaulters before they skip payments.
In studying strategic defaulters, FICO found that they tended to have good to excellent credit scores and show skill in managing money. They tend to use less of the credit available to them on cards and generally avoid retail credit. Often, they have large mortgages and made relatively small down payments.
Notably, they were likely to have sought new credit in the six months before they stopped paying their mortgages—and they continued to stay current on other debts even as they let their home payments go.
Joanne Gaskin, senior director of scores and analytics at Fair Isaac, says that FICO’s model assigns borrowers a score from one to 300. Those who score between one and 120 have a high likelihood of strategically defaulting within the next year.
The information can allow mortgage servicers to begin to work with borrowers before they stop paying. Ms. Gaskin says. It may also help lenders move more quickly to encourage borrowers to work out a solution that is preferable to foreclosure, such as a loan modification or a “short sale,” in which a home is sold, with the lender’s approval, for less than what is owed on the mortgage.
Credit bureau Experian helps lenders find borrowers who already have missed payments and are likely to be headed to a strategic foreclosure so that the lenders can adjust how they work with them. The firm found that in addition to good credit scores, strategic defaulters tended to have higher incomes and larger mortgages, and often own more than one property.
Among the very small percentage of people who seek out a new mortgage before halting payment on the old one, almost half are strategic defaulters, Experian says.
Using the data, a credit-card company might halt its preapproved offers once mortgage payments are missed, or make preapproved offers that take into account borrowers’ recent actions, says Angela Granger, an Experian vice president.
The decision to strategically default is a ticklish one, since homeowners need to weigh the significant consequences to their credit-worthiness against the impact on their savings. People who need to move and who owe far more on a home than what it is worth may have to choose between cleaning out a college or retirement account or letting the home go.
However, Fannie Mae says it will take legal action to recoup its losses if it believes borrowers have the ability to pay. It won’t back a new mortgage for a borrower for seven years after a strategic default.
The decision also can wreak havoc with credit scores. A high credit score can drop up to 300 points after a strategic foreclosure, and won’t return to the same starting score for five to seven years.
The better solution, say experts, is to work out a short sale, or even negotiate a “deed in lieu of foreclosure,” in which the keys are formally turned over to the lender, which at least shortens the costly foreclosure process.
Borrowers who work out a short sale may see their scores decline almost as much initially as in a foreclosure, but they should recover sooner.”
Fannie Mae and Freddie Mac have released highly anticipated guidelines for the revised Home Affordable Refinance Program (HARP). Among the key program revisions, the GSEs have eliminated or raised the loan-to-value (LTV) cap, and relaxed representation and warranty stipulations – changes that officials expect to at least double the number of homeowners with a HARP-refinanced mortgage. Since the program was launched in 2009, just under 900,000 borrowers have participated.
Negative equity typically excludes a homeowner from refinancing through traditional channels. Removing previous LTV ceilings will allow homeowners who are severely underwater due to plummeting property values to take out new loans at today’s lower interest rates. There are, however, some LTV conditions depending on loan type. There are no LTV restrictions for fixed-rate mortgages with terms up to 30 years, including those with terms of 15 years. For fixed-rate loans with terms between 30 and 40 years, LTV is limited to 105 percent. Likewise, a 105 percent LTV cap has been placed on adjustable-rate mortgages (ARMs) with initial fixed periods of five years or more and terms up to 40 years. Any borrower with an LTV ratio below 80 percent is not eligible for a HARP refinance. However, both GSEs do offer assistance to these borrowers through their traditional refinance programs.
The GSEs provided specifics on which liabilities would be lifted and noted that the rep and warranty adjustment is one of the most important components of the new program. The lender will not be responsible for any of the representations and warranties associated with the original loan. The lender is also relieved of the standard underwriting representations and warranties with respect to the new mortgage loan as long as the data in the case file is complete and program instructions are followed for collecting information on income, employment, assets, and fieldwork. The lender is not required to make any representation or warranty as to value, marketability, or condition of the subject property unless they obtain a new appraisal. Lenders will, however, be held accountable for any fraudulent activities.
Regarding program eligibility as it relates to delinquencies, the borrower must not have been behind on their payments at all within the most recent six-month period, and had no more than one 30-day delinquency within the last year. The GSEs are also removing the requirement that the borrower (on the new loan) meet the standard waiting period following a bankruptcy or foreclosure. The requirement that the original loan must have met the bankruptcy and foreclosure policies in effect at the time the loan was originated is also being removed. The new HARP program has been extended through December 31, 2013.
This case illustrates the importance to obtain a spouse’s consent when one spouse attempts to transfer the marital home. A purchaser who takes title with knowledge of the marriage and without full consent may be liable for damages. Property Asset Management, Inc. v. Momanyi et ux., et al., New Jersey App. Div., September 14, 2011
On September 14, 2011, Governor Chris Christie signed into law A-2748, the bulk sales legislation initiated and strongly supported by NJAR®. This law, which took effect immediately upon being signed, exempts individuals, estates and trusts involved in purchasing one- and two-family residential and certain seasonal rental properties from bulk sales notification requirements. Please note that LLC’s involved in real estate transactions pertaining to one- and two-family residential and seasonal rental properties are still subject to bulk sales requirements. In addition, the law is retroactive to August 1, 2007, meaning that any transactions taking place between that date and September 14, 2011 were in essence, never subject to bulk sales requirements.
This new law, which was approved unanimously by both houses of the state Legislature, immediately protects one- and two-family residential real estate transactions from being unnecessarily delayed by the bulk sales notification requirements imposed by the New Jersey Division of Taxation. In many cases, the previous requirements led to unnecessary closing delays or sellers being asked to place potentially thousands of dollars in escrow until the Division of Taxation cleared a property sale to proceed.
The Division of Taxation’s bulk sales notification form and NJAR® bulk sales addendum no longer need to be submitted by those purchasing these types of residential properties in New Jersey. If a previous owner of a one- or two-family home or seasonal rental property owed state taxes on revenue earned from the property (i.e. if the seller ever rented the property), the purchaser will not be considered liable for any taxes owed by the seller. NJAR® sought this provision in the legislation and was successful in its inclusion and implementation.
The judgment of divorce was silent regarding the value to be ascribed to the marital home if it was not sold upon the triggering event, it fell to the divorce judge to supply that omitted term. Sachau v. Sachau, N.J. (2011); 2011 WL 1775988; New Jersey Supreme Court, May 11, 2011
The New Jersey Division of Taxation recently issued guidance in the form of “Frequently Asked Questions” in connection with requirements of purchasers, transferees and assignees under New Jersey’s bulk sales law. The guidance takes on added significance due to changes to the bulk sales law in 2007 which significantly expanded the transactions that are subject to the bulk sales law and the liability of purchasers that fail to comply with its requirements.
The bulk sales law, N.J.S.A. 54:50-38, applies to any sale, transfer or assignment in bulk of any part or all of a person’s “business assets.” If a sale is subject to the bulk sales law, the buyer is required to notify the Division of the proposed sale and, among other things, the price, terms and conditions by filing Form C-9600. The Division must be in receipt of such notice at least 10 business days prior to the buyer taking possession of or paying for the sale assets. The Division will then notify the buyer of any possible claim for New Jersey taxes and the amount.
The Division has aggressively administered the bulk sales law. For instance, it is the Division’s position that a sale of a single family residence that was leased by the Seller would be subject to the bulk sales law, requiring the Purchaser to provide the Division with a bulk sale notice and to otherwise comply with the bulk sales law, even if the Purchaser has no knowledge that the residence was leased. Due to the severe sanctions imposed on buyers failing to comply with the bulk sales law, it is critical to determine whether the transaction is subject to the bulk sales law.
Some important observations concerning the Division’s administration of the bulk sales law:
- The Division’s interpretation of the term “business assets” used in the bulk sales law is very broad, thereby expanding the transactions that it views are subject to the bulk sales law. The Division interprets “business assets” to include any assets used in any endeavor from which revenue or consideration is realized for the purpose of generating a profit or loss. This would include both tangible and intangible assets. As noted above, the Division views all leased real estate (even single family residences) to be business assets.
- The bulk sale notice must be filed by the buyer or it is not effective.
- The buyer or its agent must hold all amounts required to be escrowed by the Division. The seller or its agent may not have any right to hold or control such amounts.
- The Division has indicated that it is possible for the amount of the required escrow to exceed the purchase price or that an escrow may be required in situations where there are no sale proceeds (e.g., short sales or deed in lieu transfers). However, the Division does note that it will determine escrow amounts based on all facts presented.
- The Division has indicated that a bulk sale notice will be incomplete if it is unable to identify a seller entity.
- The Division has indicated that residential real estate that is leased or otherwise used in a business is subject to the bulk sales law even if:
- The property is leased to friends and family;
- The property is only rented while the seller is on an extended vacation;
- The buyer does not know that the property was leased or used in a business by the Seller (the Division’s position would not change even if the buyer received an affidavit from the seller or thesSeller makes a representation in the purchase agreement in this regard); or
- Only a portion of the property is leased or used in a business (e.g., a seller expenses a portion of the residence as a home office or makes sales of merchandise from the home).
- Short sales and deed in lieu transfers are subject to the bulk sales law.
Recent amendments to the bulk sales law which expand the scope of the transfers subject to the law and the liability of buyers for failure to comply with the law in combination with the Division’s guidance regarding its administration, require buyers of residential real estate to take steps to determine if a transaction is subject to the bulk sales law and, if so, to carefully comply with such law or insure that other contractual protections are in place.