It’s easier than ever before to walk away without a deficiency and maybe even thousands of dollars in your pocket.
And to top it off you usually don’t have to pay taxes on the debt you walked away from when you agreed to the short sale on your primary residence.
If you can’t stay in your home, this is frequently the best possible scenario.
You don’t have to pay taxes on that debt because of theMortgage Forgiveness Debt Relief Act, which was enacted in 2007 as President George W. Bush was leaving office.
Even though thebill passed with overwhelming bipartisan support and was enacted by a GOP President, tea partiers and Republican strategists alike seem fixated on the ‘moral contagion’ factor as well as the program’s $2.7 billion price tag.
Which means that if you agree to a short sale on your $200,000 home for only 150K, you could have to cough up taxes on the $50,000 of forgiven debt.
Currently the Debt Relief Act allows for up tax relief on up to $1 million of debt if you’re single, $2 million if you are married.
Once again there’s a lot of talk from some conservatives about the cost to the taxpayer. Never mind the fact that President Obama and the $25 billion settlement has made principal reductions and loan modifications the centerpieces for stabilizing the housing market.
So even the idea that this tax break might not see the light of day in 2013 is a slap in the face to everything the Attorneys General spent months haggling over.
The same government that is dangling the carrot of refinancing in front of you might very well bat it away with a massive tax bill.
Bottom line, if you’re thinking about a short sale, get started NOW. Short sales can sometimes take months to complete, and if you wait til one minute after the clock strikes midnight on December 31st, you run the risk of your beautiful stage coach turning back into a pumpkin.
It is of course an election year, so this lame brain duck Congress cannot be counted on to come through for homeowners. I thoroughly expect them to let the Debt Relief Act lapse, and once again you’ll be on the hook for taxes on ‘loan forgiveness income’.
Loan forgiveness income. If that’s not an oxymoron, then I don’t know what is!
For 5 years now we’ve been a huge champion of the short sale. We’ve been banging and banging away at the banks because they didn’t share our opinion.
There has long been an institutional reluctance among our nation’s lenders to embrace the short sale, but it appears they are finally coming around.
According to Corelogic’s most recent numbers, short sales accounted for 9 percent of all residential transactions last November.
In January of 2008, they represented only 2 percent. That’s a 350% increase in the amount of homes sold at short sale.
Hallelujah.
It may have taken them a while, but the banks are finally letting go of the arcane notion that foreclosing on a delinquent borrower is always the best option for them.
The short sale has and will always be a much better alternative for the banks. In many cases, when modification isn’t an option, a short sale is better for the existing homeowners as well.
It’s good for the banks because it’s the fastest way to bring down their massive backlog of foreclosures.
Now that more and more foreclosures are lingering in the courts, banks now realize its the simplest way to get these homes back on the market, sometimes in just a few months.
They may not get back the full value of the home but their losses are about 15 percent less than if the home was foreclosed on, according to Bloomberg News.
It’s good for the borrower because they can walk away, legally, with little or no debt at all. Some banks are even offering cash incentives, as much as $35,000 in some cases, to entice homeowners to sell back their homes. (more…)
One thing that’s taken a huge hit in the housing crisis is people’s credit scores. I’ve seen it with plenty of good responsible homeowners.
The reality is that most people who overextended themselves during this financial crisis did so because they had good credit scores.
In fact when I used to ask people in a seminar who had bad credit prior to the financial meltdown no one would raise their hand.
In fact it was only people who had good credit that got themselves in trouble.
The way you build your credit seems antiquated and doesn’t always reward you for being good with your money. If you try to live frugally, use only debit cards and curtail your borrowing, you should be rewarded.
Yet someone who lives beyond their means, yet pays the minimum on their cards, will in fact end up with a better credit score, even if you’re on the verge on bankruptcy.
This goes right to the root of the problem, where we preach the benefits of spending wisely, yet reward people for living on borrowed money. It’s entirely counterproductive to the financial recovery of this nation.
Orman and I agree that people should be rewarded not for how much money they borrow and repay but for how much money they spend without using credit in the first place.
Orman realizes this and is trying to do something about it.
She’s begun offering a pre-paid debit card called “The Approved Card”, and she’s managed to convince at least one of the credit rating agencies (Transunion) to watch the spending habits of people using it. She hopes that TransUnion will ultimately decide to use this information to help adjust a person’s credit score.
Non-profit ProPublica and National Public Radio allege that Freddie Mac, which was set up to make home loans more accessible, was in fact betting against homeowners.
It’s a highly disturbing, and completely shocking report. ProPublica’sJessie Eisinger and Chris Arnold of NPR claim that the government-owned mortgage company was investing in securities that paid substantially more if people continued to pay off high-interest mortgages.
At the same time, they were tightening the grip on credit, making it difficult for homeowners to refinance and get out of such mortgages.
So what was good for Freddie Mac’s bottom line was diametrically opposed to what was right for some people who had mortgages with them.
Heath Ledger as "The Joker"
It’s a scheme so deviousThe Joker wishes he thought of it first.
Now Freddie Mac officials claim there was a Chinese wall set up between the staffers responsible for their investments and those who dealt with credit regulations.
They deny there was any intent to manipulate credit regulations to enhance their pockets, and the investigation offered no evidence that there was.
Yet they’ve already agreed to stop making these risky investments, known as inverse floaters, after the Federal Housing Finance Agency leaned on them once the investigation became public.
Even if you buy Freddie Mac’s explanation, it doesn’t soften the blow. The conflict of interest here is unequivocal. The company is now essentially, owned by the taxpayers, and has a direct impact on who and who can not get a home loan. (more…)
We here at theSouth Florida Law Blog decided to clock in a few hours this weekend, because if we didn’t we’d probably fall behind President Obama’s new man-in-the trenchesEric Schneiderman.
President Obama only announced this new investigative unit during Tuesday’s State of the Union, yet the “check”, or in this case the subpoena, is already in the mail.
If you were skeptical that Obama was still interested in the status-quo when it comes to the banks and doing business, may we present Exhibit A.
Eric Schneiderman is turning himself into a modern-day Elliot Ness.
You remember Ness don’t you?
The federal agent whose team of “Untouchables” couldn’t be bought off and helped bring down Al Capone?
Schneiderman too has the era of a man who will not be co-opted. If anyone can stay above the fray and not be reeled in by the banks and their money, he can.
Investigation Going After Cause of Housing Crisis
Schneiderman has stood up to the President before, openly opposing the settlement agreement that we here at the South Florida Law Blog have railed against. And now he is Obama’s point man for placing blame and creating accountability for causing the worst economic crisis in the US since the Depression.
Elliot Ness
The Huffington Post is reporting that outside of claims directly relating to robo-signing fiasco, the banks will not be released from the threat of prosecution for the vast majority of securities-related crimes. (more…)
Like the characters in "The Blair Witch Project", the banks are running scared!
Well what a wild week it has been. When we came to work on Monday we feared President Obama would put the housing crisis to bed without ever holding the banks’ feet to the fire.
The settlement with the banks, which we have blogged about ad nauseam this week, seemed as sure as a chip-shot field goal.
But thanks to President Obama’s suddenly get-tough approach, as evidenced by his State of the Union speech, we’ve seen the banks’ kick go wide-right and now all bets are off.
Can There Be Real Change In Mortgage Industry?
Now we are not completely sold that things will play out exactly as homeowners would like, this is of course the federal government we’re talking about, but for the first time we have a true sense of optimism. The President may finally be seeing things our way, and we want to throw our full support behind him.
There is no doubt cages have been rattled in the mortgage industry, and nerves have been frayed. If Obama’s plan to re-write the foreclosure rules didn’t have some kind of teeth, then we doubt we’d be seeing the type of reverberation thorough the media and the top echelons of government that we’ve detected in the last few days.
Banks Are Fearful of Settlement Collapse
The settlement could be falling apart at the seems, at least JPMorgan Chase CEO Jamie Dimon thinks so. He told CNBC this morning that Obama’s announcement to investigate the packaging and servicing of mortgage loans could stop the settlement cold. (more…)
It’s a great time to do a short sale. 
