Senate Bill 6337 was recently introduced in the WA State Legislature regarding short sales.
After a short selling homeowner gets the shortfall deficiency waived, the homeowner receives a 1099 in the mail because debt forgiveness is a taxable event. As we’ve learned, some people may have to pay taxes on the deficiency, others may not depending on their circumstances. More about that from the IRS here.
When a bank/lender issues a 1099 for debt forgiveness that means the bank also gets to write off the deficiency as a bad debt which may decrease the amount of taxes the bank/lender owes the IRS. Seems fair.
SB 6337 is asking the WA State Legislature to no longer allow a bank to pursue a homeowner for the deficiency on a short sale once the bank issues a 1099 and has received that favorable tax write off. Okay,
still seems fair…
Here’s the Realtor Summary Sheet
Key Points:
Provide certainty and consumer protections for short sale sellers is critical in the current real estate market. Successful short sales often prevent foreclosures that would harm consumers, tax revenue and economic recovery.
Jillayne here. Foreclosures are a natural and necessary part of the market cycle. Not everyone is going to be able to hang on to home ownership. It’s beyond debate that the high homeowner ship rates we saw at the top of the bubble were not sustainable. Foreclosed homes will be sold to investors and other home buyers who can afford home ownership using rational underwriting guidelines instead of the insanity of the bubble days. BTW, here’s what default rates look like for loans originated in 10-11 compared w/the bubble.
There are many foreclosure prevention programs available today, including the new changes to the Home Affordable Modification Program. Many homeowners in foreclosure have been in the system 18 months to 2 years without making a payment. Yes, their credit score will dive, but they’re also living rent free for 2 years. Seems to me that this might be a sort-of stealth economic shot in the arm, unless they’re using the money to shoot things into their arm.
Regarding tax revenue, there’s no excise tax paid on a trustee deed v. a short sale which is conveyed using a warranty deed, however, after foreclosure there IS excise tax paid when the foreclosed REO home is sold.
Regarding economic recovery, this particular law is not going to help our economy in WA State recover any faster. The banks are foreclosing slowly so as not to crash the market with REOs. If we really want an economic recovery to happen faster, let the foreclosures commence. We will hit bottom VERY fast and then everyone will be super busy again. But that ain’t gonna happen and I fail to see how this bill could be tied to an economic recovery in our state.
This legislation will protect short sale sellers from mortgage debt collection actions when the short sale seller was issued a 1099-C Form and thus must pay income tax on the discharged debt.
Wait a minute. If a homeowner HAS assets, why would a lender want to approve a short sale without the ability to collect the shortfall either at the close of escrow in the form of a new unsecured note, or in the future? Put yourself in the lender’s shoes just for a minute: If you sold a home and took back the paper/held the note, and now the new home buyer wants to sell short, would you just simply “forgive” the difference out of the goodness of your heart? NO. Not if you have a cold black heart like mine. I’d want the person to prove financial hardship first. I’d run the numbers and if it makes sense to take the write off, well then maybe my heart could be convinced to melt just a little, for, say 5 minutes which is enough time to sign the paperwork. If however, your home buyer had assets, why would you want to waive the short fall? Think about this for a minute. If all banks/lenders just give a blanket hall pass on all short sale deficiency then the masses would suddenly sell short. Oh now I get it. Maybe this would then motivate more people to….list their home, which means more real estate commissions. Okay, I’m getting it now. Realtors, I love you, but I’m not convinced this is in the best interest of homeowners.
Lenders still have the ability to decide whether to reserve the right to collect mortgage debt owed after a short sale, or whether to issue a 1099-C and claim a deduction for tax purposes.
Oh goodie. I’m sure the bankers will thank us for that.
Go to the 1 hour 9 minute mark (1:09) of this video to hear the six minutes of dialogue from the bill sponsor and the two lenders who showed up.
One of the possible consequences if this bill is passed is that if banks/lenders are discouraged from pursuing homeowners (with assets) for the short sale deficiency, then it is entirely possible that
banks/lenders will then decide to just foreclose.
I’d like to hear/read/see real examples of homeowners who were pursued for the deficiency and see if these are people who are financially destitute or if these are people with assets.
If we are serious about “protecting short sale sellers,” let’s require all homeowners obtain prepaid legal counsel before the short sale is listed. Attorneys would make sure the final paperwork has no deficiency clause and seller’s legal questions can be answered by someone who is a member of the WA State Bar Assoc. But I’m not in charge of the world yet so until then, go forth into the conversations surrounding this bill educated on the possible consequences.