In all the discussion and dissension over the $700 billion government bailout intended to stop the downward slide of the economy, it is encouraging to finally hear of some plans to help the “Main Street” we keep hearing about. Since this is where the problems started, it seems reasonable that it may have a place in the recovery.

On November 11, Fannie Mae and Freddie Mac announced a program to help homeowners in default on a loan held by the two entities modify the terms of their loan to possibly forestall a foreclosure. Today, November 20, Fannie Mae went one step further and announced a halt to foreclosures scheduled for November 26, 2008 through January 9, 2009. There are some limitations. It applies to

• All portfolio and MBS pool mortgages owned or guaranteed by Fannie Mae that are currently scheduled for foreclosure
• Foreclosures scheduled for sale from November 26, 2008 through January 9, 2009
• Single family properties only
• Occupied properties only

The purpose of this temporary halt is to allow time to institute the loan modification program announced November 11, which will begin on December 15. That program provides for the following potential options for those mortgages currently in default:

• Repayment Plan: paying off the delinquent amount over time to bring the loan current
• Fannie Mae’s HomeSaver Advance: paying off the delinquent amount with an unsecured loan
• Modifying the Existing Loan: changing the terms of the loan to pay off the delinquent amount and/or lower the monthly payments
• Pre-foreclosure sale: agreeing to sell the property for less than the loan amount (typically a short sale)
• Deed in Lieu of Foreclosure: lender accepting a deed to the property from the borrower and cancelling the debt

Borrowers covered under this procedure should be receiving a letter from the foreclosure attorney or trustee handling their file. That letter will tell the borrower to contact their loan servicer (the company to whom they make their payments), to discuss alternatives to foreclosure.

While Fannie Mae & Freddie Mac hold or guarantee the majority of the home loans in the US, that leaves a lot that are held by individual lenders. This program does not apply to them, but you may find that they are actually more flexible. To qualify for the Fannie Mae/Freddie Mac program, the borrower must be in default. Chase and Washington Mutual (www.wamu.com/wamucares) are working with borrowers who are still current on their payments but can provide evidence of hardship, and there may well be other lender/servicers who are doing so.

The bottom line is that anyone who is behind on their mortgage payments or thinks they are going to get behind on their mortgage payments should get on the phone to their servicer (the place they make their payment) sooner rather than later. While Congress and the federal Administration are trying to figure out where to spend that $700 billion, some lenders are trying to solve the problem where it started.

If you own real estate on Lummi Island, Lake Whatcom, SuddenValley, Geneva or south of Lakeway Drive in Bellingham, you recently received a notice from the Whatcom County Assessor that your property is worth more than it used to be. Since real estate in these areas was last assessed prior to 4 years of rising real estate prices, it’s not surprising that the Assessor says it is worth more today than it was in 2004. On the other hand, for the last few months you have been reading that real estate values in Bellingham and Whatcom County are falling, so why has your taxable value gone up 50%, 60%, 70% or more? The next big question is – does that mean your taxes will go up by the same percentage? And the last question is – what can you do about it?

Let’s start with the Why. The law requires counties to determine the “market value” of real estate on a regular basis for the purpose of levying taxes. In Whatcom County, ¼ of the county is assessed every year. This system means that if there have been major market shifts, the changes can be huge over a 4 year period. But values have gone down over the past year, right? Perhaps. Generally speaking, homes in the upper ranges and raw land have dropped over the past year. Have they dropped to 2005 levels? In some cases, yes. On the other hand, homes in the lower price ranges, particularly in some areas, may have maintained their gains. The number of homes sold has also dropped over the past year, giving assessors fewer choices of comparable sales for real estate that is somewhat atypical.

Next Question: How much will your taxes increase? At this point, no one knows. Taxes for things like bond issues, which are for specific amounts, will not increase as assessed value rises. The percentage collected will change so that the same amount is collected based on the new total assessed value of all real estate in Whatcom County. The general fund taxes are a bit more complicated. Counties are limited as to how much additional property tax they can collect in any year over the year before, not counting the additional taxes gathered from new construction and development. Theoretically, actual taxes should go up considerably less than assessed valuse, but my experience is that a jump in one typically brings a jump in the other.

Last Question: What can you do about it? You can appeal, and if you can show that comparable property sales do not support the new assessed value, it can be reduced. The first step is to call the Whatcom County Assessor’s office at 360-676-6790. If the assessor’s analysis of your property is incorrect, they may be able to resolve it immediately. If they can’t help, you need to file an appeal petition with the Board of Equalization. Appeals must be filed on forms available at either the Whatcom County Council office or the County Assessor’s office, both in the courthouse at 311 Grand Ave in Bellingham. Appeals must be filed no later than July 1 of this year or within 30 days of the date on the change of assessment notice. They must be returned to the County Council office – a phone call or letter does not constitute filing an appeal. You will be notified when your hearing date is set.

I have successfully argued before the Board and been granted a roll back in assessed value of a property. The key is to provide the Board with the tools they need to make the decision you want. They do not have the power to reduce the assessment for any reason other than evidence of real estate values which would support the value you are claiming. Comparable sales are the best because value was established by the sale. Evidence of real estate comparable to yours that is currently listed at a lower price than your assessed value could also be of help. Comparable properties need to be as close to yours geographically and in basic characteristics as possible. Your evidence needs to be in writing and to the Board at least 5 days before your hearing so that they have a chance to review it (it can be submitted separately from your appeal petition). This will be much more effective than just showing up and telling them all about it.

The Whatcom County Assessor’s office has an excellent website at http://www.co.whatcom.wa.us/assessor/. It has complete instructions on how to go through the appeal process as well as explanations of how assessment values are established and taxes are determined. If you need information on properties currently for sale or sold, go to our website at www.JohnsonTeamRealEstate.com, choose Recent Home Sales, and map your neighborhood. There is even a calculator that will estimate the value of your property if you enter the address. If you still need some help in deciding whether to appeal or putting it together, don’t hesitate to contact us at info@JohnsonTeamRealEstate.com or 360-527-8766.  We’ll do anything we can to help.

The current Bellingham/Whatcom County housing climate has created crisis for some homeowners and opportunity for some home buyers.  As in any time of instability, there is the potential for risk on both sides.  The first step to managing risk is to know the terms; the second step is to have some knowledge of the process; the third step is to have some knowledge of the potential pitfalls.

Short sale and foreclosure are terms we are hearing a lot recently in discussions of the Bellingham and Whatcom County real estate market, and many people use them incorrectly, which gets everybody mixed up.  Let’s try to make some sense of all this…but to do that we need to add a few additional terms.  We’ll talk about equity, default, distressed properties, bank-owned, REO and foreclosed.  Don’t worry, it really isn’t all that hard once you know the vocabulary.

Let’s start by defining the basic terms:

• Equity – The amount left over after you sell your house and pay off all the liens (think mortgage, taxes, etc) and costs of sale (think real estate commission, repairs to sell, Washington State and Whatcom County excise taxes, title insurance for the buyer, escrow or attorney fees, etc).  Many sellers forget about the costs of sale when calculating their potential equity, which is why you should always get a “net sheet” from your real estate agent.  Note:  an appraisal, a listing price, an estimate of value allow you to calculate only “potential” equity – you don’t know how much you really have until the check is in the bank.
• Short Sale – A sale in which there is negative equity.  In other words, the sale price does not cover all the liens and costs of sale, so the seller must bring money to the table to close.  If the seller can’t or won’t add money to close the transaction, (s)he may ask the lender to take less than is owed.  The seller cannot sell under this circumstance unless the lender agrees, because the seller cannot provide clear title to the buyer.  Note:  whether the seller is or is not current on the loan payments has nothing to do with whether a sale is “short”.
• Default – A borrower (property owner) is in default when they have violated the terms under which they agreed to pay back their loan.  Typically, this means they are at least 30 days past due on a payment.  At this point they will most likely get a call from their lender or a written Notice of Default.  It is very foolish to ignore these.  Note:  a seller in default can have a huge potential equity or none at all.
• Distressed Property – An owner’s primary residence which is in the foreclosure process or in danger of foreclosure because the owner 1) has defaulted on the mortgage; 2) is at least 30 days delinquent on the mortgage; 3) believes that they are likely to default on the mortgage within 4 months or 4) at risk of loss due to nonpayment of taxes.  This is fully defined under RCW 61.34 and holds pitfalls and additional responsibilities for buyers who offer to help a seller avoid foreclosure.  This is a Washington State consumer protection law and penalties are steep.
• Foreclosure – The process between the Notice of Default and the auction on the steps of the courthouse.   After default, fees & penalties are assessed and the interest rate jumps to the “default rate” as specified in the promissory note that the seller signed when they borrowed the money.  During the early part of this process the seller can “bring the loan current” by making all past due payments plus extra interest, penalties, etc.  The time comes, however, when a seller’s only option is to pay off the amount owed (which at that point has grown substantially due to the extra fees).   This can be done by refinancing the loan (but by this time they probably can’t qualify) or selling the house.  The seller does not need permission from the lender to sell, so long as there is sufficient equity to pay all liens and costs.  Remember, a seller can be in the foreclosure process but still have equity in the house.
• Foreclosure Sale – The final step in the foreclosure process, when the house is put up for auction on the steps of the courthouse and is purchased, usually by the lender, but potentially by anyone.  The details of foreclosure sales are an article in themselves (there a number of books available on the subject), so we won’t go into them here.  Suffice it to say that when it is over, the borrower no longer owns the house and has a period of time to vacate.
• Bank Owned, REO (real-estate owned), Foreclosed – These 3 terms all mean the same thing:  the foreclosure process is over and the bank (or whoever bought it at the auction) owns the house. 

As you can probably tell by now, the primary confusion arises because people often refer to a home at any point in this process as “a foreclosure”.  What we have just seen is that the conditions which govern what can happen to that home at various times in the process are very different, which means that the impacts on a homeowner and a buyer are very different.

Let’s Look First at the Homeowner

  The steps and time frames through the foreclosure process are defined by Washington State law, with a typical time frame between default and foreclosure sale of around 6 months.  It is to a homeowner’s advantage to renegotiate their loan or sell the house rather than have the bank foreclose, and they have a considerable amount of time to explore their options.  For the purposes of this article, suffice it to say that getting into any of the positions described above has a negative impact on a homeowner’s credit score, but the earlier in the above list that one acts, the less the impact on both credit score and overall financial situation.  The absolute worst thing a homeowner can do is to pretend that they don’t have a problem.  The absolute best is to take action when they think they see a problem coming.

Homeowners sometimes have the attitude that they are going to lose the house and will never be able to buy another one anyway, so what difference does it make if their credit score is bad?  Tragically, they are failing to think about how many aspects of their lives are influenced by their credit score, from renting an apartment to the amount of utility deposit required to the amount they pay for insurance – not to mention what happens when they need to buy a new car.

Losing one’s home, or being forced to sell it is a tragedy, but a homeowner does have some control over the amount of the damage.  Particularly in recent weeks, the possibility has increased that a bank will work with a borrower who is in trouble.  The key is to contact them early.

How Does All this Affect a Buyer?

The impact on a buyer depends on what point in the process (s)he enters the picture.  Note that the scenarios described below make the assumption that the terms of an agreement include those in forms provided by the Northwest Multiple Listing Service.

            In a short sale situation, whether prior to the seller going into default or after, the buyer will be negotiating with the homeowner.  However, the homeowner will be able to perform only if the lender agrees to the terms of the sale, meaning any agreement will be conditioned upon the lender’s approval.  This means there could be as much as a  4 month wait between agreement between buyer and seller and confirmation from the lender.  This means that often a buyer must spend money on inspections and loan fees without knowing that they will be able to buy the house or what the ultimate interest rate will be on their loan.

            If a house is in default and is therefore in the foreclosure process, but the seller has equity at the purchase price, there is no impact on the buyer.  All liens will be paid from the seller’s proceeds at closing and clear title will transfer to the buyer.  The one exception to this is if the closing date falls within 20 days of a scheduled foreclosure sale.  In that case, in the State of Washington, the buyer has a legal responsibility to consider the seller’s interests above their own.  It is critical that they talk with an attorney prior to entering into such an agreement.

            If a house has been foreclosed upon, the lender (or other person who bought it at the foreclosure sale) is the owner.  There are a couple of oddities in buying a foreclosed home: 

• Typically, a foreclosed home being sold by someone other than the lender is not eligible for a conventional loan within 90 days of the foreclosure sale.
• Lender owners often have special addenda which they require to be included in any purchase and sale agreement. 
• Owners of foreclosed properties are required to provide the Washington State mandated disclosure form.
• The deed given by a lender will not usually be a Warranty Deed, but title insurance will be provided for a buyer.

For the most part there is little impact on the buyer.

Summary

Hopefully we have given you a better understanding of the terms, the process and the potential pitfalls involved in buying and selling Bellingham & Whatcom County properties impacted by current problems in the credit markets.  If you have more specific questions or need additional resources, don’t hesitate to contact us at www.JohnsonTeamRealEstate.com for help.

Thanks to Gary Tice of Fairhaven Mortgage for reviewing this information for accuracy.  Any errors, of course, are ours.  If you would like to discuss financing or refinancing options, you can reach Gary at 360-224-1492 or gary@fairhavenmortgage.com.

The big news of the morning beside the analysis of the presidential debate was the Fed. The FOMC dropped the funds rate .5% to 1.5%. This drop was a coordinated move world wide.

An important note to remember is that the FOMC does not control the mortgage interest rates directly as they are based on the mortgage securities bonds. While the FOMC does not control mortgage rates, they do influence them and time will tell how the traders/markets will react to the lower rate.

The FOMC is set to have another meeting on October 28th and 29th and from the sounds of it another rate cut is not out of the question.

Now it’s a waiting game to see how markets react, as of now mortgage rates remain relatively unchanged by the news, but as we all know now more than ever, that can change!

Who is ChaCha you ask? I didn’t hear of this text service until my best friend returned from a trip to Los Angeles. Evidently, in L.A. and throughout California, ChaCha is the revolutionary way you can get information on the go. I decided to give it a try when I myself was “on the go” to Canada and wanted to know the wait times for the three Canadian border crossings at Sumas, Lynden and the Peace Arch. I texted ChaCha at 242-242. ChaCha responded in a few minutes saying the Lynden crossing was the shortest wait. Needless to say, we were through the line of cars in less than 2o minutes.

Now, I am the first to say that ChaCha is not entirely accurate, but the benefit of the service is that you are texting “LIVE” with a real human being on the other end. In the age of automated technology and digital voice recordings, this live human touch is refreshing. So unlike calling to pay my cell-phone bill or update my contact info at my bank account. Sometimes, ChaCha has countered my somewhat asinine questions with equally silly responses.

Me: “What is mulberry root?”
ChaCha: “Mulberry root is a root dug up from a plant that bears fruit called mul…”

So what is the downside to having a somewhat comical exchange with texter on the other end? With human activity inevitably come human errors. For the purposes of this blog I asked Lylene to give me a real estate question that she both believed ChaCha could answer and to which she new the anwswer herself. After drawing a slight mental blank she said, “How bout ‘how many homes were sold during the month of August in Bellingham?”

ChaCha first responded that during the month of August, 684 single family homes were available for sale in Bellingham, WA.

This did not answer my question. I reworded and sent the text again.

ChaCha responded that for the month of August, 2359 units sold in Bellingham, down 25 percent from the same period last year.

According to Lylene this answer is blatantly inaccurate. So what can we learn from this little experiment?

If all you need to know are the latest wait times for U.S./Canadian border crossings rely on ChaCha (242-242).

If you want to know the latest, accurate, and up-to-date information on real estate statistics and the market in Whatcom County, rely on The Johnson Team.

Visit www.JohnsonTeamRealEstate.com for more information. �

Short Sales- sales of properties which generate insufficient funds to pay off the liens and closing costs - have become a hot topic in recent months.  They are different from a foreclosure in that the owner is still making the payments in most cases, but they require lender approval to close.  Our thanks to Nicole Walker of Fairhaven Mortgage for contributing the following series of questions and answers regarding short sales.  Her contact information is at the bottom if you have further questions.

Will there be any tax consequences to doing a Short Sale?

Typically, the tax consequences will be less severe vs. letting the home go to foreclosure.  If the home is sold at foreclosure auction, you will still receive a 1099-A for the amount the lender lost due to the sale.  In a short sale, most lenders (except for those that are out of business and not worried about the O.T.S.), will ALWAYS give you a 1099-C for the amount they have lost due to the short sale, if they decide to not seek a deficiency judgment (in almost EVERY case they will opt to send you a 1099-C for the amount of the loss).  We always recommend that you consult with a CPA regarding taxes.  Additionally, we recommend that you become familiar with IRS form 982 prior to deciding the pursuit of a short sale. 

Can the bank give me a 1099-C and report my credit as paid less than agreed?

Legally?  No.  Do they do it anyway?  Yes.  So, you will need to keep that 1099-C as proof that they ‘wrote off’ that loss by essentially ‘giving you the difference of the purchase price and amount owed as income’.  The bank can not legally report ‘paid less than agreed’ to the credit bureaus if they accepted partial payment of the not e and also sent you a 1099-C (income to you) for the difference of that note.  Talk to a Real Estate Attorney for clarification on the subject.  If needed, you or your attorney can contact the bank at a later date about ‘fixing’ their slight oversight in sticking it to you twice. 

Can the bank seek a ‘deficiency judgment’ for the amount they lose by accepting a Short Sale?

In most states yes, but a lot of the time they will opt to send you a 1099-C and write it off as a loss on their books.  The thing that you should know is that VERY FEW lenders will seek a deficiency judgment due to the cost to get the judgment and due to the fact that you probably can’t pay it anyway.  99.99% of the time the lender will send you a 1099-C instead of even worrying about the deficiency judgment, even when they can legally seek that option.Once they have sent you a 1099-C, they cannot seek a deficiency judgment.  They can only do one or the other, not both.

How does a foreclosure versus a Short Sale show up on a homeowners credit?

It depends on how the creditor reports it to the credit bureaus. Generally, a foreclosure will show up as a FORECLOSURE and can stay on a homeowners record for up to seven years. Anytime the homeowner applies for a new loan or has their credith run, the foreclosure will likely show up. More and more employers are running credit for job applicants. A Short Sale is listed as SETTLED DEBT, and is much less harmful to the homeowners credit than a foreclosure. It is not Paid in Full as it would be if the full balance was paid off on the mortgage, but a Short Sale is much better credit wise than a foreclosure. We recommend that you consult a credit company for more information.

What is a Deficiency Judgment?

When a creditor (lender) files a lawsuit against a debtor (borrower) through the courts in an attempt to collect an amount not covered by the value of security that was put up for a loan or installment payments. In other words, if the lender recoups less money than is owed, whether it be via Short Sale or foreclosure, then they have the right to collect whatever the difference is. However, with the right negotiator working on the borrowers behalf, the deficiency judgment rights can be waived.

Why should I do a Short Sale?  If I am going to have to move anyway, why shouldn’t I just allow the bank to foreclose so I can stay in the house rent free for longer?

The main benefit of a short sale is that many in many instances you can still stay in your home rent free just as long as if the house were to go to foreclosure and you will still be able to show your mortgages as “paid in full” vs. “foreclosure”.  The amount of loss to the bank is usually less in short sale, thus the amount of the 1099 to the homeowner in a short sale is less.  You will also want to have an expert on your side dealing with the lender.  If you allow your home to go to foreclosure, there is no one there to help you clean up the mess and pick up the pieces as you struggle with bad credit for the next 7-10 years. 

Nicole Walker

Just when we think we have the income tax laws regarding real estate figured out, the federal government has to go and change them again!  This time the changes come as part of the 2008 Housing and Economic Recovery Act (HERA), H.R. 3221, an attempt on the part of government to help individuals impacted by the current mortgage crisis without spending money to do it.  It’s called “revenue neutral”, which means that they have to collect more money from somewhere to pay for it. 

The additional collection relative to real estate comes from a change in the way profits (capital gains) from the sale of a primary residence are (or are not) taxed.   Currently, if a person sells a house for a profit (capital gain) after living in it as their primary residence for 2 of the past 5 years, there is no capital gain tax due on $250,000 of the gain for a single person or $500,000 for a couple.  They are free to do whatever they want with the money and there are no age restrictions.

Americans are a creative people, particularly when it comes to avoiding taxes, and during the recent boom, this tax provision provided an incredibly easy way to make money.  Let’s look at a simplified example:

A couple owns a house (their primary residence), a vacation home and a rental house. They sell their primary residence, take $500,000 in tax-free profit and move into their rental house.  They live there 2 years, sell it, take $500,000 in tax-free profit, buy a home where they want to retire and move into their vacation home.  They live there 2 years, sell the former vacation home, take the tax-free profit and move into their retirement home.  3 sales, no capital gain tax.

The sale of a former rental does have some tax implications regarding recapture of depreciation, but that has been minimal relative to the potential for gain.

Congress has decided that this scenario does not fit the original intent of the law, which was to eliminate capital gain taxes on the increase in value of a person’s home.  As of January 1, 2009, there will still be no capital gain tax due on a profit generated by the sale of one’s personal home where they have lived for 2 of the past 5 years, with the following exception:  If that home was converted to a personal home from a rental or vacation property, capital gain tax will be due on that percentage of the gain equivalent to the  percentage of time that the house was used other than as a primary residence since January 1, 2009. 

For most homeowners, this change will be of no concern, but many knowledgeable people have incorporated this tax provision into their financial planning .  It has always been important to talk with your financial advisor or accountant  before making a decision to sell property, and never more so than now.

If you are currently thinking about selling and curious what your Bellingham or Whatcom County home maybe worth visit our website at www.JohnsonTeamRealEstate.com

We are hearing the term “short sale” more often recently, so the question is surfacing more often as well.  Basically, a “short sale” is a property sale that will generate insufficient funds to pay off underlying liens and selling costs.  In this scenario, an owner who wants out of a property has some options.

• They can pay the difference between the sale proceeds and the amounts due at closing.
• They can arrange a “deed in lieu of forclosure” with the lender, wherein they deed any interest they may have in the property to the lien holder and walk away.
• They can stop making payments, which will trigger the default clause in the Deed of Trust, which will ultimately result in foreclosure by the lien holder.
• They can ask the lien holder to approve a sale resulting in an amount less than will pay off the lien and closing costs.  The lienholder comes up “short”, but accepts that as full payment - hence a “short sale”.

All of these descriptions apply to a basic single lienholder situation.  Sometimes the situations aren’t so basic - there can be more than one lender involved, property tax liens, IRS liens, personal judgements - and the only option may well be that of foreclosure.  Also note that in some cases lenders can hold the owner responsible for the balance of the lien that they do not recover.

But back to the “short sale”.  We are seeing more of these properties listed for sale, and if you are considering buying one, you need to be aware of how the process works. 

• If it is listed through the NWMLS, the rules require disclosure that the listed price will result in a short sale, so you can choose whether you want to play the game or not.  If you are buying a property that is not listed through the NWMLS, you need to ask the question of the owner. 
• Even if the seller signs your offer, their acceptance must be subject to the acceptance of the lender (this needs to be stated in the purchase and sale agreement), and the lender may require submission of more than one offer before a sale for less than enough to cover the lien and closing costs will be considered.
• You will probably not have a response from the lender for some time - perhaps months.  Lenders may use your offer to try and create a bidding war to get a better offer (they don’t want to lose any more than necessary). 
• You may or may not have the opportunity to withdraw your offer while waiting for a response from the lender.  Decide what you are willing to accept and make sure it is specified in the written offer you make.
• A lender may ultimately decide that they will do better in a foreclosure and refuse to accept any offer.
• Once a lender accepts an offer, they may demand closing in a very short time period.  They may demand that inspection and financing contingencies are waived at the time of their acceptance. 

Can you get a good deal buying a “short sale”?  Perhaps…but remember that the lender always has the foreclosure option available to them, and they are going to take the route where they think they will have the least loss.  Also, we are seeing multiple offers bidding up the price for some homes being sold as short sales - you aren’t the only one looking for a bargain.  Don’t assume that because a home is a “short sale” it will sell for less than a comparable home wherein the seller has some equity.  If the value is there, the market will pay it.

Bottom line:  “short sales” can be opportunities, but they can also cost you other opportunities.  Choose your home based on your needs, not just whether it is the “best deal” out there.¼/p>