The Rest of the Short Sale Story

I read a story about short sales in today's local newspaper. Although it was accurate, it told only half of the story. As a real estate and tax attorney, I have consulted with about 300 homeowners regarding the legal and tax ramifications of short sales and foreclosures.

What is missing from the story is 1) why we went from zero distressed properties to 45% of the properties being in that situation, 2) why the banks (in reality servicing companies) drag out the short sale procedure, sometimes without a sale being made, and 3) how they are still defrauding the government and taxpayers with the after sale or foreclosure documents they file with IRS after the transaction. I cover the first two in my book, “Greed-American Dream Becomes the Global Nightmare.” The last one is a new twist to the puzzle.

1. The reason that the number of distressed properties has increased is solely attributable to the actions of the Federal government and the lending institutions. The problem could have been nipped in the bud had different actions taken place in 2007. The banks, which created the problem with their weapons of mass destruction (easy credit, subprime loans, and mortgage-backed securities), handled the problem like they had for 100 years: foreclose and sell the property quickly at below market value, just to get it out of their portfolio. That worked fine in the past, when there were down payments and verification of income required on home loans. However, there were millions of loans that had been made in which there was no equity.

If someone then needed to sell their home in the same neighborhood, they were facing a fair market value of less than what they owed. At that time, getting a short sale through was next to impossible because the banks were not staffed with anyone to handle them, and they failed to look at the problem logically based upon the lack of equity in property, and that the manner in which they addressed the problem would simply make it worse.

2. In the vast majority of short sale transactions, the banks are not the lenders. The scheme that they put together was to make loans, package them into trusts, turn them into securities which they would get rated as AAA by Standard & Poor’s or Moody’s, then sell them to unsuspecting investors throughout the world. They made money creating the loans, selling the loans, and after the sale had maintained the right to service the loans, which provided them with ongoing income.
When a mortgage goes into default, the fee charged to the investor by the servicer is higher than when not in default. The longer the property is in default, the more money the servicing bank makes. If there is a modification of the loan, the banks do not get paid in a lump sum, but must wait for their payment, just like the investor. When there is a short sale or a foreclosure, the servicing bank gets paid immediately from the funds at the sale of the property, with the balance going to the investor. They have built in their own profit structure.

3. The latest fraud is that they are issuing fraudulent 1099’s to the previous owner, in such a manner that benefits the lender or the servicing bank at the expense of the taxpayers or the homeowners. I am in the process of preparing a lawsuit against Chase Mortgage based upon a fraudulent 1099-A. Chase foreclosed on a property and reported to San Luis Obispo County that the fair market value was $143,000.00. This reduces the property taxes that would be required to be paid to the County. When they issued the 1099-A, it showed a fair market value as $345,000.00! They then sold the property for $120,000.00. By doing this, they created a fraudulent $225,000.00 capital loss to offset other capital gains that they might have had, all at the expense of the taxpayers and the property owner, who was actually entitled to that capital loss, because it was investment property.

Although demand has been made to correct the 1099-A, and it has been reported by me to both IRS and the County Assessor’s office, nothing has been done.

I think it is important that people start demanding an investigation these issues by our elected representatives, Democrats and Republicans, why they are allowing our country and its people continue to suffer for the benefit of the stock market, which in no way truly reflects the health of the nation.

The Latest Bankster Tricks

I thought the banks had gone as far as possible to take money from the taxpayers and the government through their TARP funds and the manner in which they paid it back, enabling them to pay bonuses to their executives without government interference. They did not make the money by doing what banks are supposed to do, which is lend money. Instead, they invested it in the stock market, driving it up, and then selling and reaping the profits.

Of course, that results in capital gains that is taxable income with no offsetting deductions other than capital losses. God forbid the banksters should pay tax to the government (and the taxpayers) who bailed them out. They had to come up with a way to create more capital losses.

Of course, for these brilliant people, this was an easy task. Here is what they did, and I have the proof, which I am forwarding to the Internal Revenue Service this week. This was a JP Morgan Chase Bank transaction.

1. When they foreclose on a property, they report the "transfer value" to the county recorder. I am not sure how this affects the property taxes in other states, but in California the property taxes are assessed based upon the transfer value, as are the transfer taxes. The property for which I have the proof was reported to the county as having a transfer value of $143,000.

2. Chase then issued to the previous owner a 1099-A, as required by Federal law, to report the amount of the obligation and the fair market value of the property. In this case the outstanding principle was $283,000.00. In spite of the fact that they had shown a transfer value of $143,000 to the county, Chase reported that the Fair Market Value of the property was $345,000, more than $200,000 higher!

3. Chase then put the property on the market for $147,000, even though they had already turned down a short sale offer of $150,000 cash. They ultimately sold the property for $130,000.

What this means is that they now showed a capital loss of the difference between what they reported as the Fair Market Value ($345,000) and the final selling price ($130,000). Using those numbers, their capital loss was $215,000 which they could now offset against the capital gains from their stock dealings, saving them $32,250 in Federal taxes, and who knows how much in state taxes.

Doesn't seem like all that much for a big corporation such as Chase, but multiply that by 100,000 foreclosures and you come up with something like $3 billion dollars in fraudulent tax evasion.

In the mean time, our government leaders ignore these facts and have allowed the big banks and the rest of the financial markets to run our country because they have all of the wealth. They continue to drive down the prices of homes through the foreclosure process, while the government sits on the side lines making meaningless gestures regarding helping homeowners, while allowing the banksters free reign in destroying the fabric of America.

For more, read my book ... The American Dream Becomes the Global Nightmare

Jerry Brown Turns Back on California Home Owners

Jerry Brown has, once again, used his position in government to make himself look like a champion of the people, and once he accomplished that goal, he turned his back on them.

In June, 2008, in his position as Attorney General of California, Jerry Brown filed suit against Countrywide Home Loans and its officers alleging various acts of fraud, predatory lending and deceptive lending practices. The suit alleged (and I know it to be true) that Countrywide would pay incentives to mortgage brokers when they put borrowers into risky adjustable rate mortgages with pre-payment penalties.

Eventually, Countrywide and Bank of America (BofA acquired Countrywide) entered into a Stipulated Judgment whereby Bank of America and Countrywide would voluntarily modify mortgages on specific types of loans without all of the normal mounds of documentation that the lenders required for loan modifications.

The problem with the Judgment was that it did explicitly stated that the judgment did not provide a private right of action by the homeowner if Countrywide and Bank of America did not abide by the judgment. In essence, the only right of enforcement was left to Jerry Brown and the Attorney General's office.

I tried helping many of the people to save their homes through modifications, but Bank of America never followed the terms of the Stipulated Judgment. They demanded tons of documentation, would never provide an answer, and failed to modify the very loans that were the subject of the judgment. When I mentioned the terms of the Judgment to employees of of Bank of America, they had no idea that it even existed. They had the script that they worked from, and that was the end of it. They continued to foreclose on homes, and then resold them at below market value prices, continuing to drive prices down.

Jerry Brown never took any further action to enforce the terms of the Judgment.

Jerry Brown got the publicity he needed to start his new run for Governor of California, and now he needed to appease those who could provide campaign contributions ... the banks who had fresh TARP money.

Jerry Brown states that he is a "seasoned servant of the people of California." The truth is that he is a professional politician who loves nothing better than to spend the taxpayer's money on his pet projects and supporters. California does not need another 4 years of Jerry Brown.

Jerry Brown Rides Away Again

Once again, the illustrious Jerry Brown has grandstanded on behalf of the little people in order to get some headlines, and then turns his back on them while running for governor.

More than a year ago, as attorney general for the state of California, Mr. Brown filed a lawsuit against Countrywide Home Loans and its subsidiaries for its unlawful predatory lending practices, which was shown in great specificity in the complaint that was filed. Countrywide and Bank of America agreed to settle the lawsuit by agreeing to spend $8 billion dollars to modify those predatory loans.

Once that agreement was put into place, Mr. Brown pounded his chest and told everyone who was listening that he brought Countrywide to its knees, and that thousands of people would have their homes saved and the crash in real estate values would end. Countrywide/Bank of America announced their home retention program through which they would address all of these loans.
Fast forward one year, and we discover that foreclosures still take place, the value of property had continued to plummet, and realistic mortgage modifications are few and far between.

I have worked with many victims of these predatory loans, and my experience has been that they either say “You don’t qualify,” or they come up with a “modification” that is meaningless and unworkable. That allows the lenders to say, “Most of the modifications that are made are defaulted on again.”

Furthermore, Countrywide is a small percentage of the problem. Why didn’t Brown sue the others, such as World Savings (now, Wachovia and Wells Fargo) and Washington Mutual (now Chase)? There are dozens of others that continue to use government bailouts, while allowing the victims of these predatory loans to wallow in despair, destitution and continued unemployment.

Oh, I forgot. He needs to concentrate on another run for governor.