By Shawn M. Yesner, Esq.
Yesner & Boss, PL
There can be no question that the real estate landscape in Florida has changed dramatically during the previous decade. Between 2005 and 2007, short sales were few and far between. Homeowners were more easily able to save their homes, through refinances or simply by selling the house and pocketing the profits or buying a new home.
Today, however, many homeowners are under water (meaning they owe more than their house is worth). Acronyms like HAMP, HARP, TARP, and RMFM are being thrown about by lenders, homeowners, courts, and governments alike; the term “bail-out” no longer applies to aviation; and “occupy” has entered the popular lexicon.
In response, there are various Federal and Florida laws aimed at Florida real property issues. This article discusses three of those – The Mortgage Forgiveness Debt Relief Act, the Florida Mandatory Mediation requirements, and the Florida Legislature’s attempt to speed up foreclosures in Florida.
The Mortgage Forgiveness Debt Relief Act
The Mortgage Forgiveness Debt Relief Act of 2007 (the “Act”) was enacted on December 20, 2007, and generally allows taxpayers to exclude discharge of indebtedness income if the income is related to the short sale, foreclosure or deed in lieu of their primary residence.
There are many misconceptions associated with the Act. The main one is that the Act prevents the issuance of forgiveness of debt income (through IRS Form 1099) against a primary residence. That is simply untrue; in situations where more than $600 of debt is forgiven, the lender MUST issue form 1099. Another myth is that the Act applies to all homestead residences; this is again false. There are four requirements to be able to exclude income pursuant to the Act:
First, the loan must have originated prior to January 1, 2009. Therefore, income from forgiveness of indebtedness related to loans recently originated will not qualify for exclusion under the Act.
Second, the loan must be for less than $2,000,000 ($1,000,000 if married filing separately for the tax year). Therefore, most Florida homeowners will qualify under this prong of the exclusion test.
Third, the loan must be against the taxpayer’s principal residence. There is some difference of opinion between CPAs and tax professionals as to whether principal residence is defined similarly to the capital gains exclusion (must be principal residence 2 of the previous 5 years) or whether the property is principal residence at the time of the event that creates the forgiveness of debt income.
Finally, the Act applies to forgiven debt used to buy, build or substantially improve the principal residence. The Act also applies to refinances to the extent the refinance paid off the loan used to buy the house or to the extent the refinance was used to substantially improve the principal residence. Therefore, “cash-out refinances” or refinances used to pay off credit card debt, pay off car loans, take vacations, or put kids through school, will not qualify for exclusion under the Act, even if the debt was against the taxpayer’s primary residence.
It should be noted that there are other methods to exclude forgiveness of debt income, but these must be discussed and analyzed by a CPA, tax attorney or other tax professional, and these other methods are not covered by the Act.
Of greatest importance to taxpayers is that the Act is scheduled to sunset on December 31, 2012, meaning the Act will only apply to short sales and foreclosures completed before December 31, 2012. Therefore, to the extent a homeowner is considering it, now would be the time to proceed with a short sale, as there are no guarantees that the Act will extend beyond 2012!
Florida Mandatory Mediation Program
Florida Supreme Court Chief Justice Charles Canady terminated the mandatory foreclosure mediation program on December 19th, 2011. “The program was established as a means for the court system to address the overwhelming number of mortgage foreclosure cases coming into the system. The Court has reviewed the reports on the program and determined it cannot justify continuation of the program. Accordingly, … the statewide managed mediation program is terminated,” wrote Canady.
Created in 2009 by Administrative Order 2009-065, the state of Florida updated various foreclosure procedures and forms to implement a mandatory mediation program for homeowners whose primary residences were in foreclosure. The Administrative Order was meant to address the increased volume of mortgage foreclosure cases throughout Florida.
Mediation, a form of alternative dispute resolution, is typically a cost efficient way for adverse parties to resolve their disagreements without resulting to prolonged litigation. The mandatory mediation program had its benefits: the lender was responsible for paying the fees for the mediation and, ideally, the mediation would result in a settlement or modification that would stop foreclosure. The program also had its challenges: the mediations that occurred under the statewide managed mediation program were resulting in a “no compromise” in over seventy percent of cases. This left the majority of participants in foreclosure without any resolution – the exact opposite result of the program’s intention.
With the December ruling by the Florida Supreme Court, it will once again be left up to the discretion of local state judges to determine whether mediation will be a beneficial and cost efficient way to resolve or settle a foreclosure dispute.
Speedy Foreclosures in Florida
In early March 2012, the Florida House of Representatives passed HB 213 – An act relating to mortgage foreclosures. HB 213 proposed sweeping changes to Florida’s foreclosure process in the state of Florida:
The Bill would reduce the statute of limitations for deficiency judgments (the time period in which the lender would have to sue) from five years to one year. However, the reduction in the limitations period only applied to a foreclosure sale or deed in lieu of foreclosure. There was no mention of a reduction in the limitations period following a short sale. Accordingly, it is this author’s opinion that lenders would still have 5 years following a short sale to recover any deficiency.
The Bill would have created additional allegations in the foreclosure lawsuit itself regarding the identity of the entity that owns the note; who is entitled to enforce the note; and the servicing agent. The Bill also imposed sanctions against a plaintiff for failure to comply, but the sanctions did not go so far as to invalidate the mortgage foreclosure itself.
Homeowner and Condominium Associations were included in the Bill, which would define them as “lienholders” and allow them to use the expedited procedure identified in Florida Statute, Chapter 720. The expedited procedure allows the lender or any “lienholder” to apply to the Court for an Order to Show Cause why foreclosure should not be entered; thus shifting the burden to the homeowner to prove why the foreclosure should not be entered, versus the bank to prove why foreclosure should be entered. There are some practical procedural issues with this section of the Bill. For example, what if the association were to speed up the foreclosure, but the lender failed to file those documents necessary to obtain judgment?
In the case of a non-owner-occupied house, the Bill would allow the lender to apply to the Court for an order directing the occupant to make payments to the lender directly, or be evicted from the premises. Again there was no discussion as to how this provision would impact current Florida Law allowing the homeowner or condominium association to collect rent from a non-owner-occupant in cases where the association payments fall behind.
Finally, the Bill would allow expedited foreclosure procedures against non-owner-occupied homes in Florida. It should be noted that these provisions failed to rise to the level of a “non-judicial” foreclosure; the Bill still required that the case be brought before the Circuit Court. However, it would also expedite the processing of a foreclosure dramatically reducing the time for a lender to foreclose – sometimes as long as two years or more.
While there were both some good and some bad provisions in this Bill, it only passed the Florida House of Representatives. The Senate failed to approve the Bill during this latest general session that ended on March 9, 2012. Therefore, speedy foreclosures will have to wait until the next Legislative session.
About the Author
Shawn M. Yesner is founder of the Yesner & Boss law firm. He represents clients in residential and commercial foreclosures, bankruptcies, residential and commercial closings, debt collection negotiation, and general corporate matters. Find us on the web at www.yesnerboss.com.