Through their association with the California Association of Realtors, the Tracy/Central Valley Realtors have sent a strong message to Governor Schwarzenegger to sign SB 1178 , extending anti-deficiency protections to homeowners who have refinanced their homes and are not in jeopardy of having to pay state tax on the amount of deficiency if their homes go into foreclosure, or even short sold to prevent foreclosure.
C.A.R. has issued a Red Alert! asking REALTORS® to contact Gov. Schwarzenegger and urge him to sign SB 1178 (Corbett), extending anti-deficiency protections to homeowners who have refinanced “purchase money” loans and now are facing foreclosure. C.A.R. is sponsoring this critical piece of legislation to protect homeowners in foreclosure from attempts by lenders to sue homeowners for the difference between the value of the foreclosed property and the outstanding balance on the mortgage loan.
Here are the key talking points of the bill:
· SB 1178 is fair. SB 1178 preserves the legitimate understanding between the homeowner and the lender when the property was originally purchased.
· SB 1178 only applies to the amount originally financed, not any "cash out" that an owner may have borrowed above and beyond the initial loan.
· SB 1178 is does not re-write existing contracts. The bill does apply to new suits brought on existing loans, even if the loans were made prior to the passage of the bill. However, the homeowners may still owe the difference between the mortgage balance and the discounted amount as a result a "deficiency judgment." If granted, this judgment will affect the homeowner and their credit report just as any other judgment.
The obvious goal is to get the bank to accept the "payment in full without pursuit of any deficiency judgment”. Homeowners need to know that the discounted amount (the difference between the mortgage balance and the short sale) may be declared as income on their income tax return by means of a "1099."
Since the homeowner has probably been under such extreme duress and probably hasn’t made much income, a 1099 may not adversely affect them. The homeowner can speak with an accountant for advice to determine whether or not in fact the 1099 will create a tax liability or how much tax liability. A 1099 may be given to the homeowner as a result of income they've received. For example, if the bank is owed $100,000 and agrees to accept $65,000 on a short sale, the homeowners may have actually made $35,000 (the short sale amount) and could receive a 1099 for that amount.
The bank can seek a deficiency judgment for the shortage on the actual amount received versus the amount that was due. Using the example above, the judgment would be recorded against the homeowner in the amount of $35,000. Likewise, the same judgment can be sought when the property sells at the courthouse for less than what is owed or after the REO department sells the property for less than the full amount of the loan. When negotiating a short sale, you can require that the bank waive its right to a deficiency judgment as part of your agreement to short sale.
For more information about the bill click here California State Assembly passes SB 1178 protecting homeowners or visit DavidOrmonde.com
California State Assembly passes SB 1178 protecting homeowners