Tax lawyer Mark Muntean sent around the following thought on lowering the appraised value of a home in a world of declining real estate values.

I think it was Bruce Springsteen who said “Every cloud has its silver lining.”1 One such possible silver lining is emerging from the sub-prime meltdown. My wife was bemusing our property tax bill the other day, and it was my chance to prove that I am not totally worthless around the house.

Similar to many California counties, Alameda County, allows for an Informal Request for the Decline in Market Value Reassessment (Prop. Eight) to be filed, reducing a property owner’s annual property tax bill. This is not a formal property tax appeal. Instead, this is a one page form that any property owner can fill out.

The real beauty of this form is that it does not require a formal appraisal. The property owner merely gives their opinion of value based on recent market information, which most likely found on the Internet.

Nearly every California county has a similar process. However, a word of caution is that this informal process has a deadline for this year. While Alameda County’s deadline is April 10, 2008, according to Los Angeles County’s Decline-In-Value Reassessment Application (Prop.Eight) form, the form must be filed by December 31, 2007. Interestingly, San Mateo County’s form does not list a deadline. However, additional information can be found on the county assessor’s website.

It is possible that a taxpayer may benefit from filing a form this year, reflecting a decrease in value to date, and a second form next year, if there is an additional fall in value. Commercial net leases frequently require the lessee to pay property tax. Thus, the lessee may explore possible property tax savings as well.

Formal property tax appeals can be pursued in 2008. To timely file a property appeal for the 2008/2009 tax roll year, a completed Application for Changed Assessment form must be submitted to the county Assessment Appeals Board where the property is located no later than September 15, 2008. September 15, 2007 was the deadline for the 2007/2008 tax roll.

At least three homeowners called my office this week with a foreclosure sale set in less than 5 days and wanted to file bankruptcy to stop the sale. What is with people who wait until the last minute to look for a solution to losing their home? When I’m tired and cynical, I think they must believe in the genie in a bottle, willing to give them three wishes.

But the stories got stranger still, as we talked to these callers: two of the three wanted to stall the foreclosure so that they could complete a short sale. The sale was going to result in no money to the homeowner and they would lose the home, yet they thought they were ready to spend money to file bankruptcy for the privilege of selling rather than being foreclosed.

Historically, we have found that people who wait til the last minute make difficult clients. They put off unpleasant tasks and fail to appreciate deadlines, or even that their lawyer is bugging them in order to make things better.

I decided that I am not willing to take on emergency bankruptcy filings for procrastinators unless there is something to save by the exercise. Enabling a short sale doesn’t measure up.

The adjustable rate mortgage mess is with us: no amount of pussyfooting about whether a legislative change is necessary will make the problem vanish. The choice we have is whether we sit back and let hundreds of thousands of homes be foreclosed or whether we give bankruptcy courts the tools to soften the impact of the crisis.

Currently, the only mortgage that a bankruptcy judge cannot alter is a home mortgage; mortgages on vacation homes, apartment buildings, and commercial property can all be modified in bankruptcy. The ability to modify these mortgages in bankruptcy does not seem to have ruined the credit markets to date.

A provision of the bankruptcy code, inserted to encourage the home lending industry years ago, now ties the hands of a bankruptcy alternative to massive foreclosures.

If bankruptcy judges were empowered to write mortgages down to the value of the property when the case was filed, and alter the terms, within a Congressionally mandated standard, both homeowner and lender would benefit. The homeowner gets a shot at keeping his home and paying for it, based on today’s values; the lender gets just what he would get if he foreclosed: a house now worth less than the value at the inception of the loan. Plus the administrative costs of restructuring the mortgage have got to be less than either staffing an n house mortgage modification operation or foreclosing, maintaining and trying to sell the foreclosed house.

The only cost here to the taxpayers is perhaps some more court clerks for the bankruptcy system. We don’t bail out the lenders who made foolish (or deceptive) loans; we don’t provide amnesty to the borrowers who at best were overly optimistic, and at worst were sold snake oil that puts their homes at risk.

Surely, permitting the modification of home mortgages has to be a better solution than neighborhoods of empty, bank owned houses, and displaced families. Because that certainly seems to me to be the alternative.

California has a program to refund a portion of property taxes to qualifying seniors, including those who rent. The deadline for applying for this year’s refund is October 15.

To qualify, you must be 62 years of age or older; owned or rented in 2006, and have an annual income less than $42,770 in 2006.

The form is available online from the Franchise Tax Board.

Spend the rents generated by a property in foreclosure and you may have invited big trouble even if bankruptcy is in your future.

The borrower in the typical real estate transaction pledged the rental income and other proceeds of the encumbered property to the lender along with the real estate, as security for the obligation to repay the loan. Those rents are “cash collateral” in which the lender has a legal interest.

The borrower may have a fiduciary relationship to the lender with respect to those rents. Failure to pay them over to the lender may be a species of fraud, potentially non dischargeable in bankruptcy.

I’ve seen a rash of clients in the past couple of weeks who have rental houses that are now, or soon will be, in foreclosure. Once a notice of default is recorded, starting the foreclosure process, the lender won’t accept payments unless the borrower can tender the entire amount necessary to cure the default.

So, the borrower is collecting rent from the tenants but the lender isn’t accepting payment of those rents if not sufficient to cure. The borrower is in possession of a hot potato.

My advice to such clients is to set up a bank account and deposit any rent net of the costs of preserving the property to this separate account which contains only the cash collateral that belongs to the lender in question.

I haven’t yet had to figure out if/when the lender will accept payment of those funds, but that’s a far better problem to have than a nondischargeability action against the borrower for fraudulent misuse of the lender’s security.

If this fact pattern mirrors your situation, get an attorney involved in making sure that you don’t lose more than the property to foreclosure.

California has several laws that limit what a mortgage lender can do to collect its money after the foreclosure. I was reminded of the purchase money antideficiency statute yesterday when meeting with a client who took out two loans to buy a home. The home was now in foreclosure.
California Code of Civil Procedure 580(b) provides that a lender may not sue a borrower after a foreclosure sale when the loan was used to acquire a home. This Depression-era statute puts the risk of non payment solely on the lender who made the loan to buy the property. The lender’s sole remedy is to foreclose on its deed of trust.

Contrast these facts to a loan taken out by a borrower for other purposes, such as remodeling, business, or payment of other bills. Such a loan doesn’t fall within the anti deficiency provision because it wasn’t used to acquire the home. A holder of a second deed of trust on a HELOC, for example, has the right to sue the borrower should a foreclosure by the senior mortgage lender cut off its interest in the collateral. Facing those facts, perhaps bankruptcy is the right choice.

For yesterday’s client, the fact that both loans on the troubled property were taken out to buy the house protects the borrower from any future collection action by either lender. This client didn’t need bankruptcy protection. They’ll be survivors of the mortgage meltdown.

The usual question for a bankruptcy attorney is “can I keep the (fill in the blank)”. Whether it’s a house, or a car, or a computer, clients want to know if filing bankruptcy will strip them of their “stuff” bought on time. Frequently the answer is that they can keep the asset as far as the bankruptcy system is concerned.

Whether they should keep the property is another question that I want to raise. Jed Berliner suggests that homeowners with recent adjustable rate mortgages may have no equity to preserve and would be better off letting the house go.

I would expand the analysis: if the choice is to pay $900/month to keep the current car on which you owe more than it’s now worth, what is point in keeping it? I wish for my clients a truly fresh start with living expenses they can afford. Paying more than something is worth clouds that fresh start.
It’s tough to surrender your purchases, but having filed bankruptcy should bring more clarity to financial considerations.
Paying more than the house or the car is worth may not be the wisest choice.

Two tax issues popped up as I discussed impending foreclosures with a client with several investment properties. Remember that a foreclosure sale is treated for tax purposes as though it was an actual sale, with the winning bid treated as though the property owner got the money. The result is that a capital gain may result. This is more likely if the property has been held for a substantial period and the tax basis reduced by depreciation or the property has been refinanced and the equity pulled out.

The second possible tax gotcha may arise in short sale situations where the amount of the shortage may result in cancellation of debt income.

Technorati Tags: foreclosure, tax , bankruptcy

For the past couple of years in Northern California, there has been a flurry of refinancing fueled by low interest rates, substantial property appreciation, and financial needs of homeowners. While before, it seemed that every unemployed high tech worker here got a real estate license, it seems like half of them now became loan agents. The terms of the loans they peddled got more and more complex at the same time the experience and quality of the persons pushing the loans declined, in my view.

I’ve wondered whether all of these non standard loans might present Truth in Lending violations. Truth in Lending is federal law designed to see that borrowers get clear and meaningful information about the cost of a proposed loan before they commit. A federal judge in the Eastern District of Wisconsin just found disclosures by Chevy Chase Bank in connection with an adjustable rate mortgage to violate Truth in Lending, and certified the case as a class action. Andrews v. Chevy Chase Bank, Case No. 05C0454, 1/16/07.

One of the remedies for violation of Truth in Lending is the rescission of the loan and the crediting of all payments on the loan to principle. The statute of limitations is generally three years from the transaction.

I suspect that this case, against this lender, is just the beginning.

Cathy Moran