Short Sale & COPES (Medicaid)

[ItsJustMe]

Hi all!
I have a really interesting situation that I hope some of you can maybe give some insight on-

I have a seller (married couple) who have gone through bankruptcy & it has been discharged. The home was not part of the bankruptcy, but is now in forclosure. The sellers have moved out & resigned themselves to the fact they will let the house go back to the bank.
They are willing to sell to me, the bank is willing to do a short sale. BUT- the sellers don't want to sell unless they can be assured that when the bank takes less than owed & issues a 1099 to them it won't affect his COPES (Community Options Program Entry System) & her disability because of showing as a "gain" and a "resource"  even though they did not actually receive any funds from the sale....

This is WA State law: (From what I can find out, according to COPES): "There may be a penalty if you transfer a home for less than fair market value within 36 months of applying for Medicaid. Such transfers may result in a period of ineligibility for Medicaid."

He *must* be able to remain on COPES as he needs coverage for his medication & other care. I spoke to a DSHS rep & they said that any amount showing on the 1099 would be considered "profit" & a "resource"- and if he or his spouse gives away a resource, "The gift may result in a period of ineligibility."

The Rep told me that most owners walk away from their homes just so they don't lose their eligibility as most are sick/disabled & can not go without the medical coverage & monthly financial assistance.

HELP! I've got a seller AND a bank willing to deal with me if I can only get this COPES thing under control so that my sellers don't lose their aid- Also we can't do anything that would affect HER disability-My understanding is that Social Security has similar guidelines about "gains" and "giving away a resource"- Any input would be especially welcomed, especially from those who are familiar with WA State COPES/Medicaid!
THANX!

[SA]

wow, what situation!  i'm new to all of this, but, i think what my teachers would recommend is to inform the bank that they need to state in writing that they will not file a 1099.   if you needed to, you could show the bank pretty clearly why this is a deal-breaker for your homeowners.
they absolutely cannot loose their healthcare benefits.
best of luck, and congrats to you for being out there and making deals happen.

[SA]

forgot to say, my understanding is that it is not unusual at all to ask the bank to either waive a deficiency judgement, or not file a 1099.

[ItsJustMe]

my understanding is that it is not unusual at all to ask the bank to either waive a deficiency judgement, or not file a 1099.

Hi SA-

Thanks for your input!

Yes, the bank must do one or the other- we do not want a deficiency judgement against them either, as they have no way of paying it, so a 1099 must be issued.

Sad part in this is, they have had perfect credit (37 yrs worth) until now, that is why we are trying so hard to stop the foreclosure, so it doesn't show up on their credit- the bankruptcy is bad enough. A deficiency judgement would also show on their credit, not to mention that if they were able to get ahead in future years, they would have this hanging over their heads.

Also, keep in mind when dealing at the State & Federal level that the benefit recipient(s) have a financial worker.
When you apply and get benefits (state or Fed) you sign a release of information form that (to my knowledge) is good forever. So your financial worker knows EVERYTHING about your financial situation, now AND in the future. Also, both agencys REQUIRE that you report any changes in your situation within 10 days. If you do not, there are penalties associated with not doing so, the worst of which could be being denied benefits forever.

So this is a sticky situation, we have to report a sale to the agencys & even if we did not, they would find out as they know that the home is in foreclosure & if sold the bank would have no choice but to furnish info. to the state & feds if asked (which I'm sure that they would be) as the financial workers keep pretty close tabs on what is going on in a situation like this.

[SA]

brace yourself, a lot of typing to follow!

what a predicament!  i can't remember hearing of such a tight 'box', before.
basically, if i understand you correctly, medicaid eligibility REQUIRES that the couple go into foreclosure!  what a deal!

Let me try to break this down into individual points:

1099 - is a form filed to the irs by the bank reporting the part of the debt the bank had to forgive as ‘income’ to the homeowners.

-you can’t even just ask the bank not to file a 1099, because the homeowners are required by law (this is state law?) to report any change in their financial situation to medicaid within 10 days, so, basically, they have to report any short sale.

-basically, you’re telling us you can’t do a short sale.

Or, rather, the HOMEOWNERS can’t do a short sale.

Given that parameter, can ‘someone else’ do a short sale?:
1) Can you work out an arrangement where the homeowners deed the house to a third party, or a trust or llc, and, in effect pass on the need for a short sale to the ‘new owner’, and have the bank do the short sale with the new owner?
Or is this just the same as assuming the loan?  If so, can you get the bank to let a third party assume the loan and take it from there?

2) Can you ‘buy the note’ from the bank?  It’s none of medicaid’s business how much the bank discounts its own note.  
How I envision this working is, you buy the note from the bank at whatever discount they were going to short sell it for.  As far as I know, ‘buying the note’ does not result in any kind of ‘deficiency’ or ‘1099'.  You would proceed as with any short sale, where you get a bank to discount the debt, and find a buyer for the property at a discounted price. In this scenario, at the closing, the buyer would ‘buy’ the ‘discounted note’, and the homeowners would deed the buyer the house.
Oh boy, this is convoluted, but, see if you can follow me:
technically, at this point, the homeowners would still have a ‘deficiency’, because the note-buyer bought (for the sake of argument) let’s, say, a $100,000 note for a discount from the bank, let’s say, for $60,000.  So, the homeowners still owe the note-holder the full$100,000, and any ‘forgiving’ or short sale of the $40k discount would be ‘income’ in the eyes of medicaid.

You said in one of your posts that medicaid told you that most people accept foreclosure, with the bad credit and ‘deficiency’ that go along with it, in order to keep their medicaid.

SO, you have the note-buyer agree ahead of time in writing that s/he will
- foreclose on the property, thus, no 1099, AND
- NOT EVER FILE IT WITH CREDIT AGENCIES, thus save this poor couple’s 37 year credit history.
In this scenario, the homeowners can honestly comply with medicaid and report ‘yep, we had a  foreclosure’.
Alternatively,
-the note-buyer could go the deficiency route, but, again, have the note-buyer agree ahead of time in writing that s/he will NOT pursue the deficiency/sic bill-collectors on the homeowners.  Again, medicaid has no problem with deficiency.  As long as the homeowners ruin their credit/peace of mind, medicaid is happy.  Amazing.

Well!  This has been a very interesting puzzle.  I’d like to know if I’m totally off base logic-wise.  I’d also be interested to know if anything like this would actually work.  There are bound to be a lot more cases like the one you’ve described.

[SA]

Re: the homeowner's previous bankruptcy

does medicaid count the debts wiped out in bankruptcy as 'income' in their convoluted way of thinking?

if not, did BOTH homeowners file bankruptcy, or just one?
if it's just one, can the other homeowner take full title to the property and then file bankruptcy, and handle the deficiency/1099 issue that way?

[SA]

another long thought:

...hmmm, this is making me realize that ‘note-buying’ is really, functionally, the same as ‘short-selling’.  In both cases, the bank is accepting more than it is owed, on paper.  In the case of ‘short sales’, it is NOT the bank’s idea.  In the case of ‘note buying’, it IS the bank’s idea.  In fact, many(most?) banks INTEND to sell their notes on the secondary market, it’s a part of their business plan.  How strange, when you look at it from this perspective!
When the homeowner’s in trouble, it’s they’re ‘at fault’ and it’s called a short sale.  When it’s the banks idea, it’s a ‘good business practice’, and called ‘selling the note.’ Of course, I realize that with short sales, the bank is also owed some back payments, and they may be called on to discount the note SUBSTANTIALLY more than (50%), than with regular note-selling.  But still, it seems like the bank could get so much more of its money if people could just deal with them them rationally the minute they get into trouble.  One of those funny paradoxes.

[ItsJustMe]

Hi SA!

Okay, your thoughts are GOOD ones, here are my responses:

basically, if i understand you correctly, medicaid eligibility REQUIRES that the couple go into foreclosure!

Yes and no. Medicaid (& Social Security SSI (disability))really doesn't give a rip what they do, so long as they are prepared to accept the consequences IF medicaid/SSI deems this as a resource that they gave away (more on this resource thing later-this is actually the crux of the matter) (ie: no benefits for 6mos or 8 mos, or 1yr or... etc, etc, -whatever they decide & however they decide it).

Most homeowners walk away (I can see why) because the red tape is so horrendous, & basically it's a whole lot easier just to let it go than to fight the system.

1099 - is a form filed to the irs by the bank reporting the part of the debt the bank had to forgive as ‘income’ to the homeowners.

Yes, correct.

-you can’t even just ask the bank not to file a 1099, because the homeowners are required by law (this is state law?) to report any change in their financial situation to medicaid within 10 days, so, basically, they have to report any short sale.

Yes. This is state AND Federal law having to do with anyone who is on Medicaid and/or disability.
BOTH agencies use financial workers to handle benefits cases, the financial worker may end up being the same one for both agencies, maybe 2 different Fin. workers, it strictly depends.

A lot of times, SSI is tied tightly to Medicaid if the benefit recipient gets Medicare- Medicare does not pay 100% so Medicaid acts as a "suplemental insurance" to pay the difference for low income recipients, since they can't afford a suplemental insurance policy themselves. This is confusing, & actually does not pertain in her situation so is of no consequence, but this is why one Financial worker could end up handling a state AND Federal benefits recipients case together. Make sense?

-basically, you’re telling us you can’t do a short sale.

Or, rather, the HOMEOWNERS can’t do a short sale.

No. We can do whatever they want to do if they are willing to accept the consequences.

Given that parameter, can ‘someone else’ do a short sale?:
Can you work out an arrangement where the homeowners deed the house to a third party, or a trust or llc, and, in effect pass on the need for a short sale to the ‘new owner’, and have the bank do the short sale with the new owner?
Or is this just the same as assuming the loan?  If so, can you get the bank to let a third party assume the loan and take it from there?

No. The effect would be the same. This is where it gets sticky and here's where the giving away a resource thing comes into play.
Both state and Federal agencies impose consequences when you give away a resource (such as a home in this case). If they were to deed the house to anyone without compensation both agencies would look at it this way.
Compensation MUST be at FMV for the agencies to deem that they did not "give away a resource" & impose penalties.

Now, FMV may be under what they owe on it (it is because it needs work) HOWEVER, we are right back to the 1099 scenario because the sold for less than they owed so they have a "gain".

Can you ‘buy the note’ from the bank?

This may be a possibility, but there are 2 notes- a 1st & a 2nd. I have not approached the bank about this, but I would have to buy the 2nd, make advances to the 1st & foreclose in 2nd postion. I honestly don't know if the bank would sell out both positions at a discount at the same time. I will think more on this one.

You said in one of your posts that medicaid told you that most people accept foreclosure, with the bad credit and ‘deficiency’ that go along with it, in order to keep their medicaid.

Yep.

As long as the homeowners ruin their credit/peace of mind, medicaid is happy.  Amazing.

Yep.

I’d like to know if I’m totally off base logic-wise.  I’d also be interested to know if anything like this would actually work.  There are bound to be a lot more cases like the one you’ve described.

No, I don't think so, you have some good & interesting ideas.
I don't know- but I'm going to find out!  
There ARE- it happens ALL the time, this is what is so sad!!


I will get back to your other posts after a while- I have an appointment to meet with my homeowners to discuss this further.
Thanks so much for your posts- maybe we ALL will learn something from this mess!

[ItsJustMe]

Sorry for the delay, had some stuff to take care of over the weekend.

Here are the rest of my responses:

you have the note-buyer agree ahead of time in writing that s/he will
- foreclose on the property, thus, no 1099, AND
- NOT EVER FILE IT WITH CREDIT AGENCIES

It is my understanding a foreclosure will show on their credit regardless of any filing/non-filing with any credit agencies. I don't know if this is correct, but this is what I have been told.

does medicaid count the debts wiped out in bankruptcy as 'income' in their convoluted way of thinking?

No, I don't think so, as I'm sure my homeowners would have mentioned that they were all ready in a pickle due to this if Medicaid did.

if not, did BOTH homeowners file bankruptcy, or just one?
if it's just one, can the other homeowner take full title to the property and then file bankruptcy, and handle the deficiency/1099 issue that way?

Both of them declared bankruptcy.

this is making me realize that ‘note-buying’ is really, functionally, the same as ‘short-selling’

Somewhat. With a Short Sale, you "generally" get a better deal- it all depends on the BPO.
With note discounts, I believe there are guidelines that financial institutions have to follow, so the discount is probably not as much as you'd get with a SS.
Again, a SS is mostly dependant upon the BPO as well as how good the financial situation of the bank is at the time. If it is poor & they have lots of defaults on their books, they may be willing to cut a better deal. If it is good, and they show they are making $, they may not be willing to deal as much & the "deal" might not be so good.

it seems like the bank could get so much more of its money if people could just deal with them them rationally the minute they get into trouble.

WHEN has a financial institution or government agency EVER dealt rationally????  ???

[SA]

Yes and no. Medicaid (& Social Security SSI (disability))really doesn't give a rip what they do, so long as they are prepared to accept the consequences

Yes, i understand.  what i meant was, functionally, from the point of view of trying to solve the problem, it looks like S.S. won't work because medicaid would view it as income/whatever and the consequence (lose benefits) is one the homeowners don't want.

[SA]

Btw, I will be getting back to all of your answers as time permits today (and maybe tomorrow?).  In the meantime, perhaps it would help if you tell me what your timeframe is/when is the foreclosure?

and, how bad is the situation?  How wide is the gap between the mortgage and the fair market value of the house?
Are they actually 'upside down' in terms of value?  Or, did they just run out of time to sell their house?

The most practical 'solution' is a very non-fancy, non-technical one.

Let the house go into foreclosure.

You've said they don't want to ruin their 37 year perfect credit history, but, as you've also said, they already have a bankruptcy.

They're not going to be able to get a mortgage for a while anyway, at least not a traditional, conforming one, so why view the foreclosure as a 'bad' thing? I know, I know!  But, it's 'positive' in that they are securing what they want most, their medicaid benefits.

i realize that this would be hard on you, after putting in all of this work (you got the bank to agree to a short sale, wahoo!), and i don't mean to make light of this aspect.  Do you have 'angle' on the house going into foreclosure?  could you find a prospective buyer and match him/her up with the bank for an 'assignment fee'?

could you bid on it yourself?

that way, your time wouldn't have been wasted.

more to come,

[SA]

Most homeowners walk away (I can see why) because the red tape is so horrendous, & basically it's a whole lot easier just to let it go than to fight the system.

okay, got it.  in that case, why isn't 'walking away' considered 'giving away a resource'.?  in the typical foreclosure situation you ARE giving away a resource.  you are walking away from equity.  i know, i know, the gov't doesn't have to make sense, its the gov't.

There ARE- it happens ALL the time, this is what is so sad!!

it IS sad.  very disturbing.

[SA]

...Compensation MUST be at FMV for the agencies to deem that they did not "give away a resource" & impose penalties...
...Now, FMV may be under what they owe on it (it is because it needs work) HOWEVER, we are right back to the 1099 scenario because the sold for less than they owed so they have a "gain".

highly illogical.  Mr. Spock (star trek) would never approve!
okay, i know this is the gov't, so, i'm assuming/re-iterating from your previous posts that you know, without a shadow of a doubt, that medicaid would view 'reduction of debt' as a 'gain'?

even though this reduction would make little or no difference in their cash flow? (i'm assuming once they leave the house they will rent an apt?)

and, if it DID slightly impact their cash flow, i.e., if their apt rent would be less than their mortgage payment why wouldn't this increase in cashflow trigger a medicaid problem, even if they did sell or 'walk away' from the house and rent a less expensive apt.?

this kind of reasoning reminds me of what robert kiyosaki disparages in his books.  the false reasoning of accountants who value 'assets on paper' over actual, real life, cash flow.

i know, i know, the gov't doesn't have to make sense.

this is where the word 'byzantine' comes from.

[SA]

No. We can do whatever they want to do if they are willing to accept the consequences.

i understand, got it.  what i meant was more along the lines of "there is no acceptable way for the homeowners to do a short sale, given that they want to keep their medicaid benefits."  

note:  i could have also written "...given that they don't want to die (from lack of medication)".   sheesh!  what a system!

[SA]

This may be a possibility, but there are 2 notes- a 1st & a 2nd. I have not approached the bank about this, but I would have to buy the 2nd, make advances to the 1st & foreclose in 2nd postion. I honestly don't know if the bank would sell out both positions at a discount at the same time. I will think more on this one.

i take it they are being held by the same bank?  this would make it easier.  my teachers have taught me techniques for handling the situation when the 2nd is held by a different bank.  1st mort. holders usually require that the 2nd be wiped out.  they don't want to take a loss if someone else is getting paid.(more on this scenario below)

my understanding is the bank expects the second mortgage  to be 'wiped out' unless the sale of the house, either on the market, or through foreclosure, brings enough money to cover BOTH mortgages.

a first mortgage is always paid first.  if there's nothing left, the second (and third, etc) mortgages don't get paid at all.  lenders KNOW this.  that's why their interest rates are higher for 2nds and 3rds. the risk is higher.

Scenario Where the 2nd is Held by a Different Bank:
you go to the second and offer them 5-10 cents on the dollar.  or maybe even a token $500.
they generally agree because the'll prob get nothing anyway at the foreclosure.
then you 'pay' off the 2nd out of your profit from the short sale.

you arrange for it all to happen at a double closing so that you don't have to 'front' the money.  it's just deducted from your cut of the short sale.

this 'buying the note option' is looking like the most promising loophole to me, at this moment.

remember, the 'note' for the full amount, still exists, in your possession.   the difference is, it only cost you, let's say, for example, $500 for a $50,000 note, and you're not counting on getting the full 50k value(or, any value at all, for that matter).

would medicaid be happy if they just say "yep, we still have a 50k 2nd mortgage"?  or do they have to show that that they are still making payments on the debt?

if the answer is  "yes, they still have to show that they are making payments on the debt", then, it would seem to me that you would trigger the same problem if they had no financial difficulty and just sold the house for what they owed and moved to a cheaper apt.  My point here is to establish that selling and moving would generate a) reduction of debt, and b) lower monthly expenses(because of a move to a cheaper apt).

My point is to provide evidence that this would NOT seem to be the case.
according to your previous post, as long as there is no 1099 or deficiency, medicaid has no problem with 'walking away'/i.e., 'foreclosure' .  and yet the foreclosure option would lead to a) reduction of debt, and b) lower monthly expenses because of a move to a cheaper apt.

what i'm trying to do here is show my reasoning for concluding that, the right way of a) reducing debt and b) reducing expenses WOULD be acceptable to medicaid.  

and THAT is what we're really trying to figure out here., the right way of reducing debt and expenses.

this is why i keep coming back around to 'buying the note':
if you find that medicaid will not accept any  form of debt reduction don't REDUCE  the debt, BUY it, and change the TERMS.

i'm not sure if i've explained this clearly, so i'm going to spell out the whole scenario and flesh it out with some imaginary numbers.

Proposal: Buying the Note

Assuming: 1st mort of 150k, 2nd mort of 50k, FMV of 140k because of need for repairs.  once repaired, FMV of 200k

you have to show medicaid that neither debt, 1st or 2nd, has been 'wiped out'.

if the 2nd is held by a different bank, you offer 2nd note holder $500.  at worst, you pay them 5-10%. you now own the 50k second mort.  medicaid still truthfully sees a 50k debt.
this will be easy to accomplish if the 2nd is owned by the holder of the 1st.

you work out your short sale plan with the holder of the first mort(150k).

let's say, under ordinary circumstances, you would have done a short sale for 50%, 75k.  

instead of the short sale, you buy the note from the bank for 75k.

the bank should agree to this, they were going to do a short sale with you anyway.

once again, medicaid is truthfully told the homeowners have a 150k debt.

Now, I’m assuming you do not, personally wish to buy the house.  I’m assuming you will be finding a buyer/rehabber to purchase the property before the foreclosure date.

All that is necessary is arrange for a ‘double closing’.
                       
SO, at the closing, let’s say the rehabber buys the house for 60% of FMV(200k): 120k.

First you would ‘buy’ the 2nd mort for whatever you got them to agree to($500-5000).  Funds would come from the rehabbers 120k.

Then the bank would ‘sell’ the 1st mort. note to you for 75k, which would be paid out of the rehabber’s 120k.

Title would transfer from the homeowners to you and then from you to the rehabber, all in a matter of minutes.

After paying the 1st and 2nd, any leftover funds would go to you:
120k -5k(2nd mort) - 75k (first mort) = 40k.

Remember, to keep medicaid happy, you are still holding the original 200k debt.  The homeowners can tell medicaid that the debt is in the hands of a private investor, and they are making payments. You can work out whatever payment terms that will satisfy medicaid: ‘token’ monthly payments until the debt is satisfied, ‘a balloon payment’ due in 2025.  With both of these options you might want to sign a paper privately with the homeowners saying that you will forgive the debt in the event of their deaths. In other words, you will not sue their estate to collect the debt.  (surely you don't have to tell medicaid about THIS?)

Heck, you could even turn it into a ‘negative amortization’ loan, with every missed payment added to the principal of the loan.  Medicaid should LOVE this; the debt will actually grow (just kidding, kinda).

So, that’s the ‘buying the note’ scenario.

please let me know what you find out about the acceptability of the 'buying the note' scenario, i'd be very interested to hear if this would work or not.