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Borrower has second thoughts about that second chance

By Ilyce Glink and Samuel J. Tamkin
Friday, March 11, 2011; 4:04 PM

Q. I was going into foreclosure, but the bank gave me a loan modification. I agreed to the modification at the beginning, but now I see it was a mistake and think foreclosure would be better. What do I have to do - just stop paying?

A. A quick answer to your question is yes. If you stop making your payments, the lender will certainly reinstitute the foreclosure proceedings to sell the home and satisfy all or part of the debt you owe.

The whole loan modification process has been a nightmare - not so much for the big-box lenders but for troubled borrowers. The government held out the promise that loan modifications would help people save their homes. But it was far from the truth. At first, lenders were overwhelmed by the volume of applications and lenders took forever to get through the files. Borrowers were given the impression that they would be considered for a loan modification if they met a certain minimum standard and were granted a trial loan modification.

Those trial loan modifications were anything but a trial. Borrowers were told to follow the lenders' instructions, pay a certain amount and wait for a response from the lender. However, what the borrowers got was months on hold waiting for lenders, lenders that reported those same borrowers - whom they claimed they wanted to help - to the credit-reporting bureaus as either delinquent on their loans or as paying less than required.

Those same borrowers were being hurt by the system that was supposed to be helping them. Borrowers who had stellar credit histories and credit scores soon found that their trial loan modifications had hurt their credit scores so much that they would be unable to qualify for a traditional refinance because of their participation in the government-sponsored loan modification program.

Recently released statistics indicated that only a small number of people who applied for loan modifications actually received a permanent loan modification.

Those who did not receive a permanent loan modification and were bounced from the trial loan modification received a rude awakening. Their lenders told them they would, at once, have to cough up the money to bring their loans current, even though the borrowers had paid the amounts they were told to pay during the trial loan modification. Now those same borrowers faced a higher chance of foreclosure than before their participation in the loan modification plan.

Decide for yourself whether you should make any more payments to your lender.

You might want to get a copy of your credit history from annualcreditreport.com to see how the loan modification has affected your credit history. You can download a free copy from each of the three major credit reporting bureaus at this site. The site will also offer you a copy of your credit score for about $8.

You might find this information helpful in seeing where you stand now, what impact a foreclosure will have on your future credit history and score, and what you will need to do over the next several years to restore your credit.

Q. I purchased a beach property in North Carolina with a friend a couple of years ago. We put down 10 percent and financed the rest. We thought we could sell the property quickly, but we were wrong. The co-owners have been having financial problems and stopped paying their share of the mortgage, taxes and insurance about two years ago. Since then, they have been paying the utilities and I've paid everything else.

Renting it out covers about 60 percent of the expenses, but we lose money on the whole. Our property is about 20 percent underwater.

Although I'm able to continue covering the monthly expenses, I'm stretched pretty thin. If the rental income doesn't continue at the same level (or if anything breaks), I might not be able to cover the payments.

I recently received notice that the co-owners have filed for bankruptcy. Should I consider a short sale, loan modification, bankruptcy, a deed-in-lieu or even bankruptcy?

A. Ideally, if you can find a way to rent the property more days and cover all of your expenses, your problems would be simplified. Have you considered using the Internet to market the home? You can use a site like VRBO.com, Craigslist or Zillow.com to list your vacation home and set up a page with pictures to market it to vacationers and renters.

If there's a rental company in your area or one that specializes in your development, you might consider having them list the home for rent in exchange for a portion of the proceeds. Use as many marketing methods as possible to reach prospective renters.

If you are actively marketing the home in all these directions, and yet are unable to increase the number of days you rent the home, your next choice is to continue to make the payments and lose money on the investment on a monthly basis until your situation deteriorates or improves.

But you should talk to an accountant if your situation gets worse. Depending on your federal tax situation, you might be able to get a tax benefit from your rental losses.

Taking advantage of any federal income tax benefits could soften the blow from your losses. But if these losses are unmanageable, you'll have to consider drastic measures.

If you're drowning financially under the burden of owning this investment property, you might have to sell it at any cost. You have several choices when it comes to trying to get rid of the property:

You can list the property for sale and work with your lender in the short sale -- that is, selling the home for less than what you owe and having the lender agree to accept that payment.

If you can't find buyers and you stop making payments on the loan, the bank will commence foreclosure proceedings.

You can ask the bank to modify your loan by reducing the interest rate. Or the bank might propose a different solution that could work for you. Some lenders might agree to allow a borrower in your situation to transfer title of the home to them in a deed-in-lieu-of-foreclosure situation. Basically, you're giving the keys and the title to the home over to the bank.

One complication you might face is that your co-owner is in bankruptcy. Once a person files for bankruptcy, his assets become part of the bankruptcy proceedings and a trustee in bankruptcy is assigned to administer those assets. That means that any decision that you and your friend would have taken together now must be agreed to by the trustee in bankruptcy.

If you need your friend to work with you in the short sale, deed-in-lieu, loan modification or any other issue involving his interest in the home, you'll have to deal with the trustee.

Here's another wrinkle: Now that your friend is in bankruptcy, your lender might come after you for the entire amount owed on the loan. If you sell the property short, and deficiency judgments are allowed in your state, the lender might go after you for the shortfall from the short sale or foreclosure. In some states, a lender can obtain a judgment against a borrower after a short sale or foreclosure to recoup its losses.

Finally, if you are able to sell the home in a short sale, keep in mind that if the lender does accept less than the full repayment on the loan, you could be taxed by the federal government on the amount that you are short paying the lender.

Depending on your situation, that tax amount could be quite painful. If this were your primary residence, you wouldn't have to worry about this phantom income. Once you have more information from your bank, accountant, attorney and your friend in bankruptcy proceedings, you might have a better picture of what you need to do.

Q. My dad passed away recently and now my mother is the sole owner of a timeshare in Florida. We have tried to sell it, give it back to the company and donate it, all to no avail. We live in New Jersey.

The document that they received when they bought the timeshare states that the timeshare "benefits and obligations hereunder shall inure to and be binding upon the heirs, executors, administrators, successors and assigns" of my parents. Does that mean that her children will be liable for the timeshare fees and maintenance when she dies?

A. Unless your parents put your name on the deed to the timeshare property, you will not be held responsible for it when your mother dies.

When buying timeshares in developments, people often focus only on the upfront cost, forgetting that they will have to pay the development's annual fees and dues.

As the economy has been in a prolonged period of uncertainty, many people have shied away from various types of spending, including timeshares. If your mother's timeshare participates in a hotel program that allows buyers to exchange the use of the timeshare for points, your mom may consider doing that, especially if neither she nor anyone else in the family uses the timeshare. Check with the timeshare company to determine what her options are short of selling it.

While getting points in a hotel program doesn't solve your problem in the long run, in the short term it may give your family something it can use elsewhere or for other things while you sort through the situation.

Looking ahead, if you don't want the timeshare at the time your mother dies, you can elect not to accept that inheritance. Just because your mother has indicated that you should receive something from her estate doesn't mean you have to accept it.

If no one accepts the timeshare, her estate would continue to own it, and it would become a liability for her estate. If she has assets in her estate at the time of her death, the executor of her estate may have to use those assets to continue payments on the timeshare.

That's where the language in that deed comes into play. When your mother dies, her estate becomes responsible for the timeshare as her "successor." That language does not put you in the middle of debts and obligations that your parents might have incurred.

It would be wise for all of you to sit down with the person who prepared her will or an estate planner to determine what you should do with the timeshare at the time of her death.

For now, your options include continuing to use the timeshare; pursuing options to trade its use on a yearly basis, and advertising the timeshare for sale through the development's management company, Craigslist and other sites, and even using a real estate broker in your area.

In some locations, selling a timeshare can be difficult, but review your options now. It could be better to sell a couple of years down the line, if the market strengthens, especially if the timeshare is in a premium location.

Q. I own my own business. I received a 1099 form for work that I did for another company, but after deductions my tax return shows that I only made $4,000 last year. Now I can't get a mortgage. Is there some way around this?

A. If you own your own business and only paid yourself $4,000 last year, you might have a big problem trying to show that you can afford a mortgage.

I'm hoping that you actually have more income, and that your tax deductions don't affect your cash flow. That's how it works in many industries, including real estate investment.

If you work in the real estate industry and have many investment rental properties and commercial buildings, you could find yourself with little income to show on your tax return. Real estate investors benefit from the ability to depreciate their buildings on a year-to-year basis and offset that depreciation against income produced from their properties.

If you have real estate properties that throw off good income and you earned quite a bit of money from these properties even after deducting expenses, your tax return might show that you have little income once you subtract property depreciation.

That said, a lender who is experienced in lending to business owners in your industry should be able to look over your tax return and see through the line items to understand what your true cash flow is each year.

For example, if your true income last year would have been $100,000 but because of tax benefits - not cash payments you made to others - you were able to reduce your income to $4,000, a lender may be willing to review your overall tax situation and still give you a loan. But that lender may not offer you a loan on the same terms given to a person who has an easy tax return and falls into all of the normal standards lenders have come to expect from borrowers these days.

However, if your tax return shows that you only made $4,000 last year and the deductions were cash outlays that reduced the money you actually have, you probably won't find a lender willing to give you any loan for a home.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "Buy, Close, Move In!" Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites, thinkglink.com and expertrealestatetips.net.

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