Effective December 1, 2014,
the Courts of the State of New York will oversee negotiations between lenders
and borrowers to achieve a short sale or deed-in-lieu within foreclosure
settlement conferences. The Courts are empowered to sanction parties who
negotiate in bad faith.
Previously, borrowers were only allowed to attend the
conferences to discuss workout options, such as loan modifications and payment
plans, which would allow borrowers to keep their homes. If borrowers were
denied loan modifications, their cases would be released from the settlement
conference part, and they would be forced to do short sales or deeds-in-lieu on
their own without court intervention or oversight. Oftentimes, these exit
strategies took a very long time because many borrowers with second mortgages
had difficulties settling their second mortgages or were unable to keep up with
the lender’s numerous and complicated document requests. Many borrowers simply
gave up and allowed their properties to go to foreclosure rather than spend
thousands of dollars on legal fees for help with a short sale that was never
going to be approved.
Now, with court oversight, it is anticipated that lenders
will now be making quicker decisions on short sale and deed-in-lieu
applications within the State of New York, and there should be fewer
foreclosures overall. The court referees will set deadlines for the submission
and review of short sale and deed-in-lieu applications and will ensure that the
borrower is complying with the lender’s document requests and that the lender
is properly reviewing the applications.
Despite this new rule, it is likely that short sales will
continue to decline because the Mortgage
Forgiveness Debt Relief Act of 2007 expired at the end of 2013. Under this Act,
borrowers were not required to pay income tax on cancelled mortgage debt as a
result of loan modifications, short sales, or deeds-in-lieu. Now that it has expired,
borrowers who choose to do short sales may be hit with large tax bills after
they sell their properties for less than what is owed on the mortgage. Therefore,
even though the short sale and deed-in-lieu application process will be quicker
with court oversight, borrowers may still choose to not move forward with these
exit strategies because they cannot afford the taxes.
