By Jeff Lazerson | firstname.lastname@example.org | MortgageGrader.com | January 01, 2021
Effective Friday, Jan. 1, Assembly Bill 1885 increases the amount of home equity protected against creditors, likely preventing more owners from losing their homes in bankruptcy.
The new homestead protection starts at a floor of $300,000 and caps at $600,000. The previous homestead exemption ranged from $75,000 for singles, $100,000 for a married couple and $175,000 for seniors and the disabled.
The law, which bases the exemption on a county’s annual median price for single-family homes, does not cite the data source that will determine the baseline. Beginning in January 2022, the exemption will adjust for inflation based on changes in California’s Consumer Price Index.
High-cost Los Angeles and Orange Counties will fall into the equity cap of $600,000. Riverside County will be an estimated $400,000 and San Bernardino County roughly $340,000.
The big idea behind the homestead exemption is to help homeowners keep their primary residence secure by placing it beyond the reach of the consequences of economic misfortune.
After filing Chapter 7 bankruptcy to discharge debts, a court-appointed bankruptcy trustee will evaluate the dollar value of a debtor’s assets and figure out what is available to liquidate and pay the creditors.
Let’s say a Los Angeles home is worth $1 million. The mortgage lien is $400,000 with $600,000 in equity. So long as a homeowner lives in the residence prior to a bankruptcy filing, the home is protected from creditors.
There is more to the formula in something called “realizable equity,” according to Irvine-based bankruptcy attorney Michael Nicastro. That is the fair market value minus 6-8% for the cost of a sale, any capital gains taxes that might be owed, mortgage liens, minus the homestead exemption.
For example, let’s say an Orange County home was worth $1.2 million with equity of $700,000 and a mortgage lien at $500,000. Assuming a 7% cost of sale or $84,000, capital gains tax of $50,000, a mortgage lien of $500,000 and your $600,000 homestead exemption add up to $1,234,000. Your home equity is protected from creditors and you would not be forced to sell your home.
Let’s use the same example as above but the mortgage lien is $250,000 instead of $500,000. In this case, the additional equity beyond the homestead exemption protection ($84,000 cost of sales, $50,000 capital gains, $250,000 lien plus $600,000 homestead equity) $1,200,000 minus $984,000 or $216,000 of additional assets.
In that case, the trustee would likely sell the home, using the $216,000 to distribute to creditors. The $600,000 homestead amount must be reinvested into another homestead (primary residence) within six months according to Nicastro.
Some mortgage lenders will consider a new purchase mortgage for a borrower one day after bankruptcy discharge. Say a borrower has $600,000 from the bankruptcy trustee and wants a $900,000 home after being forced to sell a $1.2 million home. If the buyer has a credible, documentable story behind those financial woes the loan will probably get approved.
Ninety-five percent of homeowners do not file a Declaration of Homestead, according to Glenn Awerkamp, title manager at Lawyers Title.
The preliminary change of ownership form may imply homestead but don’t take a chance, Nicastro says. File the form yourself.
You can get that form from a local title company. It must be notarized and recorded in your county recorders’ office to be valid. Excluding notary charges, the Orange County Clerk Recorders Office estimated the fees at $85 to $88.
Riverside-based bankruptcy attorney Scott Talkov sees the increased homestead exemption as a handout to debtors and homeowners, and a huge loss to creditors.
“Debtors can now sell all of their assets right before bankruptcy, pay down their mortgage so long as the equity does not exceed the exempt amount, and file bankruptcy on the remaining debts,” he said. “This strategy is known as exemption planning, whereby debtors convert otherwise non-exempt assets into exempt assets. This will become even more widespread as home equity becomes the government-protected piggy bank that creditors cannot touch.”
My advice to you: Seek legal guidance with a bankruptcy attorney before you go down this road.
Freddie Mac rate news: The 15-year fixed rate averaged 2.17%, the 11th record-low, and two basis points lower than last week. The 30-year fixed rate averaged 2.67%, up one basis point from last week.
The Mortgage Bankers Association was closed and did not report this week’s loan application volume.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was an astounding $315 more than this week’s payment of $2,215.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 2.25%, a 15-year conventional at 1.99%, a 30-year conventional at 2.375%, a 15-year conventional high balance ($548,251 to $822,375) at 1.99%, a 30-year high balance conventional at 2.375% and a jumbo 30-year fixed at 2.75%.
Note: The 30-year FHA conforming loan is limited to loans of $477,250 in the Inland Empire and $548,250 in LA and Orange counties.
Eye catcher loan program of the week: A 15-year, fixed at 2.25% without cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com. His website is mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011