Are In Foreclosure Whose Homes Are Worth Less Than The Loan Balance(s).
Q: Are you in foreclosure? Is your home worth less than what you've financed it for? There's an interesting advertisement on KGO radio paid for by Boston Harbor Corporation offering help to people who are in foreclosure whose homes are worth less than the loan balance(s).
A: Here is how the program works: 1. Let's say your home is worth $250k but there's an existing loan of $290k. Under a standard transaction, you would have to pay $40,000 into escrow in order to close this deal and pay off your bank. Please note: I am aware there are sales costs that may cause a net of less than $250k, but for simplicity, let's just say you offered the property for $260k and someone paid you $250k which you gave to your bank. 2. You fill out the necessary paperwork on your property and submit it to Boston Harbor with a processing fee of $125. They will examine the paperwork to see if your home qualifies. If it doesn't you're out $125 and the process is ended. 3. If Boston Harbor agrees to continue with you, upon notification you pay Boston Harbor a fee of 1% of your outstanding loan balance (less the $125 you already paid), and GIVE them a grant deed to the property. They now have your $2900 and are the owner of record for the property. 4. They continue to try to sell the property, possibly using your previous real estate agent. 5. They negotiate the short sale with the lender. 6. If the lender doesn't co-operate, the foreclosure occurs against Boston Harbor, not you. 7. In either case, there are no debt forgiveness interpretations against you with respect to the IRS which could trigger a 1099 from the lender and a taxable event that could leave you owing taxes (see above). 8. If a foreclosure ends up on your credit record, you report to the credit reporting agencies that you sold the property prior to the foreclosure, therefore you were not responsible for the loan. Sounds pretty good, doesn't it? The above is what they are promoting as a benefit to you. Now to shoot holes in the theory. I'll number the following paragraphs to correspond with the above para- graphs. 1. No comment here. Paragraph 1 sets up the situation. It's happening all over the bay area and southern California. 2-3. Let's assume Boston Harbor (BH) approves your home, and you agree to let then take the home off your hands. You are effectively paying them to buy your home. They give you a feeling that you are off the hook. a. Your bank has to approve the transfer, or they can trigger their due on sale clause. What this means is upon the transfer of your property, the bank has the right to call the loan and demand pay- ment of the full balance. BH claims you have a constitutional right to sell your property. What they forget to mention is the constitution also protects the other party in your transaction, the bank. If you transfer the property without your bank's cooperation, they have the right to demand full payment of the balance because you breached your contract. b. BH will not make payments or save your loan. They will not make any payments. In other words, from the lender's point of view the property is still in foreclosure. 4-5. You would be doing this yourself anyway. 6. Although they foreclose against BH, YOUR name is on the loan, not BH's. The foreclosure will end up on your credit record, and you're out of the credit business for 7 years. There are two peices of paper in California when it comes to home loans. There is the pro- missory note (the actual loan document) and a trust deed (the secur- ity instrument). It's like owning a car. There is a promissory note and the pink slip. Just as you are the registered owner of the car, you are the owner of record of the property. Just as you can transfer your interest in the car to someone else by transferring your registration, you can transfer all your interest in the prop- erty by transferring your grant deed. It does not alleviate your responsibility to make payments on the loan. 7. This is a dangerous paragraph and you should consult your CP
A: I've been in this business for years and have seen how the IRS works and it is not pretty. BH leads you to believe you will not fall under the jurisdiction of the IRS's debt forgiveness/income interpretations (Section 108 a-e). Going back to the last paragraph, your name is on the promissory note and trust deed, not BH's. If the bank takes a loss, there is debt forgiveness. The IRS may view your transfer of the property as a means of evading (not avoiding) paying the tax on the debt forgiveness and may still come after you. BH has a slick interpretation of this. They purchased your home for the loan amount $290,000. They sold it on a short sale for $250,000, or for a net loss of $40,000. The bank also loses $40,000. The bank sends BH a 1099 (like a W2) showing an income (due to debt forgiveness of $40,000). Since the property is an investment property for BH they write off their $40,000 "loss." So now we have a bank writing off $40,000, and BH writing off $40,000, who does that leave for the IRS to go after? Whose name was on the loan? Actually, since your name was on the loan originally, the lender is going to 1099 you, not BH. 8. What BH claims here is also false. If the bank agreed to let BH purchase the property subject to their loan (many people incorrectly call this an assumption), BH may have a point here. But why would a bank transfer the loan to a corporation that has no intention of reinstating the loan? A lot of asset managers would be out of work if they did this, and a lot of stock holders would be contacting their attorneys to take action against the management of the bank. The following is an actual case study we are currently tracking. The following record is of a Notice of Default that was recorded against the Boston Harbor Corporation (owner name). Please note Jeffrey P Hollobaugh (the trustor) still shows up as the person whose name is on the loan, not Boston Harbor's. If this goes all the way to foreclosure, the bad credit report will go on the trustor's (Jeffrey P Hollobaugh) record, not Boston Harbor's. If there is a deficiency, which could trigger a taxable event, the lender will issue the 1099 to the trustor (Jeffrey P Hollobaugh) since that person is on the lender's records as the person who obtained "debt forgiveness" through the deficiency on the loan. Owner Name: Boston Harbor Corp Owner Mailing Address: 2365 Northside Dr Owner Mailing City: San Diego Owner Mail State: CA Owner Mail Zip: 92108 Owner Phone: Salutation Name: Boston Trustor: Jeffrey P Hollobaugh Et Al Site Address: 505 Cypress Point Drive #69 Sity City: Mountain View Site State: CA Site Zip: 94043 Year Tax Value is Current For: 1993 Assessed Value: $132000.00 Date Default Recorded: Aug 22, 1994 Instrument Number for Default: N567-1022 Loan Number: 6861 Lender Name: Douglas County Bank & Tru Lender Phone: Lender Address #1: Lender Address #2: Lender City: Lender State: Lender Zip: Trustee Information on Next Page (PGDN) TS#: 94-58341 Trustee Name: Professional Foreclosure Corp Trustee Phone: 714/432-7715 Trustee Address: 5 Hutton Centre Dr #1050 Trustee Address Continued: Trustee's City: Santa Ana Trustee's State: CA Trustee's Zip: 92707 Amount of Arrearage: 7019.00 Date arrearage is figured through: Aug 22, 1994 Payment owner is due: 1994/05/01 Amount of Original Loan: $118800.00 Date loan was recorded: Sep 29, 1989 Loan Book #: L114 Loan Page #: 1340 Additional Information: CONDO; 662 SQFT; DEEDED 4-94; 1 CAR GARAGE; 1971 SUBDIV Date DDI Picked Up Default: Aug 31, 1994 APN: 158-46-069 Use Code: CONDO Letter Sent: Y Posted to Net: Please note in the "Additional Information" above, the property was deeded or transferred to Boston Harbor in April of 1994. No go up 5 lines to "Payment owner is due:" Notice it is the May 1 payment where the delinquency started. Boston Harbor took this property over in advance of the Notice of Default (which was recorded in