Central Valley Real Estate

California Foreclosure Timelines

I found this great article on the website for the California Association of Realtors, which details exactly how the foreclosure process works in the state of California.

Analyzing the Steps of Foreclosure
-By Sara Sutachan, Senior Research Analyst, California Association of Realtors

Foreclosures are at an all time high according to various data sources both nationally and in California. Based on preliminary calculations by the CALIFORNIA ASSOCIATION OF REALTORS®, the number of foreclosures in the state is expected to exceed 220,000 for the year, reaching a peak in 2008 and remaining elevated in the first half of 2009. As such, home prices will continue to face downward pressure through the first or second quarters of next year because of the presence of foreclosures/distressed sales. 

Given the recent rise in the level of foreclosures and the impact they have on the current real estate market, it is worth reviewing the steps in the foreclosure process in the state of California. The process begins when a homeowner has missed a payment or two, at which time the lender may choose to start the foreclosure process. This usually happens in 45 to 60 days but the decision to begin the foreclosure process is at the lender’s discretion and may vary.  Once the lender decides to begin the foreclosure process, the lender is required to file a 30-Day Notice of Intent to file a Notice of Default (NOD).

The 30-Day Notice is a rule put into place by Senate bill 1137 in July of this year and applies to owner-occupied residential properties sold between January 1^st, 2003 and December 31^st, 2007. After the 30 days are up, the lender can file an official NOD.  Lenders of residential properties that do not fall under the Senate bill can simply file an NOD after the first missed payment, again the actual time they file an NOD is at the lender’s discretion so may vary. The lender provides information on how to reinstate the loan and the homeowner has not less than three months from the NOD filing to do so.

If the homeowner does not act by end of three months after the NOD is filed, the lender can proceed with the foreclosure.  The lender must publish a Notice of Trustee’s Sale, which is posted for 20-31 days (the law requires lenders to post the sale for at least 20 days but most usually file 31 days before the sale because of an IRS notice requirement). In all, the homeowner has a little over three months to bring their loan into good standing from the time an NOD is filed on their property. In addition to the time frame above the homeowner can, by law, bring their loan current until five days prior to the Trustee Sale. Even after the deadline to cure a default is filed, the homeowner still has an option to pay the entire loan amount up to the time of the Trustee Sale. However, once the Trustee Sale is recorded, the property is transferred to a new owner, in most cases the lender itself, and all bets are off for the homeowner. The property is then owned by the lender and becomes a real-estate owned or REO property.

The elapsed time from the first sign of financial distress to the final Trustee Sale may range anywhere between four and seven months, during which the homeowner can take steps to avoid foreclosure. The two most common ways of avoiding foreclosure are to negotiate a plan with the lender or negotiate a short sale (selling the home for less than what is owed to the lending institution). Regardless of how a homeowner’s mortgage problems are ultimately resolved, the foreclosure process tends to be lengthy and stressful, not to mention costly for all of those involved. The lender has incentives to work out a deal with homeowners if it is viable for them because the foreclosure process costs time and money in terms of legal fees, carrying costs, maintenance costs, and the burden of selling the property. The first thing for homeowners to do when they are facing difficulties paying their mortgage is to call their lender as soon as there is a problem. This early communication is key to avoiding foreclosure.

Where To Start If You're Afraid To Lose Your Home

You're either behind on your mortgage already, or your rate (and payment) are about to jump significantly, or perhaps you're current on your mortgage but you owe more than it's worth and now you need to move. What do you do?

There are an over-abundance of people and companies who will try to tell you what you should do. But who can you trust?

The Homeownership Preservation Foundation (HOPE) is a non-profit organization funded by the financial services industry and Fannie Mae that operates a hotline to help homeowners understand the options available to them and how to work through them. Each HOPE counselor is HUD-approved and has a credit counseling certification. As a non-profit, the services are provided free of charge and without bias of any kind.

HOPE is probably one of, if not the best place to start. The number is 1-888-995-HOPE. It is open 24/7 and has operators that speak English and Spanish. HOPE can also be found on the web at http://www.995hope.org

If you are looking for a local non-profit credit counseling agency, you can also check out http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm and search for local HUD-approved counseling agencies located throughout the country.

If you are in a pickle, do something about it. If you're not sure where to start, and want good quality, unbiased information, this is the best way for you to start.

READ THIS before walking away from your home!

OK, so any Central Valley real estate observers have probably heard about the large wave of foreclosures that has started and is expected to continue over the next couple of years. Since the mortgage default rate in the greater Modesto area is 3-4% (1 out of every 25-30 people), chances are you or someone you know may be staring a potential foreclosure situation in the face.

Whether it's you or someone else, PLEASE make sure they understand the broader consequences, i.e. more than just a damaged credit rating (c'mon, you didn't really think lenders would let you get away quite that easy, did you?).

A brief synoposis of the following excerpted article from The Orange-County Register shows the following other potential pitfalls:

(1) Depending on the type of loan, the bank may be able to go after your other assets to make up for the money they lose by foreclosing on your house. By other assets, I mean stocks, savings, and possibly even your paycheck.

(2) The shortfall amount that the bank eats when they foreclose is treated by Uncle Sam as taxable income, paid at your normal income tax brackets (e.g. not the lower capital gains tax rates) at the federal and state level. Just because Bill pulled $80,000 out of his house to buy an RV and travel more doesn't mean he won't be responsible for it somehow. Money you don't ever pay back is income, right? Maybe Uncle Sam is fairer than you think...

Anyway, if you or anyone you know is looking at this possibility, please read on.

From The Orange-County Reigster, July 8, 2006:
"Refi Loans Could Prove Costly In Future"

"Homeowners behind in their mortgage payments after hawking the house to pay for a major remodel or a new boat or car may be in for a rude awakening.

If they previously refinanced and their lender decides to foreclose, they may not only lose their house, but the bank also may be able to go after their other financial assets including stocks, savings and their paycheck.....

And even if the bank doesn't go after their other assets, a foreclosure may mean a big tax bill from the IRS and state Franchise Tax Board for any shortfall between what the bank gets for the sale of the owner's home and the value of the loan.

Some homeowners with little of their own money in their homes may think they will do what strapped homeowners in the '90s did: turn over the keys to their lender if things get really bad and walk away.

 

"This is going to become a hot topic," predicts Bradford L. Hall, managing director of Hall & Co., CPAs in Irvine, who remembers the pain of foreclosures during the 1990s. "There's very little awareness of what can happen when you can't make your payments and are forced to sell your home for less than the mortgage balance or lose your home through foreclosure..."

But Hall and other financial experts warn that things may be different this time because so many people have refinanced. The difference is the recourse loan.

In the past, when a lender foreclosed, the homeowner usually still had the original loan they got when they purchased the house. Original loans, considered purchase money, are non-recourse loans that limit lenders to recovering only what they can get when they sell the house. They can't go after the owner to pay any difference between the foreclosure sales price and the loan balance.

But in California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower's assets once they obtain a court judgment.

"They can literally go after everything you have," Hall says.

There are a few limited exceptions. Retirement accounts are excluded, and declaring bankruptcy could protect some homeowners.

In the past, lenders have been reluctant to go after borrowers personally because it takes time and can involve costly litigation, but Hall says things might be different this time, especially if a borrower has substantial assets.

The tax man   

Even if a lender doesn't go after a homeowner's personal assets, a foreclosure can trigger income tax consequences.

Hall notes that lenders usually want to get rid of foreclosed properties as quickly as possible and often will sell them at auction prices much lower than the true market value. If the house is listed or sold for less than the loan value, the homeowner will not only lose his house but also may have to pay income taxes on the difference because it is considered debt relief income.

For instance, if the foreclosed homeowner has a $500,000 loan and the lender sells the house for $450,000, the homeowner will have to pay taxes on the $50,000 difference. The $250,000 tax exemption for singles and $500,000 for joint filers does not apply to debt relief income, in this case the $50,000.

The tax owed on the debt relief is based on the homeowner's ordinary income tax rate, not the lower capital gain rates. The exclusion, however, may still be available to reduce any capital gains in the difference between the sales price and the homeowner's basis.

"Some would say that's a disaster, but it's better than having the lender take you to court, obtain a judgment and then go after (your other assets)," Hall says.

Hall recommends homeowners who are getting behind to talk to their lender to see if they can restructure the loan and/or payment terms. At the same time, they should seek financial counseling and tax advice.

If they have a recourse loan, they should consider selling before allowing a lender to foreclose to obtain the maximum sales proceeds and reduce their financial or tax exposure, Hall says.

Norm Bour, owner of Priority Plus Lending in Laguna Niguel, thinks there are some homeowners who should just cut their losses now.

"There are a lot of people who are homeowners who shouldn't be, living day to day just to support the house," he says.

"My advice to them: Sell."

All About Capital Gains Tax Exemptions

Suppose you could receive up to $250,000 tax-free cash. Better yet, suppose you could receive up to $500,000 tax-free. Still better, suppose you could receive this tax-free money over and over again, but not more frequently than once every 24 months.

Stop dreaming. It's possible. Thanks to Internal Revenue Code 121, millions of U.S. home sellers enjoy these tax-free benefits each year when selling their principal residences. But it is important to understand the simple rules.

HOW TO QUALIFY FOR THIS TAX BREAK. Whether you own and live in a house, condo, cooperative apartment or other type of principal residence, you can qualify for Uncle Sam's most generous tax exemption. To be eligible, you must have owned and occupied your primary dwelling at least 24 of the last 60 months before its sale.

Single home sellers can qualify for up to $250,000 tax-free profits. A married couple filing a joint tax return can qualify for up to $500,000 tax-free capital gains if both spouses meet the occupancy test even if only one spouse's name is on the title.

The method of holding title doesn't matter. Title can even be held in a revocable living trust, as millions do, to avoid probate.

However, if there are two co-owners not married to each other, then both names must be on the title for each to qualify. Military and Foreign Service members have special generous rules allowing the 24-month occupancy period as far back as 15 years before the home sale.

If you bought your principal residence as recently as 24 months ago, and occupied it since then, you meet the ownership and occupancy test. The 24-month residency need not be continuous. Brief temporary absences, such as for a 30-day vacation, count as occupancy time.

However, if you acquired your home in an Internal Revenue Code 1031 tax-deferred exchange as a rental property, and later converted it to your principal residence, for such sales after Oct. 22, 2004, you must own the property at least 60 months (24 of which it must be your principal residence).

Home sellers of any age can qualify. It doesn't matter if you buy another replacement home or not after the sale. Nor does the dwelling have to be your residence on the date of sale.

For example, if you lived in your primary home 24 months, and then rented it to tenants up to 36 months before the sale, you still qualify for this tax exemption.

IF YOU HAVE TWO HOMES, DETERMINING YOUR PRIMARY HOME ISN'T ALWAYS EASY. Suppose you own a "summer home" and a "winter home," as millions of U.S. homeowners do. You spend about six months each year in each home. Both residences therefore meet the 24-out-of-last-60-months IRC 121 ownership and occupancy tests.

But the IRS says only one residence can be your "main home." This issue was vital in the tax case of Guinan v. U.S. (2003-1 USTC 50475). The Guinans sold their Green Bay, Wis., home where they spent more time each year than in their other residences. The Wisconsin home met the 24-month ownership and occupancy tests. The owners kept bank accounts and automobiles in Wisconsin.

But the U.S. District Court ruled it was not their primary residence because the sellers never filed income tax returns from Wisconsin. As a result, they had to pay $45,009 capital gain tax on the sale of their Wisconsin home.

The IRS says principal-residence indicators -- if you own more than one residence -- are (1) place of employment; (2) principal abode for the taxpayer's family members; (3) address on taxpayer's federal and state income tax returns; (4) location of taxpayer's banks; (5) automobile and driver's license registrations; (6) voting location; and (7) civic affiliations, such as taxpayer's religious organizations and other membership groups.

LITTLE-KNOWN BENEFIT FOR DIVORCED AND SEPARATED HOME SELLERS. Many divorced and separated couples are not aware they can still qualify for up to $500,000 total tax-free principal-residence-sale profits. If one divorced or legally separated spouse (called the "in spouse") qualifies for the $250,000 tax exemption by owning and living in the home at least 24 months of the last 60 months before its sale, the other spouse (called the "out spouse") can also qualify for up to $250,000 tax-free home-sale profits when the home is eventually sold.

This little-known tax break is often used when one spouse stays in the home until the children become 18 or 21 and the home is then sold with the profits divided between the ex-spouses.

ADJOINING VACANT LAND SALE CAN ALSO QUALIFY. Another little-known benefit of IRC 121 allows the sale of a vacant lot adjoining the principal residence to qualify for this tax exemption. However, the adjacent principal residence must be sold within 24 months before or after the lot sale.

UP TO $500,000 TAX-FREE HOME-SALE PROFIT IN YEAR OF SPOUSE'S DEATH. Although a surviving spouse should not rush to sell the principal residence in the year of a spouse's death, IRC 121(b)(2) permits use of the exemption up to $500,000 in the year of a spouse's death if a joint tax return is filed. In limited cases where a surviving unmarried spouse maintains a household for dependent children, this tax benefit may be available for two additional tax years.

However, a surviving spouse who inherits the deceased spouse's share of the principal residence should be aware he or she will receive a new 50 percent "stepped-up basis" to market value on the date of death. In community property states, the surviving spouse usually receives a new 100 percent stepped-up basis to market value if both spouses held title.

PARTIAL EXEMPTION IF YOU DON'T MEET THE 24-MONTH OCCUPANCY TEST. If you occupied your principal residence less than the required 24 months, but the reason for your home sale is (1) change of employment site meeting the moving-cost tax-deduction rules; (2) health reasons; or (3) unforeseen circumstances, you can qualify for a partial exemption based on the number of occupancy months.

The "unforeseen circumstances" rules are still evolving. The IRS allows these acceptable reasons: (1) divorce or legal separation; (2) death in the immediate family; (3) unemployment; (4) decreased income with the homeowner unable to pay the mortgage and basic living expenses; (5) multiple births from the same pregnancy; (6) damage to the home from a natural or manmade disaster or terrorism; and (7) condemnation, seizure or other involuntary conversion of the property.

If you qualify for a partial exemption, and you occupied the principal residence 18 of the 24 required months, for example, then you qualify for 75 percent of the $250,000 or $500,000 exemption.

TWO WAYS TO AVOID TAX ON MORE THAN $250,000 OR $500,000 HOME-SALE CAPITAL GAIN. If you will have a principal-residence-sale capital gain exceeding the $250,000 or $500,000 exemptions, there are two ways to avoid tax:

1. The first method is to convert your home into a rental property. Then it qualifies for an Internal Revenue Code 1031 tax-deferred exchange for another rental or business property of equal or greater cost and equity.

Most tax advisers suggest renting your former principal residence at least six to 12 months before exchanging it. IRC 1031(a)(3), known as a "Starker exchange," then allows selling the property, having the sale proceeds held by a qualified intermediary third-party beyond your constructive receipt, designating the replacement property within 45 days, and completing the acquisition within 180 days after the old property's sale.

2. The second method, allowed by IRS Revenue Procedure 2005-14 effective Jan. 27, 2005, allows use of both IRC 121 and IRC 1031 in a single property sale. This slightly complicated ruling is retroactive to tax years for which the statute of limitations has not expired.

Gain is first excluded under IRC 121 up to $250,000 or $500,000, and the remaining gain then can qualify for an IRC 1031 tax-deferred exchange. An example of this procedure applies where the principal residence was converted to a rental and then the property is "down traded" for another rental property after claiming the IRC 121 exemption.

SUMMARY: Internal Revenue Code 121 is a very generous tax exemption up to $250,000 or $500,000 that can be used over and over but not more often than every 24 months for qualified home sellers. For full details, please consult your tax adviser.

HOW TO QUALIFY FOR THIS TAX BREAK. Whether you own and live in a house, condo, cooperative apartment or other type of principal residence, you can qualify for Uncle Sam's most generous tax exemption. To be eligible, you must have owned and occupied your primary dwelling at least 24 of the last 60 months before its sale.

Single home sellers can qualify for up to $250,000 tax-free profits. A married couple filing a joint tax return can qualify for up to $500,000 tax-free capital gains if both spouses meet the occupancy test even if only one spouse's name is on the title.

The method of holding title doesn't matter. Title can even be held in a revocable living trust, as millions do, to avoid probate.

However, if there are two co-owners not married to each other, then both names must be on the title for each to qualify. Military and Foreign Service members have special generous rules allowing the 24-month occupancy period as far back as 15 years before the home sale.

If you bought your principal residence as recently as 24 months ago, and occupied it since then, you meet the ownership and occupancy test. The 24-month residency need not be continuous. Brief temporary absences, such as for a 30-day vacation, count as occupancy time.

However, if you acquired your home in an Internal Revenue Code 1031 tax-deferred exchange as a rental property, and later converted it to your principal residence, for such sales after Oct. 22, 2004, you must own the property at least 60 months (24 of which it must be your principal residence).

Home sellers of any age can qualify. It doesn't matter if you buy another replacement home or not after the sale. Nor does the dwelling have to be your residence on the date of sale.

For example, if you lived in your primary home 24 months, and then rented it to tenants up to 36 months before the sale, you still qualify for this tax exemption.

IF YOU HAVE TWO HOMES, DETERMINING YOUR PRIMARY HOME ISN'T ALWAYS EASY. Suppose you own a "summer home" and a "winter home," as millions of U.S. homeowners do. You spend about six months each year in each home. Both residences therefore meet the 24-out-of-last-60-months IRC 121 ownership and occupancy tests.

But the IRS says only one residence can be your "main home." This issue was vital in the tax case of Guinan v. U.S. (2003-1 USTC 50475). The Guinans sold their Green Bay, Wis., home where they spent more time each year than in their other residences. The Wisconsin home met the 24-month ownership and occupancy tests. The owners kept bank accounts and automobiles in Wisconsin.

But the U.S. District Court ruled it was not their primary residence because the sellers never filed income tax returns from Wisconsin. As a result, they had to pay $45,009 capital gain tax on the sale of their Wisconsin home.

The IRS says principal-residence indicators -- if you own more than one residence -- are (1) place of employment; (2) principal abode for the taxpayer's family members; (3) address on taxpayer's federal and state income tax returns; (4) location of taxpayer's banks; (5) automobile and driver's license registrations; (6) voting location; and (7) civic affiliations, such as taxpayer's religious organizations and other membership groups.

LITTLE-KNOWN BENEFIT FOR DIVORCED AND SEPARATED HOME SELLERS. Many divorced and separated couples are not aware they can still qualify for up to $500,000 total tax-free principal-residence-sale profits. If one divorced or legally separated spouse (called the "in spouse") qualifies for the $250,000 tax exemption by owning and living in the home at least 24 months of the last 60 months before its sale, the other spouse (called the "out spouse") can also qualify for up to $250,000 tax-free home-sale profits when the home is eventually sold.

This little-known tax break is often used when one spouse stays in the home until the children become 18 or 21 and the home is then sold with the profits divided between the ex-spouses.

ADJOINING VACANT LAND SALE CAN ALSO QUALIFY. Another little-known benefit of IRC 121 allows the sale of a vacant lot adjoining the principal residence to qualify for this tax exemption. However, the adjacent principal residence must be sold within 24 months before or after the lot sale.

UP TO $500,000 TAX-FREE HOME-SALE PROFIT IN YEAR OF SPOUSE'S DEATH. Although a surviving spouse should not rush to sell the principal residence in the year of a spouse's death, IRC 121(b)(2) permits use of the exemption up to $500,000 in the year of a spouse's death if a joint tax return is filed. In limited cases where a surviving unmarried spouse maintains a household for dependent children, this tax benefit may be available for two additional tax years.

However, a surviving spouse who inherits the deceased spouse's share of the principal residence should be aware he or she will receive a new 50 percent "stepped-up basis" to market value on the date of death. In community property states, the surviving spouse usually receives a new 100 percent stepped-up basis to market value if both spouses held title.

PARTIAL EXEMPTION IF YOU DON'T MEET THE 24-MONTH OCCUPANCY TEST. If you occupied your principal residence less than the required 24 months, but the reason for your home sale is (1) change of employment site meeting the moving-cost tax-deduction rules; (2) health reasons; or (3) unforeseen circumstances, you can qualify for a partial exemption based on the number of occupancy months.

The "unforeseen circumstances" rules are still evolving. The IRS allows these acceptable reasons: (1) divorce or legal separation; (2) death in the immediate family; (3) unemployment; (4) decreased income with the homeowner unable to pay the mortgage and basic living expenses; (5) multiple births from the same pregnancy; (6) damage to the home from a natural or manmade disaster or terrorism; and (7) condemnation, seizure or other involuntary conversion of the property.

If you qualify for a partial exemption, and you occupied the principal residence 18 of the 24 required months, for example, then you qualify for 75 percent of the $250,000 or $500,000 exemption.

TWO WAYS TO AVOID TAX ON MORE THAN $250,000 OR $500,000 HOME-SALE CAPITAL GAIN. If you will have a principal-residence-sale capital gain exceeding the $250,000 or $500,000 exemptions, there are two ways to avoid tax:

1. The first method is to convert your home into a rental property. Then it qualifies for an Internal Revenue Code 1031 tax-deferred exchange for another rental or business property of equal or greater cost and equity.

Most tax advisers suggest renting your former principal residence at least six to 12 months before exchanging it. IRC 1031(a)(3), known as a "Starker exchange," then allows selling the property, having the sale proceeds held by a qualified intermediary third-party beyond your constructive receipt, designating the replacement property within 45 days, and completing the acquisition within 180 days after the old property's sale.

2. The second method, allowed by IRS Revenue Procedure 2005-14 effective Jan. 27, 2005, allows use of both IRC 121 and IRC 1031 in a single property sale. This slightly complicated ruling is retroactive to tax years for which the statute of limitations has not expired.

Gain is first excluded under IRC 121 up to $250,000 or $500,000, and the remaining gain then can qualify for an IRC 1031 tax-deferred exchange. An example of this procedure applies where the principal residence was converted to a rental and then the property is "down traded" for another rental property after claiming the IRC 121 exemption.

SUMMARY: Internal Revenue Code 121 is a very generous tax exemption up to $250,000 or $500,000 that can be used over and over but not more often than every 24 months for qualified home sellers. For full details, please consult your tax adviser.v