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Top 10 Myths About Underwater Homes

FINALLY, residential home values are beginning to rise in Florida. As a Tampa foreclosure attorney, I can attest first hand that we have entered a “Seller’s Market” again, where bidding wars, multiple offers, and short listing times are more common. The dramatic drop in homes for sale is certainly putting upward pressure on sale prices. However, most Floridians still are underwater. In other words, they owe more to the bank than the value of their house.

We hear the following 10 myths on a regular basis. How did these statements become myth? Several arose urban legend, while others stem from confusion, some from misinterpretation of Florida’s or other states’ laws, and some are printed on the internet (where it cannot be posted unless it is 100% true).

Myth #1 – “The bank cannot foreclose while I am negotiating a loan modification / short sale.”

There exists a few government programs (Home Affordable Foreclosure Alternatives – “HAFA,” Home Affordable Refinance Program – “HARP” and Home Affordable Modification Program – “HAMP”) and government-backed loans (Freddie Mac, Fannie Mae, FHA,) that require the applicable bank stop the foreclosure action, but only after there is an approved homeowner assistance program in place, a trial modification or short sale closing. In most cases, however, the lenders will have the foreclosure lawsuit and the negotiations proceed on parallel or dual tracks – meaning the servicer will not stop the foreclosure until the loan modification is signed or the short sale closes. Many homeowners have lost their residences to foreclosure auction believing that the servicer would halt the lawsuit while negotiations were ongoing. Worse, see the next myth …

Myth #2 – “I can wait until the foreclosure sale is scheduled before I start a loan modification / short sale.”

Similar to the Myth above – if the mortgagor waits too long to start negotiations with the lender, he may find himself out of time and facing a foreclosure sale prior to completion of negotiations with the servicer. Some borrowers believe that they can wait until just before the foreclosure sale date itself to commence a loss mitigation program, only to find they have insufficient time to get the solution in place before the bank auctions their homes.

Myth #3 – “I don’t like the potential consequences of a short sale, so I’ll ask the bank for a Deed-In-Lieu of Foreclosure, or I’ll just let the bank foreclose.”

The possible consequences of a short sale are: (1) request for payment of the deficiency to the lender; (2) request for an unsecured promissory note to be repaid to the lender; or (3) forgiveness of debt income. The possible consequences of a deed-in-lieu of foreclosure (where the lender voluntarily repossesses the home) are the same as a short sale. Also, the harm to the borrower’s credit is typically worse in a deed in lieu than a short sale.  “Threatening” a deed in lieu gives the borrower no leverage over their lender.

Similarly, the possible consequences of a foreclosure are the same as a short sale or deed-in-lieu of foreclosure, only the borrower has no notice of the bank’s decision to pursue deficiency or issue a 1099-C.  Allowing the house to be lost at foreclosure auction is even worse on credit than a short sale or a DIL. The banks have no fear of the foreclosure sale and so this is a bad negotiation tactic to use in the event that the terms of the short sale are unacceptable to the mortgagor.

Myth #4 – “I’ve surrendered my house in bankruptcy therefore the house is no longer mine.”

The Statement of Intentions in Chapter 7 or Chapter 13 is merely that – a statement of the debtor’s intention regarding the house. Florida is still a “Lien Theory” State, meaning the homeowner owns the house until: (1) he voluntarily sells it; or (2) the bank, Trustee or Tax Collector takes the home. The bankruptcy by itself has no bearing on the ownership of the house. If the trustee, bank or homeowner fails to take any action during the bankruptcy, the house remains the property of the borrower – making the unsuspecting homeowner liable for post-filing Association Assessments, County Code Enforcement Actions, Utility Liens, and other maintenance issues that arise post-bankruptcy.

Myth #5 – “Bankruptcy is a threat that will scare the lender into working with me.”

This is simply false. The banks are much more complex and their attorneys understand the intricacies of bankruptcy. Like the “threat” of “allowing” a foreclosure, Chapter 7 and Chapter 13 are no threat to the lenders.

Myth #6 – “My HELOC / Association cannot foreclose because it is second in priority to my primary mortgage.”

Homeowner Associations and Condominium Associations have the authority to place a lien on the home and foreclose if the assessments go unpaid (see, FL Statute 718.116 for Condos and FL Statute 720.3085 for Homeowner Associations). The associations can then foreclose and take title to the unit or sell the unit at the foreclosure sale subject to all superior mortgage liens. This means that the person who buys from the Association will still have to pay off the first mortgage (and maybe the second mortgage too) if they want to own the house free and clear of all liens. In most situations real estate investors are buying these foreclosures and renting out the units until the banks finally complete the foreclosure lawsuit.

Myth #7 – “If the house is my primary residence, I will not receive a 1099.”

Under IRS Rules and Regulations, the lender MUST issue a 1099 if it forgives (i.e. waives) more than $600 in debt. Some taxpayers believe that the Mortgage Debt Relief Act of 2007 will prevent the lender from issuing the 1099-C entirely. To the contrary, the Mortgage Debt Relief Act provides an exclusion of forgiveness of debt income under certain circumstances, rather than relief from issuing the 1099-C. In addition, the fact that the house is a borrower’s primary residence is only one prong of the MDRA. For the MDRA to apply, the debt must also have been incurred for the purpose of buying or improving the primary residence. Thus, a “cash-out refinance” will not qualify for exclusion under the MDRA, even if the house was the borrower’s homestead.

Myth #8 – “Since the bank cannot produce the original note, they cannot foreclose.”

See FL Statute 673.3091, the Florida Uniform Commercial Code. Florida law provides a procedure whereby the lender can enforce a lost, destroyed or stolen instrument if: (1) the lender can produce evidence that it owned the loan at the time it was “lost;” (2) the bank is the entity entitled to sue on the note; and (3) the loss of the note is not the result of the transfer to the owner. In most cases, however, the lender will find and file the original promissory note with the Court during the course of the foreclosure lawsuit.

Myth #9 – “I will quit-claim deed my house to a Trust, an LLC, or a Corporation, if the bank refuses to work with me.”

There are three main documents involved in all real estate transactions: (1) the Deed (or Warranty Deed or Quit-Claim Deed) shows ownership of the property; (2) the Promissory Note shows who is responsible to repay the money borrowed; and (3) the Mortgage shows the collateral that can be repossessed if the borrower fails to repay the loan. Regardless of the ownership of the house (the deed), the person or persons who signed the promissory note are the ones liable to the bank. Therefore, conveying the house out of the borrower’s name only delays the inevitable, and has no impact on the party responsible to repay the lender.

Myth #10 – “The Statute of Limitations has expired, therefore the bank cannot foreclose.”

This is one of the most misunderstood concepts in Florida Law. The Statute of Limitations is a statutory period of time beyond which the lawsuit cannot be filed. In Florida, the limitations period is 5 years from the date of default (FL Statute 95.11). The mortgage lien (see the Myth above) expires 5 years from maturity of the loan if the maturity date can be determined, or 20 years from the inception of the loan if the maturity date cannot be determined (FL Statute 95.281).

Most “internet gurus” and unfortunately some Florida attorneys believe that if the default date was more than 5 years ago, the bank cannot foreclose because that date is beyond the 5-year statute of limitations. In most cases where the last payment was more than 5 years prior, the note has failed to mature therefore the mortgage lien still exists, and to avoid the 5-year statute of limitations, the lender can simply amend its default date to a time within the 5 year statute and proceed with its foreclosure.

For those who have underwater homes and are uncertain regarding their options, please contact Yesner Law for a free and confidential consultation.

This article has been shared by our friend and contributing author; Shawn Yesner.

Yesner Law is a Tampa based boutique law firm that handles foreclosure defense, loan modification, construction liens, landlord/tenant disputes and counsels consumers on debt settlement. Shawn Yesner is a credentialed and sought after speaker on topics relating to foreclosure defense and loan modification. He presently represents clients in the following areas; Tampa, St. Petersburg, St. Petersburg Beach, Treasure Island, Medeira Beach, Reddington Beach, Kenneth City, Gulfport, Seminole, Clearwater, Clearwater Beach, Oldsmar, Dunedin, Safety Harbor, Palm Harbor, Lutz, Westchase, Carrolwood, New Port Richey, Trinity, Port Richey, and other areas that comprise the greater Tampa Bay area.