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Title & Transfer

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Posted On: 09/09/2009

Q: My sister and her husband are unemployed and face the possible foreclosure of their home. I want to help by assuming their mortgage but do not want to buy their house. Their bank won’t allow a refinance due to their unemployed status or permit a short sale by paying off part of the principal. The lender is willing to shorten the loan period but not reduce the monthly payment.

Is there a way that they can transfer their names to me on the title so we can avoid paying unnecessary costs associated with selling the house to us? Is there any impact on the tax issues and from the bank lender if we do this option?

A: In the usual case a transfer of title sets off the need for a closing and a variety of transfer taxes and other costs. However, there may be an exception that can lower transfer taxes in some jurisdictions when the change in title is the by-product of “good consideration” -- a transfer made for love and affection. A local real estate attorney can provide specifics.

Would it make any sense to just pay the mortgage until your sister and her husband again find work? There would be no title transfer or assumption needed. The government says you can give up to $13,000 to another person as a tax-free gift in 2009, so in this case you could provide as much as $26,000 to them.

While the current loan may not be assumable, you could buy the property with financing from another lender and pay off the current loan. Your sister and her husband could then rent from you.

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Guidelines under the government’s Home Affordable Refinance Program have been changed so that even if the existing mortgage debt equals 125 percent of the property’s value – if the debt is $250,000 and the value of the home is $200,000 it may be possible to get help.

The lender’s offer to shorten the loan term would likely increase monthly payments. Given that the owners are unemployed, the last thing they need are steeper monthly costs.

The lender does not want to take a loss with a short sale, a situation where a home is sold for less than the outstanding debt with the lender’s permission. If roles were reversed would you want such a deal?

Your sister and her husband could allow the property to be foreclosed. The lender would then have a huge loss and the owners would have woeful credit. However, the threat of foreclosure might cause the lender to re-think modification options. For instance, why not a longer term or a lower rate? Why not waive late fees and prepayment penalties? Such options are more attractive than a foreclosure.

If the property is foreclosed then another idea arises. You could make a bid on the property and perhaps buy it at discount. This would get the current lender out of the picture and create a new and lower cost basis.

The combination of lost jobs, toxic mortgages and devalued homes now makes foreclosure an actual bargaining chip for distressed borrowers, a way to get some relief from lenders.

The problem with this scenario is that mortgage investors who likely own the loan are not responsible for either rising unemployment levels nor declining home values. If a contract really is a contract then loan owners should be fully repaid.

There’s no easy solution to the current mortgage meltdown, but to some extent the market has begun a process of self-correction. Option-ARMs are finished, interest-only mortgages are rare, deals with no money down are declining and the use of stated-income loan applications has disappeared except for borrowers with huge down payments. Some recent sale and price data are at least stable – sometimes even up.

These shifts are good but they don’t help people already in trouble. A July report from the General Accounting Office said 5.2 million subprime and ALT-A loans from 2000 through 2006 remained outstanding and that “hundreds of thousands of additional nonprime borrowers are at risk of losing their homes in the near future.”

Unfortunately, a backlog of toxic loans plus rising unemployment levels mean that high foreclosure levels are likely to continue for some time.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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