Already refi'd through HARP...does it affect SS?

[KungFuJoe]

I'm in CA, which is a non recourse state, but since I refi'd through HARP over a year ago, I'm pretty sure I now have a recourse loan. It's actually the 2nd time I refi'd...the first time was probably 4 years ago and I refi'd both my first and second into 30 year fixed. The HARP only touched my first. How does this affect any potential SS I might attempt? Do I have any way to ensure that the lender can't go after me if the SS goes through? Also, I know there are tax laws that expire at the end of this year so I don't have to pay taxes on the difference between SS value and loan value but does that apply to recourse loans?

[Evan Bedard]

I'm in CA, which is a non recourse state, but since I refi'd through HARP over a year ago, I'm pretty sure I now have a recourse loan. It's actually the 2nd time I refi'd...the first time was probably 4 years ago and I refi'd both my first and second into 30 year fixed. The HARP only touched my first. How does this affect any potential SS I might attempt? Do I have any way to ensure that the lender can't go after me if the SS goes through? Also, I know there are tax laws that expire at the end of this year so I don't have to pay taxes on the difference between SS value and loan value but does that apply to recourse loans?

Hey KungFuJoe,

This should help answer your question.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

You may also want to read this article written by a real estate CPA. Real Estate Short Sale vs. Foreclosure Tax Consequences.

[KungFuJoe]

Thanks for the reply Evan. It sounds like my refi loan will be protected from taxes after a SS til the end of this year. Any thoughts on the recourse? Is there any way I can make sure the banks don't come after me for the remainder after all is said and done? I've heard so many horror stories of people who still have banks and/or collections years after it was all supposedly taken care of. Should I talk to a lawyer?

[Evan Bedard]

You need to try and negotiate with the lender to waive their rights to the deficiency. If the SS is approved you want to make sure there is some sort of language that lists they will waive their rights to deficiency. Here is an example of a SS approval letter in which the lender agreed to do so:

This letter will serve as Bank of America, N.A.'s demand for payment and advises you that Bank of America, N.A. and/or its Investors and/or Insurers have agreed to accept a short payoff involving the above referenced property and the referenced account(s). This demand should be used by the closing agent as our formal demand statement. No additional statement will be issued. This approval is exclusive to the offer from the buyer referenced in this letter.

WHAT THIS MEANS TO THE SELLER

The owner of your mortgage note, the mortgage insurer, if your loan is covered by mortgage insurance, and Bank of America, N.A.waive their right to pursue collection of any deficiency following the completion of your short sale and your debt is considered settled. The deficiency is the difference between: (1) the remaining amount due under the mortgage note and mortgage or deed oftrust; and, (2) the current market value of the property plus any cash contribution you make or amount you agree to repay in the future. The amount of the deficiency will be reported to the Internal Revenue Service (IRS) on the appropriate 1099 Form or Forms. We suggest that you contact the IRS or your tax preparer to determine if you have any tax liability. Bank of America, N.A. will report the debt to the credit reporting agencies as "paid in full for less than the full balance".

[KungFuJoe]

Will definitely save this example. Much thanks!!

[Evan Bedard]

Will definitely save this example. Much thanks!!

No problem, if you cannot get them to agree to waive their rights to the deficiency there is really not much benefit of going through with the short sale.. Besides the fact that after a SS you may be able to qualify for a new home within 2 years, while a foreclosure it will be at least 3+ years before you are eligible..

[KungFuJoe]

I met with a real estate rep and SS mitigator that I had been having phone discussions with for several weeks. The meeting seemed to go well, but one thing she said caused concern. Basically, she said, out of the 50 short sales she has closed in the last few years, she has never heard of a bank providing a letter stating that they won't come after the seller for the "left over" balance after all is said and done.

Even though I am in CA and it is a non recourse state, I have refinanced my mortgage twice (once via conventional methods about 4 or 5 years ago and again with HARP 1.0) and it most certainly is a recourse loan by now. Thus, my concern about possibly having collections hound me for the balance even if the bank approves the short sale. I have heard many horror stories (both here and elsewhere online) about banks and collection agencies calling on a daily basis hounding them for payment and having their credit scores permanently affected due to this.

I know there was another post here before about an example of a letter someone received from BofA that absolved them of all responsibility and it was recommended that EVERYONE get something similar from their lender prior to signing anything.

Should I be concerned that my ss mitigator hasn't heard of this? She says that none of the 50 (that she knows of) have ever been hit up for the remainder after the deal was closed. I did forward her a copy of the letter that was posted her but have not heard back yet. I actually spoke to another person that does short sales (though admittedly, he was not the negotiator, only a real estate agent who "specializes" in short sales) who said the exact same thing. He said you won't get any bank to send you such a letter but not to worry because even though my loan was a recourse loan, there are laws in CA that prevent them from going after you.

Seems like the people here are the most knowledgeable so I'm looking for some kind of concrete answer. Should I be concerned? Should I insist on NOT signing anything until I get such a letter from the bank even if my SS mitigator continues to insist that asking for such a thing would jeopardize the short sale itself? Should I find a new SS mitigator?

TIA!

[KungFuJoe]

nm...I see the comment above makes mention of not going through the process if the banks don't agree to waive. Guess I'll keep hounding my ss mitigator.