Florida Asset Protection Blog

Lender Pursues First Mortgage Deficiency Judgment

One of this week’s new clients was a man living in New York City who had over $20 million of mortgage debt, including a $3 million first mortgage owed to Fifth Third bank secured by a Florida property. Fifth Third foreclosed on the Florida mortgage, and immediately after the foreclosure sale, the lender filed a motion for a deficiency judgment. The client said he did not defend the deficiency motion (he should have defended), and court entered a $1 million personal judgment. This is one of the few cases I know of where a first mortgage lender pursued a deficiency judgment. There is nothing unusual about this client’s situation other than, perhaps, the large amount of the mortgage debt. Time will tell is this lawsuit indicates a more aggressive policy by mortgage lenders in Florida.

Forclosure Tax Effect: Imputed Income From Debt Forgiveness May Be Offset By Investment Losses

Many people facing foreclosure are concerned about income tax liability from the lender’s forgiveness of mortgage debt. If the mortgage lender does not pursue a deficiency judgment and writes-off the loan after foreclosure the lender could send the owner a IRS Form 1099 for imputed income for the amount of debt forgiven. In the case of a first mortgage, the debt forgiveness would be the difference between property value and mortgage loan balance; a second mortgage write-off creates an imputed income issue for the entire amount of the loan. There is no imputed income from debt forgiveness on your primary residence. Most imputed income issues are related to foreclosure or short-sales of investment property or second homes.

In response to a question from a Miami attorney I spoke with a local CPA concerning income tax treatment of debt forgiveness of investment real estate. The CPA is Lonnie Young usataxhelp.com. Mr. Young explained that imputed income after foreclosure and debt forgiveness often is offset by tax losses on the real estate investment. . Consider the example of a person who buys a house for $200,000 with a $180,000 mortgage. The house is lost to foreclosure when the value is $100,000. The lender sends the owner a 1099 for imputed income of $80,000 (mortgage balance less fair value). The foreclosure is a forced "sale" after which the owner has realized a tax loss of $100,000 ($200,000 purchase price less $100,000 value at foreclosure sale). The loss offsets imputed income so the taxpayer pays no additional tax.

The ultimate tax effect of imputed income depends on the owner’s use and tax treatment of the subject real estate. The CPA said that in the case of investment property, including vacant land or houses, the loss is a capital loss which is limited to $3,000 per year . If the house qualifies as Section 1231 business property (including rental property) the tax loss is characterized as a business operating loss which the taxpayer can write off fully in the year of sale. Based on what Mr. Young said, if your home facing foreclosure is rented for income then your tax loss would offset any imputed income from debt forgiveness. People facing foreclosure or short-sale of houses other than their primary residence may benefit if they have rented the home a current market rent even if the rent does not cover the mortgage payment.

The IRS may challenge the characterization of a 1231 business property where the property has been rented for less than 1 year prior to the foreclosure sale. Mr. Young said the IRS almost never challenges the one year write off where the home has been rented for more than two years.

You must discuss your individual situation with your own CPA or tax attorney. My discussion of this topic is based on a non-written opinion of one accountant. I am not a tax attorney and have not independently researched this important tax issue.

Homeowner May Be Personally Liable For Code Violation Fines On Abandoned Residence

When homeowners decide to let their upside down properties go into foreclosure they typically stop caring for the properties physical condition. Repairs are deferred unless absolutely necessary. After a homeowner abandons his house, as is often the case in pending foreclosures, maintenance stops. Grass and weeds grow wild, electric service stops and air conditioning is turned off. Lack of grounds and building maintenance often results in violations of local building codes. Code violations can result in fines, and violations under Florida building codes often have daily penalties. A foreclosure and subsequent bank sale resolves many assessments against the foreclosed property including real estate taxes and association dues. Code enforcement fines are not necessarily solved by foreclosure.

Under Florida law, homeowners are personally liable for code enforcement fines. A homeowner who vacates his home prior to foreclosure may be exposing himself to personal liability to local government fines that follow the homeowner after the foreclosure sale. People do not want to spend money maintaining a home they are trying to give back to the bank. However, your home is your responsibility as long as legal title in your name. Allowing your home to become an eyesore will invite neighbor’s complaints, code enforcement actions, and expensive fines.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

First Mortgage Lender Sues For Deficiency Judgment

As a general rule, mortgage lenders have not been pursuing deficiency judgments during the real estate recession. Second mortgage lenders have sued borrowers individually in cases. Until this week I have not spoken with any client who had been sued for a deficiency claim by a first mortgage lender after or as part of a foreclosure. I have spoke to many attorneys who defend mortgage foreclosures none of whom have reported seeing a deficiency claim by a first mortgage lender in any of the cases they are handling. This week, I saw my first deficiency judgment by a first mortgage lender. Whether this is an isolated incident by one bank in one real estate development, or an indication of changing bank policy and greater risk for mortgage borrowers is unclear.

The particular client retained me to file Chapter 7 bankruptcy because of large amounts of unsecured credit card debt. The mortgage deficiency was just one of his credit problems and was not the main problem behind the bankruptcy. The client had borrowed money to buy an investment lot in a Ginn community from Branch Banking and Trust ("BBT") secured by a first mortgage. There was no second mortgage. The lot was unimproved. BBT filed a Motion for Deficiency including a purported property value supported by a copy of an appraisal attached as an appendix to the complaint. The debtor did not respond to the Motion so BBT did not have to prove property value at an evidentiary hearing; the court entered a judgment based on the values alleged in the Motion.

Many of my clients over the past two or three years have been fearful of mortgage deficiency judgments because they had non-exempt assets with equity. These people believed that their relative wealth made them a target for a deficiency judgment. The BBT judgment does not support the theory that mortgage lenders will pick deficiency targets based on whom they believe own collectable assets. This particular debtor is insolvent; he has no non-exempt assets which makes bankruptcy the preferred solution to all his debt problems. This debtor was not targeted based on his net worth.

This case is significant because it shows that at least some lenders involved in some investment projects may pursue investors for individual liability. Whether mortgage lenders will begin pursuing mortgage deficiencies for loans made for primary residences, as opposed to investments, remains to be seen.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Some Second Mortgages Suing Homeowners To Collect Notes Instead of Foreclosure or Deficiency Judgment

 I have stated before in this blog that most large mortgage companies were not pursuing deficiency judgments after foreclosure. More recently, I have seen a few situations where second mortgage holders were suing the homeowners for personal judgments. The second mortgage companies were not suing for a deficiency judgment after the first mortgage foreclosed. Instead, these second mortgage holders have filed law suits against the homeowners to collect the underlying promissory note. This means that the mortgage company does not wait for a first mortgage foreclosure and does not initiate its own foreclosure on its second mortgage. After the homeowner misses  few second mortgage payments, the second mortgage company accelerates the entire balance of the mortgage note (which is a standard provision of most notes) and sues the homeowner to collect the entire note balance. The mortgage company retains its second mortgage; any proceeds paid to the second mortgage company from a sale of the property would reduce the balance of the judgment.

Suing directly on the promissory note without foreclosure is common practice for commercial loans. Commercial lenders hold most loans in-house as contrasted with most conventional mortgages which were securitized and sold to investors. Commercial lenders rather get general judgments against the borrower than take back real estate which they cannot sell and which would not satisfy the loan. I have also seen isolated cases where small, local banks are suing borrowers directly on the note to collect residential first mortgages. These smaller lenders are following the lead of the commercial loan departments to seek personal judgments in lieu of taking back real estate. I have not seen any large banks or mortgage lenders sue homeowners directly on their notes rather than instituting foreclosure.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida