I have a question regarding an approval letter..
Received one from Fifth Third Bank (Freddie Mac investor), with no explicit verbiage waiving the deficiency balance. When asked if we could receive a new approval with this verbiage added, I was told that a 1099 will be issued and that is all.
If a 1099 is going to be issued, does that mean they will not be coming after the seller at a later time for the short fall amount? If they are still liable for that amount, then they can't be issued a 1099, can they?
This might be a very dumb question.. just trying to figure out how to proceed if Fifth Third refuses to issue an amended approval with specific verbiage stating they waive their right to pursue the remaining balance.
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DEFICIENCY FROM SHORT PAYOFFS AND DEEDS-IN-LIEU OF FORECLOSURE
We have updated the Guide to reinforce the requirement that the Servicer, for itself and on behalf of
Freddie Mac, must waive all rights to pursue payment of the remaining balance owed by the Borrower
under a Freddie Mac-owned Mortgage for all approved short payoffs and deed-in-lieu of foreclosure
transactions that have closed in accordance with the Guide and applicable law.
Sections B65.41, Closing, Reporting and Remittance Requirements, and B65.48, Closing, Reporting and
Remittance Requirements, have been updated to reflect this additional information.
http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1205.pdf
Does the Servicer need to include this in the approval letter, or does it apply with or without the verbiage included?
I'm not an attorney or a tax professional but the seller can only receive one or the other. The short sale Lender either keeps their rights to pursue the deficiency balance, or they waive their rights and a 1099 is issued on the forgiven debt.
That's not correct. There is nothing that prohibits them from doing both.
I’ve heard that in a foreclosure my lender can 1099 me for “forgiveness of debt.” Can they 1099 me and get a deficiency judgment against me too?
Usually, if a lender 1099s you, the lender will not seek a deficiency judgment. This is just how lenders operate, not the law. By law, the lender must issue a 1099 after a foreclosure or short sale. The issuance of the 1099 does not mean that the debt is erased by the lender. It just means that the forgiven debt is taxable to you.
If the lender 1099s you and later seeks a deficiency judgment, the lender would have to issue a revised 1099, that’s all. So the issuance of a 1099 does not bar a deficiency judgment. Technically, the lender can 1099 you AND file for a deficiency judgment. You have to keep in mind that the lender could still get a deficiency judgment after a 1099 is issued. The only sure elimination of both the 1099 and deficiency judgment is to file bankruptcy before the 1099 is issued.
There are several cases that deal with this topic: In re Zaika, a PA bankruptcy court case and AmTrust v. Fossett in AZ are a couple that summarize the law.
If the foreclosed property was your primary residence,then you have no income from the 1099 by law under the Mortgage Debt Forgiveness Act. If the property was not your primary residence, then you will have phantom income from the 1099 to deal with.
http://illinoislawnews.net/?p=360
Great Information! Thanks Kevin! In over 1000+ short sale closings Between myself and 2 others I work with frequently we've all never heard of a situation where both were issued and have always been told by CPA's that it's one or the other. Have a good weekend!