In a recent court case, Helvetica Servicing Inc. vs Pasquan the Court of Appeals made a ruling that will affect a few short sale or foreclosure borrowers and may lead lenders to choose judicial foreclosure instead of the normal non-judicial foreclosure.  This will likely be reserved for larger cases as the judicial foreclosure process involves a longer time and greater costs to the lending institution.  The court held that 1) the lender could separate out the portion of a refinance in to two parts-the purchase money part which is protected under the anti-deficiency statute and the excess amount of a refinance that was not used to purchase, build or improve the residential property.  2) that construction loans fall within the purview of purchase money if a qualifying residence was built on the qualifying property. and 3) to be purchase money in a refinance,it does not have to be the same deed or lender to qualify as purchase money.

 

These are all good things for the consumer except that in this case the bank obtained a deficiency judgement of $1.9 million because of the size of the overall loan of $3.4 million.  Again, I believe the banks will reserve this judicial foreclosure for very large loans with potentially huge deficiencies but if a borrower has refinanced their property and taken additional cash out of the home, this IS AN OPTION for the lending instituion.  All the more reason to attempt a short sale rather than just simply allowing it to go to foreclosure.

I received an email this week regarding the treatment of the 1099 income from a short sale or foreclosure.  The major emphasis of the article was that the Mortgage Debt Forgiveness Act only applies to people who have taken a cash out refinance because of Arizona's status as a non-recourse note state.  In the article, they advocate using the amount owed at the time of the short sale or foreclosure as the sales price for tax purposes rather than the actual sales price. Under this treatment, most people will then show a capital loss with regard to the short sale or foreclsoure which is actually reality since most people never actually received the funds being forgiven. I am not an accountant, but this approach would seem logical as a result of a foreclosure or short sale since the borrower probably never made a gain on the property.