Real Estate Short Sales a “Minefield”

June 27,2010:

Homeowners in Washoe County, Nevada, are finding out just how different the Nevada real estate laws dealing with foreclosure are from most other states.  When facing foreclosure, one of the methods being used by lenders to speed the foreclosure sale process is to use a method called the “short Sale”.  By taking this route to settle their mortgage debt, homeowners expect to stave off the negative effect on their personal credit that would occur if they went through a lengthy foreclosure and trustee sale of their property.  In 2009, almost a fifth of all private residences in the Reno-Sparks area received a notice of default, were in foreclosure or going through a trustee sale.  But some have learned much to their surprise that their liability under the mortgage was not completely eliminated even though their property was sold and the trust deed note canceled.  An added risk is being discovered in those cases where the holder of the Mortgage follows up the short sale with a “notice of deficiency” to the homeowner advising them that they are liable for the difference between the proceeds received from the foreclosure sale and the amount due on the mortgage.  In California as well as some other states, real estate law provides that a lender accepts the home as full collateral for the mortgage note and proceeds from its subsequent sale are all that they may receive in settlement of a foreclosure sale.  But this is not the law in Nevada.  As a result, the price the lenders are willing to receive for a short sale in some cases may depend not on the market for a home in foreclosure but more on how healthy are the lists of other assets on the homeowner’s balance sheet outside their ownership of the home.  Thinking they have settled their obligations with regard to the settlement of the mortgage debt on the foreclosed residence, homeowners are shocked to receive a notice of deficiency, which in some cases is hundreds of thousands of dollars.  The lender does not want to force the homeowner into bankruptcy but if the homeowner has other tangible and marketable assets sufficient to pay the deficiency, they are likely to go this way.  This unexpected liability has caused some homeowners to declare bankruptcy in order to protect some interests in their other personal assets. Furthermore, if the homeowner does not pay the deficiency, they will have to declare that amount as taxable income. Last year the Nevada legislature passed a law designed to prevent homeowners from having to pay the potential liability of this deficiency obligation but it took effect prospectively thereby exempting only those purchasing a home after October 1^st 2009. But even this exemption is for money purchase mortgages only, not those from refinancing or from a second trust deed.  For properties bought before October 1, 2009 and sold in foreclosure, the lender may at any time within 6 years of the sale seek to recover the amount of deficiency realized in the process.  In the Reno-Sparks area, 11,000 homes, or almost 17% of the total, received either a notice of default, foreclosure, or trustee sale last year.  In the Las Vegas area, 94,862 homes received foreclosure notices last year.

These numbers are staggering and even though huge, Nevada places 14^th among 200 metropolitan areas surveyed last year.  What is the effect going to be upon the Nevada economy as we go forward?  There has been little if any commentary about the effect of these sales upon future real estate tax revenue, but if you do the math, Nevada almost certainly will suffer significant decline in real estate tax revenue, current or prospective in the coming years.  This along with consumers reducing their spending levels should put terrific pressure on our legislature to reconsider the state’s personal income tax policy.  I wonder if anyone has taken these foreclosure numbers and done an estimate of just how much tax revenue will be lost among the 50 states as a result of reduced property appraisals.  Nevada has an almost $1 Billion shortfall in its budget now and prospectively it could get a lot worse.  It seems highly probable that the Federal government will be asked to bail out many of the states, counties or municipalities experiencing sharp declines in tax revenue and where spending has risen beyond their ability to achieve fiscal balance with their budgets.  What impact will this have on our Federal Deficit?  Have our most “capable leaders” a plan to deal with this probability?  If so I certainly hope that it is better than the one they have demonstrated for the BP oil disaster.

 One Man’s Opinion—Bud Brewer