This webinar presentation compares short sales and foreclosures. It discusses personal liability, tax implications, credit impact, and other considerations for homeowners facing default. The presentation examines these issues through examples and outlines the key differences between short sales and foreclosures in each area. It also reviews Fannie Mae guidelines on reestablishing credit after a short sale or foreclosure and the policy against strategic default. The presentation concludes with an opportunity for questions.

1. Welcome to
C.A.R. Legal Live Webinar
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2. Short Sales v. Foreclosure
Stella H. Ling, Esq.
C.A.R. Managing Senior Counsel
June 1, 2011
Copyright© 2011 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.).
Permission is granted to C.A.R. members only to reproduce and use this material
for non-commercial purposes provided credit is given to the C.A.R. Legal
Department. Any other reproduction or use is strictly prohibited without the
express written permission of the C.A.R. Legal Department. All rights reserved.

3. Background
“A short sale is generally better than a
foreclosure.”
Disclaimers:
1. Every homeowner has a unique situation.
2. Agents should leave it up to their clients
to decide what to do.
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4. Today’s Agenda
Short Sales v. Foreclosures
A. Personal Liability.
B. Tax.
C. Credit.
D. Other Considerations.
E. Questions.
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5. A. Personal Liability
EXAMPLE #1
Is the Homeowner Generally Protected from
Personal Liability for the First Trust Deed?
Homeowner*
Non-Judicial Judicial
Has Only One Short Sale
Foreclosure Foreclosure
Loan
Purchase
Yes Yes Yes
Money
Refinance Yes Yes No
* Property is owner-occupied with one-to-four residential units.
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6. 6
Available at http://qa.car.org.

8. Available at http://www.fanniemae.com/newsreleases/2010/5071.jhtml.
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9. EXAMPLE #2
Is the Homeowner Generally Protected from
Personal Liability for the Second Trust Deed?
Homeowner* Has
Short Sale Wiped Out Junior
Two Loans
Second Loan is
No Generally Yes
Purchase Money
Second Loan is not
No Generally No
Purchase Money
* Property is owner-occupied with one-to-four residential units.
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10. A. Personal Liability (Cont’d)
Homeowner must show hardship to
qualify for a short sale.
Verifiable Hardship Concern About
Personal Liability
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11. B. Tax Liability
1. Capital Gains Tax: Roughly loan
amount (or fair market value)
minus adjusted basis.
2. Debt Relief Income Tax:
Roughly loan amount minus fair
market value.
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12. Exceptions to Debt Relief
Income Tax
1. Mortgage Forgiveness Debt Relief Act
of 2007: Applies to debt incurred to
acquire, construct, or substantially
improve a qualified principal residence.
• Short sale or foreclosure.
• Federal: Up to $2 million loan.
• California: Up to $800,000 loan and
$500,000 debt relief income.
Sunsets on December 31, 2012.
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13. Exceptions to Debt Relief
Income Tax (Cont’d)
2. Bankruptcy.
3. Insolvency.
4. Non-recourse loan forgiven after
foreclosure.
5. Other.
Source:
http://www.irs.gov/individuals/article/0,,id=179414,00.html.
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16. C. Credit
Background:
2006: Impact unclear.
2009: Short sale and foreclosure have
same effect on FICO score.
2010: Impact on FICO score revealed.
2011: Impact on FICO score expanded.
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17. C. Credit
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19. C. Credit (Cont’d)
Minimum time frame for reestablishing credit
under Fannie Mae guidelines
Short Sale 2 years
Foreclosure 7 years
Foreclosure with extenuating
3 years
circumstances
Source: Fannie Mae Announcement SEL-2010-08
(dated June 23, 2010).
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20. C. Credit (Cont’d)
Fannie Mae Policy Against Strategic Default:
1. 7 years to reestablish credit is reduced to
3 years with extenuating circumstances:
• Hardship; and
• Showing of no reasonable options
except default.
2. Loan servicers to recommend loans for
pursuing deficiency judgment.
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22. D. Other Considerations
Stigma of Foreclosure.
Possession of Property.
Emotional Well-Being.
REALTOR®’s Assistance.
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23. Questions?
To ask a question, type it in the chat box on
your attendee console.
Do not ask a question involving a current
transaction with an agent in another office.
Direct that question to the Legal Hotline at
(213) 739-8282.
Sorry but we may not have time to get to
everyone’s question.
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24. Announcements
C.A.R. Legal Live Webinar
http://www.car.org/legal/live
Recorded version of this webinar should
be available later today.
Next monthly webinar:
July 1, 2011
RPA Contract Tips
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25. Thank You!
For legal questions, C.A.R. members may call
our Legal Hotline at (213) 739-8282 or write to
“Contact Us” at www.car.org.
If you have any suggestions or comments about
this webinar, email stellal@car.org or answer the
survey at the end of this webinar.
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