By Donald R. Davidson III &
Roland P. Reynolds of The Wolf Firm
By Donald R. Davidson III & Roland P. Reynolds of The Wolf Firm
(Reprinted with permission from REOMAC Update- January 1995)
Boston Harbor-Safety Net or Gill Net for Borrowers?
The name Boston Harbor has often carried with it controversy. The venerable harbor was of
course the locus of the original tax revolt, and in the 1988 presidential campaign, George
Bush hung the failure to clean up the polluted harbor's water as an albatross around the
neck of Massachusetts Governor Michael Dukakis. Today in Southern California, the name has
been adopted by a corporation hawking relief from taxes and derogatory reporting to
property owners facing foreclosure.
Run chiefly by lawyers, Boston Harbor bills itself as an entirely different breed from the scam artists who have often preyed on borrowers in default. This program is aimed at borrowers whose property value is less than the balance owing on the loan against the property. The pitch is twofold: to save taxes and to save the borrowers credit rating.
In the event of a short payoff or foreclosure, a borrower whose loan is not a purchase money mortgage will be taxed by the IRS on the difference between the sale amount and the outstanding loan balance. The IRS labels the amount of this difference as "debt relief' and taxes it as income received. Boston Harbor takes a deed to the property and records it as a sale in the amount of the loan that is outstanding. In the event of a short sale, Boston Harbor records a loss. This loss is the same amount as the phantom "debt relief' income, thereby canceling it out.
This scenario sounds appealing. The only trouble is that the IRS is determined that
form will not prevail over substance. Whether the so-called sale will be treated as such
by the IRS is an open question. Certainly the transfer lacks some of the indicia of a true
sale. For instance, the original borrower continues to occupy the property rent free after
the transfer to Boston Harbor. Further, not every borrower may need the program to avoid
the tax. If tile debt is nonrecourse, no debt relief tax would be owing.
The second benefit that Boston Harbor heavily promotes, but does not guarantee, is relief from derogatory credit reports. Boston Harbor implies that after transfer of the property it is highly unlikely that a foreclosure will appear on the borrower's credit record. But, in fact, both Fannie Mae and Freddie Mac servicing guidelines require that the lender report the foreclosure under the borrower's name. Boston Harbor tells borrowers they will give them a letter for the credit reporting agency stating that there is a "mistake" and Boston Harbor was the owner of the property at the time of sale. But such a letter would only be added as an explanation to the credit report.
The cost of receiving questionable benefits can be substantial for the borrower. Boston Harbor charges one percent of the original loan amount, with a minimum of $ 1,000.00. Although Boston Harbor states that after a transfer "),our cares about this property are over " whether the property has to be lost at all is not even mentioned. There are more than just the two choices (short sale or foreclosure). In fact, loan modifications, forebearance agreements and deeds in lieu of foreclosure are all options open to many borrowers.
Some critics have voiced concern whether Boston Harbor is fully licensed and is giving borrowers all of the disclosures that they are entitled to receive under California law. In California, foreclosure consultants must give clients a number of disclosures, including written notice of a 3 day right to cancel the contract and notice that no money can change hands until the consultant finishes doing everything he said he would do.
In short, borrowers would be well advised to approach Boston Harbor carefully. It may not be able to deliver the supposed tax benefits nor ameliorate the borrowers credit problems. Borrowers expecting relief should first consult with tax, legal or financial advisors of their own choice before making any commitments.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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