On Friday, January 8, 2010, the Montgomery County Transfer Office issued a Memorandum explaining that in a short sale, if a short sale lender forgives any portion of sellers’ outstanding mortgage principal(s), the county will calculate transfer and recordation taxes on the outstanding mortgage principal(s) rather than the sales price. For example, if the sales price is $200,000 but the outstanding mortgage principal is $250,000, then the $250,000 will be used to calculate the taxes IF the short sale lender forgives the $50,000. This change can have a significant effect on preparing estimated HUDs, lender Good Faith Estimates, and whether or not a buyer will qualify for the transaction. The most immediate effect is on short sales that have already been approved but have not yet gone to closing because this ruling is effective immediately and may increase the amount of transfer and recordation taxes that will be collected at closing.
Since this ruling was issued last week, there has been much debate and some organizations are considering challenging its validity. I have talked with lenders I work with and several title attorneys who were unclear whether this is just a plan or is it truly affective immediately, but at this time, to the best of my knowledge, these seem to be the rules we must follow in calculating the transfer and recording taxes on short sales in Montgomery County.
I understand that Montgomery County, like all local and state Governments are facing budget challenges and trying to find ways to cover shortfalls, but this is JUST WRONG. A Short Sale by definition is that the sales price is less than the mortgage balance. In most cases this is due to the market decline and the reality that the home is worth less than the mortgage(s) balance. Short Sales have been used to avoid foreclosure and most banks and mortgage companies have come to accept short sales and most have improved their ability to process short sale requests more efficiently. Most lenders have been forgiving the mortgage balance. The Federal Government, with The Mortgage Forgiveness Act (2008) forgives this mortgage balance.
If you are a real estate agent, lender or title attorney doing business in Montgomery County, Maryland you should be upset by this ruling. Contact the Montgomery County Council and voice your outrage. We need to keep focusing on recovery activities, this ruling will hurt recovery, this will hurt sellers who want to use the short sale to aviod foreclosure.
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