Thursday, July 5, 2012

Dangers on the Road to Foreclosure

The Supreme Court of Rhode Island has stated that the homeowner must pay a deficiency judgment to the bank based on the amount owed on the mortgage minus the cash price for the home at auction.
By Joan d’Arc
Rhode Island has the highest home foreclosure rate in New England. If your home has been foreclosed, or you are considering “walking away,” for instance, to rent or move in with family, there are some legal facts of which you should be aware. Perhaps you’re in the middle of one of those long, drawn out “short sales” or you’re thinking of joining the new wave of voluntary or “strategic defaulters” who have decided to stop investing in your underwater home. 
But how fast can you run from banking schemes like “deficiency judgments” and “recourse” laws? In many states known as "recourse states" maybe not fast enough. 
Homeowner beware: approximately forty states have laws on the books that are blatantly bank-friendly. In a “recourse state” the bank has recourse to file a lawsuit in court to grab your personal assets, such as other properties, land, or bank accounts, and may even garnish wages. These asset grabs and wage garnishments may have not yet begun, but there is reason to believe they will begin as soon as the banks catch up with the foreclosure free-fall. 
The business of banking in many common law countries is not defined by statute, but by common law. World Law Direct explains: “Several states continue to adhere to the common-law rule that when a foreclosure sale does not yield at least the amount of the mortgage obligation, the mortgagee is entitled to a deficiency judgment measured by the difference between the foreclosure price and the mortgage obligation.” Common law allows lenders to sue borrowers directly, as well as file multiple actions on the same mortgage default. 
Following is an example of what occurred in the state of Rhode Island to make sure this dastardly deed remained secure on the law books. In the DEPCO v. Macomber case, which occurred during the infamous Savings and Loan scandal in the early 1990s, the Supreme Court of Rhode Island reiterated that the homeowner must pay a deficiency judgment to the bank based on the amount owed on the mortgage minus the cash price for the home at auction. This law is clearly based on "common law rule" which is our leftover lunch from the British Empire.

In the approximately eleven non-recourse states, the bank can only take the property, and cannot sue in court for any deficiency claimed to be owed to the bank. The states that can be classified as non-recourse for residential mortgages are: Alaska, Arizona, California, Hawaii, Minnesota, Montana, North Dakota, Oklahoma, Oregon, and Washington (and recently joining the list, Nevada). Thus, one task ahead is to explore how Rhode Island and other states can go about becoming non-recourse, anti-deficiency states.

If you go with the short sale, current home sales in Rhode Island are taking several years if they sell at all; usually way past the period of time the homeowner can survive financially.  This is true across America now in most states. During this time, the bank will expect payments on time, and will likely reject any reasonable short sale offer.  Why? Because banks are holding the cards and have lots of options; among them, selling the mortgage to a possibly related entity, or suing the homeowner for deficiency judgment in the state courts. 
And there is yet another beast set upon the weary homeowner following foreclosure. Regardless of whether the mortgage is recourse or non-recourse, the deficiency judgment is taxable by the IRS. After your house sells at auction, you will receive a 1099 from the bank on which will be reported your “income” from the sale of the house. That’s right. The IRS considers the bank’s write-off on their books as income on your books. Nothing else quite makes as clear the notion that money is not real.

For the moment, a Congressional bill put forth in 2007 placed a stop to this phantom tax until 2010, and later extended it to December 31, 2012. It is currently unknown whether this date will be extended. Other options might be Chapter 7 bankruptcy, Chapter 13 reorganization, or the simple fact of insolvency; that is, if you don’t own any property, bank accounts, trusts, etc., there’s nothing to take from you. But the IRS always gets its money somehow, usually by garnishing your wages.

Here is the crux: There is no real incentive for banks to spend the billions of dollars they got to help people. The money goes around but does not stop in your hands. I ask anyone interested or knowledgeable in these subjects to please join in this fight. If you have information on this subject, please leave your comments below, including any links to interesting information related to these subjects.

After all, you are the 99 percent!

Copyright, Joan d’Arc

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