Dec. 16, 2007

Mortgage Debt Forgiveness Passed by Senate

UPDATE: President Bush signs HR 3648, The Mortgage Forgiveness Debt Relief Act of 2007.

It took them close to two and half months, but the U.S. Senate finally got around to passing H.R. 3648, The Mortgage Forgiveness Debt Relief Act of 2007. Initially sent to the Senate on October 4th, the Senate passed this legislation on Friday, December 14th, allowing Senate Finance Committee Chairman Max Baucus to crow a bit about helping the U.S. homeowner dealing with foreclosure or a short sale.

Sen. Baucus released the following press release on Friday:

Washington, DC – Senate Finance Committee Chairman Max Baucus (D-Mont.) won passage today of legislation offering tax relief to American families caught in the subprime mortgage crisis. When debt is forgiven on a home loan, the homeowner must normally count that debt forgiveness as income and pay taxes on it. The bill approved today as an amendment to H.R. 3648 creates a three-year exception for debt forgiveness on home loans – helping families already unable to meet their mortgages to avoid incurring large tax bills as well. The bill also extends a provision allowing homeowners to deduct mortgage insurance payments from their taxable income.

“Homeowners who are already in trouble on the mortgage certainly can’t afford a big hit from the tax man too,” said Baucus. “Upheaval in the housing market has turned the world upside down for far too many families, and Congress needs to help these folks climb out of a financial hole. This mortgage tax bill will help to ease the burdens of homeowners who are hurting today.”

In addition to tax relief for debt forgiveness and mortgage insurance payments, the bill includes:

- Tax relief for volunteer firefighters and emergency medical technicians
- Help to expand housing options for college students with children
- Protection of tax relief for homeowners after the death of a spouse
- Flexibility to help co-op tenant/owners deduct real estate taxes and mortgage insurance

The bill is fully offset by increased penalties for failure to file S corporation returns or partnership returns, and new requirements for the payment of corporate estimated taxes. It is now necessary for the House to pass the updated legislation and send it to the President for signature into law.

While I'm thrilled they have finally got this close to a done deal, waiting for 10 weeks to act hurt many homeowners.

"Senate Finance Committee Chairman Max Baucus (D-Mont.) won passage today of legislation offering tax relief to American families caught in the subprime mortgage crisis."

Baucus and Finance Committee member Chuck Schumer could have "won" this months ago. Michigan Senator Debbie Stabenow introduced similar legislation, S. 1394, back in May. While this topic didn't gain momentum until August when the mortgage crisis took over the the front pages of the NY Times and Wall Street Journal, they could have passed this in October when they returned from their break. Since then, thousands of distressed homeowners, forced to choose between the lesser of two evils, made the decision to give the property back to the bank to avoid the phantom income tax potential of a short sale.

Don't you just love politics?

*Short Sale and Phantom Tax Debt Relief Overview - an overview of the debt forgiveness portion of the bill.

Feel free to search all San Diego real estate throughout the county.

Posted in Economics, Finance and Lending, Foreclosures, Real Estate News, Short Sales, Taxes

145 comments

Misty Dec. 17, 2007: So we had taken out a second on our home to do remodeling and pay off some medical bills from my husband being ill. We did an ARM loan and was told at the time that we would be able to refinance at the end of our 3 years. Once those 3 years had hit we went to refinance and the value of our home had dropped $60,000.00. Our payments were going up $450.00 every 6 months. We are almost ready to close the deal on a short sale and I was looking forward to this passing but it sounds like it does not help people like me? Can anyone clarify on this?
Bob Dec. 17, 2007: Misty, The <a href="http://thomas.loc.gov/cgi-bin/query/D?c110:5:./temp/~c110LsFqSB::">current version</a> of the bill states that: <blockquote>(2) QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS- For purposes of this section, the term `qualified principal residence indebtedness' means acquisition indebtedness</blockquote> and <blockquote>(4) ORDERING RULE- If any loan is discharged, in whole or in part, and only a portion of such loan is qualified principal residence indebtedness, subsection (a)(1)(E) shall apply only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before such discharge) which is not qualified principal residence indebtedness.</blockquote> I would assume that a cash out refi loan would not be considered "acquisition debt" - debt used to acquire the property. If the short fall exceeds the amount of the 2nd, then that amount would qualify. Clarification: Some refi debt does qualify. Let's back up a bit though. First off, with any short sale, you should consult an attorney to review the negotiated terms of the short sale. Real estate agents that are not lawyers are not qualified to give you legal advice on the documents the lender may include in the package. We have seen situations where the lender has notified the seller after the fact that they will seek a deficiency for the short fall. The seller assumed that once the short sale closed, it was done. The bank thinks otherwise. If it is a recourse loan, they may have that option. Assuming that the loan is non recourse is not enough. An attorney told me today that one lender was going after a deficiency judgment on a purchase money 2nd because it was a HELOC. I think the lender will lose, but it costs money to fight. A properly negotiated deal up front probably would have kept this from happening. Secondly, the IRS has exceptions where some sellers won't incur any tax. Bankruptcy and insolvency are two situations. You would need qualified tax advice to determine if insolvency is applicable for you, and if so, to help you get this approved with the IRS. From the IRS Q&A on <a href="http://www.irs.gov/newsroom/article/0,,id=174034,00.html">Debt Cancellation</a>: <blockquote>2. Is Cancellation of Debt income always taxable? Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve: * Bankruptcy: Debts discharged through bankruptcy are not considered taxable income. * Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.</blockquote> I hope this works out in your favor Misty.
Wayne Dec. 21, 2007: My home in California forclosed on me Dec5,2007. I had an $8500 second on the proerty. I am filingg chapter 7. Do you think I will incurr the income tax from my orginal loan amount?
Ron Dec. 27, 2007: As an agent who works short sales, I agree that sellers should get professional tax help when dealing with short sales. We as agents are responsible for getting a transaction completed. I always recommend people get advanced advice when dealing with sticky situations. With that being said I have my own question in regards to acquisition indebtedness. I purchased a home in June of 2006 and it has since gone down to a value almost $200k less than purchase price. Immediately after the purchase I refinanced for rate and term only. I took no money out other than lenders fees which were built into the new loan. I am attempting a short sale. Since I refinanced, does this still qualify me for the debt forgiveness exclusion in regards to taxes ?
Bob Dec. 27, 2007: Wayne - It would depend on whether the debt forgiven qualified as acquisition debt. Your BK attorney should be able to determine that for you. Ron - Those agents who do not understand the job description will be sued. Agents doing short sales are negotiating with debt collectors (call any lender's loss mitigation department .and the recording you'll get is the standard debt collector disclosure), which really should be the job of an attorney. With agents paid only if the deal closes, there can be a huge conflict of interest. The lawyers are lining up and the lawsuits will be plentiful. Since this was passed, I've reread the entire section of IRS Code a few times. The definition of acquisition debt is the big issue here. I think the refi problems arise if cash is taken out, but I would definitely talk to a tax attorney first. I'm also seeing more and more lenders agree to release the lien, but not the underlying debt, so when you speak to your lender's loss mit department, ask them up front what their policies are regarding debt forgiveness versus just releasing the lien. Keep in mind that this law wasn't designed to create more short sales, but to allow flexibility for loan workouts so homeowners can stay in the property. For example, if you bought the property for $800k and now it is worth $600k, the bank's net will be somewhere in the mid $500s with a short sale at market value. If you can handle the payments on a loan that is more than the lender's net, it is in everyone's best interest to simply redo your loan. This wasn't an option many looked at before because to reduce the loan created the taxable phantom income and subsequent tax. Good luck.
Ron Dec. 28, 2007: Thanks for the answers.
Rick Jan. 3, 2008: I guess I need some more clarification on this law. If you short sale your home you will be forgiven for the taxes from the sale? How do you qualify for such a thing.
Charisse Jan. 3, 2008: I am in the process of requesting for a short pay-off from my lender. We bought our house in Dec 2005 for $472K. Now, my 1st loan is resetting and my payments will go up on Feb 2008 for $1000 more. I tried to refi but no one will accept my refi because the value of the property based on the appraisal is $425K. No one wants to subordinate either. I tried loan modification but it didn't work coz I will end up paying more a month because they will escrow my tax and home insurance. The only choice I have is to ask for a short pay off from my second lender. I just submitted my short pay off package and waiting for response. If they ever approved the short pay off, will I get taxed on the forgiven amount?
Rancho Santa Fe Jan. 5, 2008: Hey Bob, did you see the distressed property stats for the Ranch?
Donna Jan. 6, 2008: Can I qualify for debt forgiveness on my investment properties? I'm hoping to do short sales on 5 of my investment properties, can my debts be forgiven?
Bob Jan. 7, 2008: Donna, you can do a short sale on any property. It's up to the lender as to whether or not they will forgive any debt. The forgiven debt will be treated as taxable income though, since these properties are not your primary residence.
Inez Zurita Jan. 7, 2008: My husband was approved through his lender for a short sale, but how much debt is forgiven? How do we find out?
Bob Jan. 7, 2008: Inez - Debt forgiveness is the difference between what is owed on the property and the payoff the lender actually receives when the property closes escrow. It is important to not that a lender can approve a short sale without forgiving the debt. Several lenders will approve a short sale by releasing the lien on the property without forgiving the debt. When this happens, the seller still owes the difference. make sure you read the paperwork you get from the lender. I would strongly recommend that all sellers involved in short sale have the lender paperwork looked at by an attorney.
Walker Todd Jan. 8, 2008: Does anyone know beginning date of debt forgiveness under the new Act? It expires in 2010, and it probably covers all of tax year 2007 (I hope), but does it go retroactively to tax year 2006 forgiveness on form 1099-C, cancellation of debt?--Walker
Bob Jan. 8, 2008: It does not apply to debt forgiveness that occurred prior to January 1, 2007.
Vanessa Jan. 8, 2008: Bob - It is my understaning that with G.W. Bush signing this new act, home owners short-selling their primary residence will not owe the difference as income tax. However, you are advising that an attorney read the agreement between the bank & owner to make sure they've agreed to forgive the debt. Is that legal for the banks to do now, considering this new act? Also, I have heard that if an owner is dismissed from having to pay the difference on their federal taxes, they may have to owe on their state taxes. Do you know anything about this? Thanks in advance for your help!
Stephanie Jan. 10, 2008: I think I am understanding this new act... but it seems like it is base don short sales only. What about foreclosures? My house in CA was up for a short sale and the bank refused and so the house finally went to foreclosure at the end of Nov. 2007. We owed 355K and the new person that bought it auction is asking 219K. Can someone help me understand if I am going to be liable for the taxes on the difference? Please... thank you
Sandra Jan. 10, 2008: In 2005 we filed for Chapt 7 and sold our home in a short sale. Recently received a tax bill for $68,000. I have read where if your insolvent and had a bankfuptcy that these were two things to present to the IRS. The debt was cancelled, but we received no 1099 is it too late to request one? Can not afford an attorney. Where would I go from here?
Mike Jan. 18, 2008: I'm going through a bankrupcy and thought I would do everyone a "favor" - and ease my conscious - by trying to sell the house. I owe $262k on the first and $62k on the second mortgage. I was just offered $226k and have now learned of the "dangers" of a short sale - I thought I was helping the bank out instead of just walking away. Now I find I have to pay the take on the difference in a short sale. The mortgage company told me there was no incentive for me to accept a short sale and his advice was to let it foreclose! So, if I have to pay the tax on the difference in a short sale and have to go through the hassle of selling my house, why would I want to sell it when I can walk away from it? I'm actually trying to do the right thing here - but not at the risk of adding to my financial difficulties.
Bob Jan. 18, 2008: Hi Mike, I wouldn't rely at all on the advise of the lender employee who may or may not have a clue, or worse, an ulterior motive. Depending on the state you are in, foreclosure may not prohibit the lender from seeking a deficiency. You should talk to your BK attorney or a tax attorney to see if the debt forgiven would qualify under the new law.
Janis Jan. 18, 2008: I've read all the comments from folks going through the same thing I am-short selling. I'm still not quite understanding. I filed bankruptcy because I was told that was the only way I would qualify for a short sale. Was not told about the taxes I might owe. The difference on what I owe and what I could get for the house is 75k. Do I qualify under the new act? Also, I was told that CA is not going along with the new law. The bank is waiting to hear from me on whether to proceed with the short but I don't know if it would be better to just walk away. If I walk away will the IRS take everything?
Angela Hurlburt Jan. 19, 2008: I have a question.... my home was foreclosed on somewhere between September and December 2007. I believe we owed $62,000 and a bid for $59,000 was what the house went for. My question is Do we have to claim that difference on our taxes as taxable income even though it was our primary residence?
Gary Jan. 23, 2008: I currently have a fixed interest loan, however my interest loan will adjust in one year (my payment will most likely sky rocket!). I am having trouble paying my monthly payment now, I dont know what options I have... should I try and negotiate with my lender? I bought the house at $500K and it is now worth about $340K! Should I just let it go and Forclose? If, so when should I do this? Now?
Alex Tanasescu Jan. 24, 2008: I purchased a property for sale price 620k. Its now worth 500k. It was an investment property and now my buiness partner has left the scene. If this goes into a foreclosure status, will the IRS tax me on this or come after my other property. The loan is a non recourse loan so my lender states. Thanks
Ellen Jan. 25, 2008: I have been living in the state of Florida since 2003--- in Jan 2007 my ex-husband filed for and won a HUGE reduction in child support---$1537 per month--- effective immediately. In March 2007 I refinanced my house to a interest only 1st and a cash out 2nd---I paid off all my debt and closing costs with the cash out. However, this has not helped me much at all---my insurance rates have skyrocketed and thus my mortgage payments have increased to a point where I can not longer afford them. Do I understand this correctly, in a short sale to the bank the difference between what I owe and what the home sells for becomes taxable and I am not protected by the new law passed since I took cash out to pay off my debts? HOWEVER, if I can't make my payments the bank then forecloses on the home and I do not owe any income taxes on the foreclosed property, since the bank takes back the property and then resells it??? Am I correct here??? Thanks.
john Jan. 25, 2008: Alex - bob asked me to respond to your question. In general I would say I would be quite surprised if you really had a non recourse "investment property" loan of that size. Before I could legally answer your questions I would have to know: 1. if you and your property are in CA 2. if it was or is your principle residence 3. was the property owned by your retirement account 4. did you specifically negotiate a non recourse loan I would also read through critical parts of your loan docs to see if they speak to your non recourse status. Finally I would want to get your lender's opinion in writing and find out why. Perhaps you only have one loan and the lender assumes they will foreclose in a non judicial manner. Therefore they told you it was non recourse (by operation of CA law.) But watch out if you have a second.
C M Hess Jan. 27, 2008: I have two questions does one have to live in their home two years to qualify for relief under HR 3648. I ask as the text says principal residence is defined by section 121 which refers to having lived in the home two years. Two if not what would be the definition of principal residence.
david Jan. 30, 2008: What about the credit implications of a short-sale. Is this viewed as a repo, bankruptcy, or ??
Chris Jan. 31, 2008: Does HR3648 apply to "deed in lieu"?
Deborah Feb. 1, 2008: My husband passed away Dec. 2007, and I can't continue paying mortgage without his check. The house is not worth what is owed on the 1st note ($73K)--last appraisal was $62K. Owed on the 2nd mortgage(HELOC) is $10K. Am trying to fix up house to sell, but should I try for a short sale? Know this takes long time, and in the meantime if I want to be able to find somewhere else to live, I can't have a foreclosure on credit report. 1st lender wants to refi, but then I'll owe more on 1st than I do now. 1) Better to refi, attempt short sale or just foreclose? 2) Will I owe tax on difference either way? 3) How do I get 2nd to agree to short sale, if that's what I end up having to do? Can't afford an attorney--none in area do this kind of pro-bono, and since I work, can't get Legal Aid. HELP!!!
Bob Feb. 3, 2008: David - a short sale is viewed as a charge off - debt settled for less than owed. Chris - Yes, it applies to a deed in lieu assuming the property and debt qualify. Deborah - the refi makes sense if you can afford the payments. You have to live somewhere. If it th refi is close to rent and you can do it, that may be a good option. If you can't stay in the property, try to line up a rental before your credit takes a hit. Feel free to give me a call if you have any questions. I'll see if I can find someone who can help.
adriana Feb. 5, 2008: for California exclusion, SB1055 senate bill announced on 1/07/08.
Joe Feb. 6, 2008: I have to relocate for work in a couple months and my wife will not be able to work where I am relocating to take care of our kids. We are current and in good standing with our 90/10 I/O ARM but it will adjust in July. I looked into refinancing but we are too upside-down on our loan for banks to consider us. I considered renting it out but wont get enough to cover even half of the mortgage payments. I talked to the lender but they can't help me unless I have defaulted on my loan (?). I need a place to stay at the new location but its cheaper to own than rent there, so I am considering getting a second home before I default on my current residence. Then work with my lender to short sale or foreclose. So my question is, will the lender of my current home be able to put a lien on my second home to try to recover the difference from the short sale/foreclosure. Or am I protected by this new law somehow. I am located in San Diego and my current loan is non-recourse. Cheers!
April Feb. 7, 2008: Apparently this does not apply in California...which is where we need it most!
Bob Feb. 7, 2008: Joe, probably not, but they may ask for a note if you do a short sale. It's all in the negotiations. Feel free to give me a call if you have any specific questions. My real estate partner is a lawyer. April, this is a federal law that applies to the IRS. From a federal standpoint, it applies in every state. States that have a state income tax may deal with it differently. Currently there is a bill in the California Senate that seeks to bring State law on debt forgiveness taxation in line with this new Fed law.
Mike Feb. 10, 2008: I have a 4 family investmet property that I bought for $560 and is now worth $450-$500. I owe $440K I am losing a $1500 a months for the last few months due to vacancy and repairs. There is a good chance it will always lose money each month now because of tenant turnover and/or repairs. I would love to sell it but I want to know how the bank would view the short sale option? I do not make enough income to sustain the loses much longer but it is not my primary (my primary is a condo that I can make the payments on but is $50K underwater) Does the bank short investment property? Is the defiency tax free? How long before I can get my credit back up. I am in the 700's now?
Bob Feb. 10, 2008: Mike - Yes, lenders will short sale investment properties. Deficiencies are not taxable, but if the bank forgives the deficiency, then you are likely going to have a tax issue. Losses on investment properties are treated differently than on a primary residence, so talk to a good tax person. It may not be as bad as you think. How your credit is impacted depends on what you are able to negotiate with the lender. They are not required to report to the credit bureaus.
Michelle Feb. 13, 2008: Florida: I have been divorced for several yrs. the divorce decree "encouraged" my ex-husband to refinance. However he was unable to & I am now finding out about a foreclosure. The bank (lender) never sent me any paperwork; work address & phone #s have remained the same.. I found out about this on my credit report. Of course my ex- did not let me know so that I could perhaps bail him out (to only save my credit). The lender stated that the total amount owed is $33,000; but if I could pay them $12,000 as early as today they would remove the amount from my credit first thing tomorrow (how generous). I advised them that I would consult an attny & get back with them. They indicated (several times) that they encouraged me to deal with them directly. It sounds a little fishy. *My ex advised me that he is contemplating filing bankruptcy. I hope to be hearing from a family friend (attny) in the next few days. Any advice? Thank you.
Bob Feb. 13, 2008: Don't cut any deal without an attorney. If you need the names of a few in Florida, let me know.
Michelle Feb. 14, 2008: I am in the Gainesville area (North Central Florida); not sure if you have any contacts in this area. Thank you!
Marsha Feb. 15, 2008: Bob, You should like you know what you are talking about. Maybe you can help me out. We are looking to sell our house. Unfortunately it is not worth what we owe. We would like to pay the difference but do not have it in full at the closing table. We are not in foreclosure, never late on a payment but the mortgage co is not willing to negotiate. They immediately said " We will send you out a short sale packet". I explained what I would like to do and they said either we have it in full at closing or we receive a 1099. Does this make any sense to you?
Marsha Feb. 15, 2008: oops I meant you sound like you know what you are talking about...Thank goodness it's Friday!
Bob Feb. 15, 2008: Hi Marsha, You are getting an expected response. It' is a rather stupid response though. Your offer is better for the lender than the choice you were offered. If you are being told that you would get a 1099, that suggests that the loan is either non-recourse or that the lender doesn't want to pursue a deficiency. If you don't care about a credit hit, then a short sale that results in a 1099 saves you money. If you qualify under the Mortgage debt forgiveness Act, then you would not have a fed tax hit. Depending on the state you are, you could still be faced with a state income tax obligation. That would still be less than paying the short fall. If you are trying to avoid the credit ding, then a short pay-off with a note for whatever you can't cover at closing should be to the lender's benefit. Who is the lender on this?
Marsha Feb. 15, 2008: The lender is Wells Fargo and it is the credit ding we are trying to avoid. I was told a note for the difference wouldn't be an option. Either I have it in full at closing or take the 1099. They acted like was from another planet!
Marsha Feb. 15, 2008: Actually let me correct that....The company that bought our loan is American Servicing Company but they are owned by Wells Fargo. I spoke to both and got the same answer.
Marsha Feb. 15, 2008: And I am in Florida...
Bob Feb. 15, 2008: Marsha, I sent this to someone at Wells. It may take a week or to get an answer.
Marsha Feb. 15, 2008: thanks Bob. Please let me know if you need my contact info. To bad there isn't some sort of consistancy around short-sales by the lenders so everyone would know what is going on.
Amy Feb. 18, 2008: Hi, Please advice. I moved to a new house in Dec 2006 and put my house up for sale from October 2006. It did not sell and has been on the market since then. Meanwhile I contacted a realtor to negotiate a short sale with the lender -which they agreed to. Unfortunately inspite of continuous showings and price drops the property has not sold. About 3 months ago, I went into default and the forclosure sale is this week. I talked to an attorney about filing Chpt 7. He said it is better to do it before the sale so I do not get hit with the tax. I want to take my time and file towards the end of the month. But it has just occured to me- Do I not qualify under the recently signed 2007 debt relief act. It was my primary residence since 2000. I have tried to sell with no luck. I have 2 loans on the property but I refinanced to the present loan in 2004/2005 . Do you think I qualify? I live in Northern California. Thanks
Ben Feb. 18, 2008: Bob has some good answers and I'm looking for an Attorney that specializes in this language. I live in Ca. and bought my Condo a couple years ago and refinanced. This is my primary residence. I now have a 1st and HELOC but did not take any money out. I owe around 520K and the value is now around 400K. My lender is GMAC and they advised me to do a Short Sale but if I will take the tax hit, then I would rather go Bankrupt. Not concerned as much about Credit score right now. Any advise?
Bob Feb. 19, 2008: Amy, The new law covers the debt equal to the original amount of debt you took on when you bought the property. If you took money in excess of the original purchase money loan amount out when you refinanced, that would only be covered through bankruptcy or insolvency. If there are two loans on the property now that are recourse loans and the 1st forecloses, the 2nd could seek a deficiency since they didn't get their one action. Bankruptcy would shield you from any deficiency. I would defer to your attorney.
Bob Feb. 19, 2008: Marsha, I just got off the phone with an attorney who practices in Florida. He said Wells and their servicing company have been the most difficult. Give me a call when you get a chance and I'll put you in touch with some people in Florida.
Bob Feb. 19, 2008: Ben, I'll email you the contact info for an attorney who can advise you.
Amy Feb. 19, 2008: Bob-thanks for your response. One more thing-Does it matter when I file the BK to shield me from any deficiency from the IRS tax and the 2nd lender-before the sale or after? Thanks
Bob Feb. 19, 2008: That's a question for the attorney Amy.
Jim Feb. 21, 2008: I owned a property in Illinois and lived in it for about 2 years before moving and renting it out for a little over a year. I was in the foreclosure process and at the point of having a judgment rendered, but had an investor make a short-sale in order to avoid the negative credit impact. The sale was made mid-2007 and ended up bringing down the principal mortgage apx $40K, which of course benefited the investor, but I later received a 1099-C from the mortgage company indicating the $40K difference. I am told that this bill includes my situation, but have not yet found someone in a similar predicament. I made no profit from this sale whatsoever, and the rent I received ONLY covered the cost of about 80% of the mortgage - I ended up over my head, because I could not sell traditionally with all of the costs that I would incur and no longer received other income that helped me get the difference covered. I am planning to file Chapter 7 once I can cover the costs, but this will probably be about 6 months from now. My tax preparer said that he thought rental properties were covered, but said that the IRS website has not indicated this update yet. Please advise - THANKS!!!
Bob Feb. 21, 2008: Hi Jim - rental properties are not covered. The question is whether or not your property would still qualify as a primary residence. Talk to a CPA if you can for clarification.
Brooke Feb. 26, 2008: Hi, I was just wondering what is the best route for me to take. My husband and I have a home he is on the 1st mtg. and I'm on the 2nd mtg. My husband is having to to file bankruptcy due to business and we can't reaffirm on our home. What do I do about the second mortgage being in my name and my husband filing bankruptcy. I'm not filing because I have good credit and other than this 2nd mortgage issue I'm just unsure of what to do. What will happen to my credit? Can they come after me for the deficiency of the 2nd? We owe 345,000 between the 1st and 2nd. I'm told that our home is worth 100,000 or more less than what we owe because of the economy. What route do I take? How do I go about informing my 2nd mortgage company about my husband filing a bankruptcy and not reaffirming on the 1st? Thanks, Brooke
Mary Feb. 27, 2008: My husband and I have been unable to afford our CA home that we bought in early 2004 for over one year now. We had been paying the mortgage anyway by charging everything else, putting us into $20,000 of usecured loan debt while we waited to sell in a better market. The market did not improve, so we moved to MT where it is possible to live off of the income we make, but cannot sell our house for what we owe. We almost had a short sale, but the buyer got restless (Wells Fargo took 3 1/2 months to review it), and backed out. Today, Wells Fargo called us (they had not yet received word about our buyer) and told us that we did not live in a stat that allowed for debt forgiveness. Is this true about MT or CA? Also, if we go bankrupt, can it be on just property? And if so, does going bankrupt before foreclosure keep one from owing taxes on the difference?
Bob Feb. 27, 2008: Brooke, I don't know. I'll see if I can get a BK attorney to respond to your question.
Bob Feb. 27, 2008: In California, the current law would allow the state to tax you. There is a bill pending last time I checked that would have the California law mirror the Federal law. Not sure why Wells would bring this up though, unless they are trying to say that they are not allowed to forgive the debt, which isn't true in California. I'll send you the name of an attorney who can answer your questions regarding bankruptcy.
Mary Feb. 28, 2008: That would be great--thank you for your response.
Jennifer Feb. 28, 2008: I am a little confused. I am going to do a short sale because of a job transfer out of state. We owe $250K, but can only sell for $175K. If he balance is forgiven by our lender, will I have to pay tax on that? Do they send a 1099 to the IRS? Our realtor explained that they just passed a law that would not let them send the 1099 and we would not be taxed, but I keep reading conflicting information. I am also filing bankruptcy chapter 7 so if I can't sell, I am just going to walk away and foreclose and put that in my banko. I am in Minnesota
Sheri Feb. 29, 2008: Bob, I stumbled on to your website with all the Q&A's; Who are you and how can I get in contact with your tax attorney partner? We are in a similar situation as the other California(San Diego) homeowners. We are trying to hang on to our home; Our lender agreed to do a loan modification from a loan ARM of 8.6% due to vary in October, to a fixed 7% for 30 years; They rolled our 2months behind payments into the loan; I read your reply to Ron on Dec. 27, 07, in particular the statement you made about "handling the payment on a loan that's more than the lenders net." Do I simply ask the Loan Mit Dept. what the payment would be on their net of a short sale value and ask if they'd agree to redo the loan to those terms? What kind of a reply do you think I'd get from them? We have not yet received the new loan docs. Also, under the new SB1055, if the lender agreed to doing this, would I be exempt from being taxed on the phantom income and subsequent tax? I hope I was understandable; this issue is quite complicated.
Bob Feb. 29, 2008: Jennifer, the law that was passed eliminates the federal income tax on forgiven mortgage debt in certain situations, but not all. It does not keep the lender from filing a 1099, because the lender is not in a position to determine whether or not the debt qualifies. If the debt is considered "qualified acquisition debt", then you would not see a tax hit. If you refinaced and pulled cash out that did not go back into the property for improvements, then you will likely see a tax issue. If you are filing bankruptcy, it is likely that the only one benefiting from the short sale is the agent. Talk to the attorney handling your bankruptcy.
Bob Feb. 29, 2008: Sheri, You can try and see if the lender will forgive some of the loan balance, but you would likely need an appraisal to demonstrate the value. I would not expect much though. You have already accomplished something that many have not been able to do by getting the lender to agree to the interest rate reduction. The Senate bill in California is out of committee and now before the full Senate. If the legislature passes it, expect the Governator to sign it. That would then eliminate the California state income tax on qualifying forgiven mortgage debt. You can reach me at 858-382-5820 and I can put you in touch with legal or tax experts here in San Diego.
Sheri Feb. 29, 2008: Thanks Bob for responding quickly. If the SB1055 passes, how is the exemption determined? Example, we first bought our house in 2001 for 273k, we owe 580k and have refi'd a few times with cash out; would we be liable for the difference between the original purchase price and what we owe on it, or would the lender forgive what they could get for the house minus the balanced owed/lent? I understand too, that money from a refi used to improve the dwelling is taken into consideration, what about funds from the refi used to consolidated debt?
Sheri Feb. 29, 2008: You already answered my question about funds being used for improvements vs. funds used for debt consolidation by answering Jennifer.
Bob Feb. 29, 2008: Sheri, start with the amount of the original loans. Any refinance of that original amount qualifies. Any cash out used for "substantial improvements" also qualifies. Any cash out beyond that is taxable. I'm still researching SB1055.
Joe March 4, 2008: Bob, We are currently in a home that has diminished in value significantly in the past 3 years. We purchased at 680K and now it is appraising by comparables at 549K. We have an adjustable fixed for 5 years and currently have a second. Is it possible to forgive a portion of the loan since we have lost significant value on the home. We are also struggling to make these payments and would really help us if the portion of the loan was forgiven. We are not speculators by any means, but we had to purchase this home since we have a large family. Do lenders forgive portions of the loan if it was refinanced at the value where the current home is now? How would we go about doing this? Thanks Joe
Bob March 5, 2008: Joe, Yesterday Fed Chairman Bernanke urged lenders to do just that. I think more will do that over time. You start the process by calling your lender and asking for a loan modification package.
Mimie March 5, 2008: Hi, Our short sale consultant just told us that the Mortgage Relief Act only applies to short sale not foreclosure. Our house has been in short sale since September 2007. Unfortunately the buyer backed out. We have 2 lenders and so far the 1st lender has approved a shortsale which expired 2/28/08. We were told we only have up to 3/19 to submit an offer, otherwise the lender will go ahead with the foreclosure/auction. Please advise : 1)Is the mortgage relief act is for foreclosure as well? 2) What is the impact on our credit between a shortsale and a foreclosure? Your comments are appreciated. Thank you.
Diane March 6, 2008: We were in the process of building a new home as our principle residence starting in November 2005. Due to delays in construction, we did not close on the construction mortgage until April 2007. By April 2007 the value of the property had gone from $1,500,000 to $750,000! In November 2007 we negotiated a short sale with the lender which resulted in a 1099 being insued to us in the amount of $750,000. Since this was new construction and we never lived in the home does this qualify for the tax exemption under the mortgage relief act? Thank you
Bob March 6, 2008: Mimie, the law applies to the cancellation of mortgage debt. That can occur through a short sale, a foreclosure, a deed in lieu of foreclosure, or even a loan modification where the lender forgives part of the loan principal. Unless you have some negotiating leverage with the bank, your credit score could be hit hard either way. If you are behind in payments, the 30, 60, 90 lates are the same regardless of the outcome. If a notice of default is filed, the score takes another hit. The only real difference is at the end and it depends on how the lender reports the short sale or foreclosure. Diane - I don't know how that would be classified. I would strongly advise that you speak to a tax attorney.
Sheri March 6, 2008: Bob, Reading Joe's question and your answer, I ask a step further: if the lender does forgive a portion of the loan and modifies the loan to it's current value, what happens to that forgiven amount? Are we 1099'd and subject to income tax or does that forgiven amount fall under the mortgage relief act. Who decides if that forgiven amount is not taxable? thank you!
Bob March 6, 2008: Sheri - the lender will issue a 1099 if debt is forgiven. If the forgiven debt is considered qualified principal residence acquisition debt, then it wouldn't be taxable. If that's the case, then you would file <a href="http://www.irs.gov/pub/irs-pdf/f982.pdf">IRS Form 982</a>.
Julie March 7, 2008: Hello, my husband has left me and doesn't care that the house forecloses. I cannot afford this house and am working with the lender on what my options are. I am looking to file bankruptcy to protect myself from unexpected fininacial hits. Do you know any good bankruptcy attorneys in Las Vegas, Nevada? Thank you so much.
Bob March 7, 2008: No Julie, but I'll tap my network and see what I can find.
Ben March 8, 2008: I just stopped making my Mortgage payment and listed my Condo for a Short Sale. We already received an offer and now I'm wondering why I'm doing a Short Sale when I could stay here,rent free, for the next 6-8 months until Foreclosure? I don't care about my Credit Score. Also,I went to see my CPA and he said that if the Lender sends me a 1099 next year then I can just prove Insolvent(Debt is more than Assets) and I won't have to pay tax on the difference.
Bob March 8, 2008: Ben, one reason for the short sale is to negotiate away any potential deficiency. If you don't have a deficiency problem, then a short sale if done wrong could actually put you in a worse position. Make sure you have an attorney over see the terms in the approval the bank issues.
Matthew March 10, 2008: So I'm a bit concerned about my mortgage. I did a 80/20 0 down interest only loan with a 2 year ARM. Bought my home for 330k a year ago and a home next store sold for 240k last week. My ARM expires in a year and I'm scared since I've heard the horror story's of un-affordable ARMs. I've tried calling my bank (citi mortgage) but they say they can't do anything until much closer to my ARM adjusting. When the ARMs up I don't want to sell but if I can't afford the mortgage i'll have to. Any ideas on what steps I should take at this point? Is foreclosure or short sell better? If short sell is it my job to convince the bank to forgive the remaining debt on the short sell so I can do the whole mortgage forgiveness thing? I live in Las Vegas and this is my first and primary residence, any information is greatly appreciated.
Matthew March 10, 2008: next door not next store is what I meant. :)
stacey March 10, 2008: Bob, We are attempting a short sale on our condo and may possibly be facing foreclosure. We have only lived in our house for 1 year, so from what I understand about the Dept Relief Act, we will still be liable for taxes on the difference between the short sale price or foreclosure sale/auction amount and the loan amount because we have not lived here for 2 years. Is this correct -- we would likely be liable for taxes? Thanks for your help!
Jessie March 18, 2008: Hi, I am in the middle of having to short sale my home in new york. I owe 360,000 on the 1st and 90,000 on the second. So far the 1st has agreed to 250,000 which I have a buyer for. But what happens to loan I owe to the second bank? There will be no money left over.
Javier March 20, 2008: Hi there, I bought a condo about 7 years ago in the bay area for 290k. i put 5% down so my balance is approx 280k currently. i refied my loans several times within the first year becauase rates were pretty low. i recently lost my job and my 5yr ARM is expiring in september. my wife is still working and could probly afford the mortgage if we are able to refinance. my rate will go up to 8.0% from 4.5%, a huge jumb in payment. there is a condo exactly like mine for sale for 370k and it has been in the market for 40days now. these condos were selling for 420k about 1year ago. i am becoming really anxious and not sure wether i should stay and try to refinance, or try to sell right away in case values continue coming down. pleeeeease help!!!!
T. Bennett March 21, 2008: I have been reading the comments made by the others as the relate to the Mortgage Forgiveness Debt Relief Act . I am still not sure if I qualify for the Mortgage Forgiveness. I do not have an ARM. My mortgage is at a fixed rate. I have never refined my home loan. Do I qualify for Mortgage Forfiveness.
David G. March 27, 2008: BOB, you are a God send and its great that you answer all of these questions? like the one im about to ask. im current on my mortgage and i know its a matter of time before i start to fall behind on my payments. i have a 560k loan with a first of 396k and a 2nd of 167k. the original loan was 465k so i took 50k for upgrades and the rest i used on my wedding. i am the only one on the loan and my wife was helping on the payments until she lost her job. i talked to short sale agents and they said they could help. after the agents looked at comps in the area they said i could sell my house for 425k with lenders approval. they said most likely the 2nd on the mortgage will get the short end of the stick and they would be lucky to get a few thousand dollars. my question is if the 2nd took a short sale for little or no money and i can prove that i took money for upgrades and i can prove insolvency will i get a 1099 or will i have pay taxes on the 167k? Or out of the 167k, 67k goes towards the original price of the loan when i bought the house and the 100k that i took out when i refi 50k when towards upgrades and 50k towards personal use so that means i pay taxes on 50k of personal use? i hope i explained myself ok.
David G. March 27, 2008: If not BOB can anyone else answer questions? By the way, i live in California.
Bob March 27, 2008: David, you pretty much have it right. The trick is that while the 2nd may have to settle for a few thousand to release the lien to allow the sale to go through, you still have to get them to release the note and agree to not seek a deficiency.
Donyale March 29, 2008: Hi, I really appreciate your forum and taking time to answer questions. We live in Michigan and we purchased our home in Feb. 2004 for $330,000 (ARM). Our payments were $2400,00/mth with escrow. As of the past year and 1/2 we have had serious financial challenges (rental investment). We own a Painting Contracting business which is maintaining, and we were able to purchase our home because of the rental properties that at the time we owned. We only have 1 rental as of today ($300.00/mth profit) We are now as of today facing foreclosure on our home (sheriff sale date April 08th). Our 1st mtg with fees is now $378,373.00 We do have a second mtg. (60,000) also, which has not received a default yet. Houses in this area were selling for $450,000 or more at the time of purchase. Here is my challenge for today, in August 2007, just to avoid the last foreclosure sale date, we entered into a repayment plan which at that time we were about 4 months behind so the new payment required one regular payment mtg. upfront of $3300,00 and then the repayment plan added in took the payment to $6000.00 (because of back taxes the lender paid them). The escrow when set up was only paying the house insurance and not the taxes?! The lender paid the back taxes of $11,000 which is included in figure above. So realizing that this is a ridiculous monthly $6000.00 payment (high because of the back taxes being included also) if were struggling with the ARM increase payments, repayment or not we would be living for a house payment instead of eating. So I went back to the lender for a loan modification request in September (lender is Countrywide Home Loans) so they explained they are extremely behind in dealing with loans so for us to continue to save as much money as possible until a decision was made on the modification. We appreciated the time believing that we could come up with the $20,000 needed to put the loan back to normal payments and or have the modification approved. We did not get a response on the modification until February 08, the lender stated that most of the investors were accepting modifications in Dec 07 and Jan 08, with the exception of ours and that it was denied. (Now because of the time delay we are a total of 9 payments due with the amount (foreclosure fees, etc) being about $34,000 to bring the ARM loan (1st mtg) current. So any insight or input is appreciated - - As we speak they are reviewing a repayment plan but based on the last repayment plan, I know this is not a real option, it only buys time, usually when the lender is reviewing the repayments the sale date gets rescheduled. So I see a few options, and if you could provide insight on something I'm missing, please let me know. 1) Take the higher repayment plan only to just to buy more time with the sale date? (30 - 60 days) to somehow find more funds. 2) Spoke by phone with a BK Atty about Chapter 13 and he wants profit and loss statements for 6 months to determine if we can even take that option via there firm? 3) Called a Foreclosure Prevention Counselor who pretty much laughed saying we waited to late and if we had found him sooner he could have done a short sale option? Would the short sale have meant we could stay in our home? 4) With an April 8th sale date the letter that came regarding the sale, stated we have lived out our equity (so not a 6 month option)? We would have only 30 days to move from the sale date - - not much time to operate, so is there any options we may be overlooking? My desire is to keep our home but I don't know where to turn, with about $6000.00 cash to pay towards a up front repayment plan option - - are we being realistic? If we had a chance to start over today, we could maintain a $3000.00/mth payment but anything above that (ARM) is not feasible. Our situation feels very unique. Any response is appreciated.
Donyale March 29, 2008: I reviewed my sheriff sale paper and it does state 6 month redemption Thanks
Angela Baltimore March 30, 2008: My husband did a short sale on a property in 2006. The bank never sent a 1099 - Is this new law retroactive or is it just for sales that took place subsequent to the rule? I ask because the IRS is now demanding $15+K on the foregiveness on the loan - apparently, we were not advised and the accountant wasn't aware of the short sale because a tax form reporting the short sale was not submitted to us to be given to the accountant thereby not reported by us but apparently reported sometime in 2007 by the bank? Is this law retroactive or not or what remedy can be sought?
Rob Lawrence April 8, 2008: The thing about foreclosures is that somebody wins and somebody loses. And guess who's left holding the bag at the end of the dance...WE ALL ARE. Wake up people and realize that it's all of us taxpayers cleaning up this mess. Regards, Rob Lawrence http://www.battlecall.com
Bob April 8, 2008: Donyale, I'm very sorry I missed your comments earlier. I'm not sure I could have provided much additional information, though. The short sale option would not have allowed you to keep the house. It would be selling the property and having CW agree to take less than owed. If you lose the property, check with a CPA about your options in dealing with the 1099. I hope thinks work out. Again, I'm very sorry I missed your comments. Angela, the law is retroactive and applies to debt forgiveness that occurred after January 1st, 2007. Talk to your tax expert and see if you qualified for insolvency.
Bob April 8, 2008: Rob, I can't begin to tell you how offensive I find your thoughtless, self serving comment. Did you even bother to read the comments people have left here? You sell a coaching plan to teach loan officers how to push loans, including sub-prime. NOWHERE on your site did I see anything about teaching loan officers how to make sure they don't help the borrower screw themselves by refusing to do a loan they may be able to get but probably shouldn't. People are losing their homes, their life savings, and sometimes their marriages. Most were not speculators. Their biggest sin was trusting agents and lenders and Fed Chairmen and NAR economists who told them repeatedly "It's a great time to buy a house", and you actually have the gall to reduce this to a zero sum game and tell them to wake up??? After taking a look at the link you left (solely for the purpose of getting found in a search engine), I'm n ot surprised. I found a few interesting statements on your site: <blockquote>Here's a great way to make sure you don't get stiffed on credit report fees...make it just another part of the loan process! I created this form to go along with all the regular loan disclosures and simply asked the customer for a credit card to cover the credit report and flood certification fees associated with the loan. And once the loan closes, these fees would be credited back to them as having been POC (paid outside of closing). Using this form does two things. First, it mentally commits them to the loan process because they are paying a small amount towards it upfront. Second, it ensures that you don't have to eat the fees! Now, I know a measly $50 to $75 doesn't sound like much, but when you do the type of volume that I do, it can certainly add up. And I'll be damned if it's me that's gonna pay for a customer that just uses me to rate shop! Sometimes, as a loan officer, you need to just whip people into shape to get the respect you deserve. Lol. :-)</blockquote> How dare the consumer shop for a fair deal and have the gall to not show you any respect. <blockquote>A fellow Battlecall warrior recently sent us his version of an ARM (adjustable rate mortgage) conversion letter. We took his letter and made it one better with our own Battlecall spin. It's where you target people who are in variable loans and try to convince them to refinance into a fixed interest rate before their loan adjusts. This is a huge market right now and I would even venture to say that it is even bigger than the current purchase market. With all of those low ball, teaser and exotic rates out there...many of these borrowers will be panicking when time is up! That's where you come in, super hero loan officer to refinance them into a fixed rate and save the day! Bravo! </blockquote> Yep. Superhero who puts them into another loan they shouldn't have while at the same time manage to eliminate any non recourse protection they might have enjoyed. Flippin' brilliant! <blockquote>Real Estate agents are funny people. They always think they have the upper hand on the home purchase. But, little do they know that it's really YOU, the mortgage broker, that controls if the deal lives or dies. The truth is, although their ego's are bigger than a prize-winning watermelon at the State Fair, I think deep down they're scared. Every realtor I've ever known has been in a panic on every deal. And more times than not, they actually screw themselves by monkeying around in the details. How many times has a realtor tried to play "favorites" and pit you and the borrower against each other at odds? It's a stupid game but for some reason they can't get enough of it. One thing that I've found useful in dealing with real estate agents, especially when trying to set up a referral relationship, is to play up the greed factor. If they realtor thinks you are going to send them business, they will kiss your behind all day long. And if they think you have hot leads to throw their way, they might even do a few jumping jacks! Here is a wonderful letter I wrote to go along with my lead generation site I use. It includes some very motivational language to help open doors into realty offices. And, even though we don't always like them, real estate agents should have a place in your marketing plan. </blockquote> Here is a novel idea - why don't you earn people's business instead of lie to them? But hey folks - you heard it straight from the horse's <strike>ass</strike> mouth - Rob here says it's the mortgage broker that is the reason why deals succeed or fail. <blockquote>If you're looking for a quick and easy opening for targeting the Adjustable Rate Mortgage (ARM) market, here is an excellent cold call sales script you can use. With the purchase market slowing down and refinances dead in the water, the only loans left are "exotic" loans such as interest only, or ARM conversion loans (otherwise known as ticking time bombs). Here's how you can approach this segment of the market and "scare" them enough to consider the consequences if their loan adjusts.</blockquote> Cold calling. People just love that. Scare tactics. Quite the bastion of integrity there Rob.
Corrinna April 10, 2008: I am living in a condo I purchased in Dec. 2005. I bought, not to live in long term, but to sell at the end of 2 yrs. Unfortunately, of course, my home has lost almost 1/2 it's value. My interest rate was supposed to adjust in Jan '08, but I modified my loan to save me for one more year. I no longer want to live here (have hated it from day 1) and do not feel it's worth paying the higher interest once it does adjust in Jan '09. I have looked at my loan docs and cannot tell for sure if it is a "purchase-money" loan or not, although I think it is. I live in CA, so I need to know if I will be charged a deficiency balance (that will be based on whether or not a purchase-money loan) and if I will be 1099 taxed for the forgiven amount. I've looked everywhere and can't find the most up to date info to determine these things. I certainly would prefer the "deed in leiu of forceclosure" but doubt my bank (HSBC) will go for it. How do I find all this out?
Corrinna April 10, 2008: By the way...I have a first and a second mortgage. The second is NOT an equity loan. I don't have a clue how that loan plays into the whole thing.
Jody Henson April 13, 2008: In April 2007 Farm Home(Rural Hosing Development foreclosed on my home:( i recieved a letter they were writing off the debt and in jan 2008 i recieved a 1099C for $11,000---do i NOT have to claim that as income on my 1040? Do i claim it on my AR state income taxes? i really need to know that---i already paid my taxes:( just heard of this law:( wanting to know if i can file an ammended tax return now & get my $$ back because this really killed me--had to borrow from my mom & the kids & i will be eating oatmeal for the next 2 months because paying taxes on the 1099C KILLED us!!
Leslie April 13, 2008: My husband and I purchased a home for $440K 2 years ago, 80/20 1st :Interest only/2 yr. adjustable and the 2nd :at a higher rate. We had planned to refinance into a 30 year fixed based on the increasing property values two years ago and never dreamed they would be depreciating so quickly. Our home on Zillow.com indicates our home is worth $348K We believe our 1st will continue to let us make interest only payments based on the interest rate we were paying in the past. (but, is this smart to continue?) However, we are struggling along financially and late on all of our other types of payments (car's, credit card, property taxes) My husband was formerly in the mortgage business as a lender and went without income for about 6 months until finding another job: much lower paying but consistent. But, all in all we are making our house payments, just now feel a month behind. We would like to stay in our house but everyone we talk to says: we should foreclose and move on. If we do foreclose will the federal and state (CA) tax debt be forgiven with the above scenerio? One other area of bad news, we are delinquent on our property taxes and just received a letter from an attorney stating that we will need to pay in full or make payment arrangements within 45 days so either way we need to act fast. Please advise our tax liability if we allow foreclosure. Thank you!
Chris April 16, 2008: Hi, we found your website will looking for some answers to our mortgage problem. My wife and I currently live in Michigan, but have a home in Minnesota. I lost my job and could not find a job that would support our obligations in Minnesota, so we moved. We have had our house up for sale for 19 months and finally received an offer. During the time it was for sale, we had the first mortgage holder approve a Ded in Liue of Foreclosure twice, but they woudln't not accept with the second mortgage. The second mortgage holder told us they would not negotiate for Deed in Lieu of, but that they wanted a non-contiingent offer. It is almost $150,000 less than what our home appraised for 2 yrs ago, and $100,000 less than what we owe. We have been consistenly told by the second mortgage holder that they would not do a Deed in Lieu of, but that they would negotiate if we received an offer. We are two weeks out form the Sherrifs sale and the second mortgage holder will no longer negotiate as of "new policy effective a month ago". If we want to proceed with a short sale, we have to sign their form at closing stating that we will negotiate the payments on the entire second mortgage and they will not provide a copy of their generic letter to review before closing. We have questions that this may not even be legal, but also that they will not provide me a copy of the form to make an educated decision on. From the postings above, it seems to me that we may be dealing with the wrong individuals. Do you know who, or what department, would be involved in helping us to negotiate, rather than an all or nothing? We do not feel comfortable signing anything stating we will pay back $70,000 without knowing all the terms. At this point, we just feel that we should let them take the house back now as we have jumped thru hoops for 19 months and am getting no cooperation. What is your recommendation? Thank you!
Matthew April 17, 2008: I have an investment property that no longer covers my note to the lender. Now knowing that the The Mortgage Forgiveness Debt Relief Act of 2007 only applies to your primary residence, what steps could I take to make this rental become my primary residence? My current primary residence is renting a room in a house (not one I own). Could I simply have a lawyer change the paperwork from my LLC to myself? What else would need to be changed? Is there are certain period of time you must live in a home to be considered your primary residence? Thanks!
Sheri April 17, 2008: Bob, California resident here: Our lender just re-modified our loan from an ARM to a fixed but we still aren't able to make the new payments and are considering a short sale. I looked at our new but brief loan docs and found a clause I am hoping you can interpret; also they (Option One Mortgage) said the old terms are the same with this re-mod loan: "All covenants, agreements, stipulations and conditions in the Note and Security Instrument shall be and remain in full force and effect, except as herein modified, and none of the Borrower's obligations or liabilities under the Note and Security Instrument shall be diminished or released by any provisions hereof, nor shall this Agreement in any way shall diminish, or affect any Lender's rights under or remedies on the Note and Security Instrument, whether such rights or remedies arise thereunder or by operation of law. also, all rights of recourse to which the lender is presently entitled against any property or any other persons in any way obligated for,or liable on, the Note and Security Instrument are expressly reserved by Lender." Does this clause mean that this loan is now exempt from non-recourse as I understand it to be? Thank you!
annette April 21, 2008: I have a rising ARM, and my payment is $4761.00 per month, and growing larger. I have been in busness for myself for 22 years in construction. The construction industry in Arizona crashed and my busines was closed due to vendors filing bankrupt. I contacted my lender to work out a better interest rate and payment. They denied my request. I am only one payment behind, and have considered a short sale, I have already inlisted a realtor specializing in short sale.She told me that I would not be responcible for the tax ramifications on the unpaid balance---But I have heard otherwise. My balance that I owe on my house is $473.000 it has been appraised at $465.000. The realtor has it for a short sale at $369,000. Will I be held responcble for the taxes on the unpaid balance? Am I protected by the new bill that has passed. I do have intentions on filing bankruptcy , If there are tax ramifacations, can I wrap it up in tbe bankruptscy.--I figure that I have lost my house and my credit is shot anyways, a bankruptcy completes the story. Can you please give some advise?
Harold April 22, 2008: In Nov 2006, I gave my daughter a mortgage note on her house in San Diego. The value of the house has reduced somewhat and as I am getting quite old, it would be good for me to forgive some or all of her note. It appears if I do so, she will not have to pay tax on the forgiven amount and I will be able to claim a loss on my taxes. She earns less than $100,000, which seems to be the limit for her to claim the forgiveness. My question is: Can I forgive the whole note without any penalties or taxes or are there any restrictions as we are closely related? Also, where could I read the actual law passed?
Janice April 22, 2008: Bob, or anyone. I am in the middle of a divorce. Just before he left me in December, we had refinanced our house. We now have a first for $312K and a second at $37K for a total of about $350K. When the house was appraised in Sept it appraised at $385K, but now is only worth about $330 -350K. My ex to be wants to just foreclose, but I want to try doing a short sale. I have 2 questions: Will we be taxed on the forgiven part of the loan (I'm assuming it would be the 2nd that would have to forgive some) and if so, who will pay it since we will be divorced? Also, can the lender go after my/our retirement or savings accounts? Thank you , Janice
Rachel April 25, 2008: Thank you so much for all of this invaluable advice! I'll probably be coming back to ask more questions but, for now, this has been one of the most helpful forums I've seen yet on short sales and tax info. Thank you!
Leng May 2, 2008: What does qualified residential mean? We have bought our home as Purchase Money mortgage and have not refinance. Our loan is jumbo loan that's why it's 1st and 2nd mortgage. We have requested to refinance, loan modification, etc to lower payments but the lender refused. I lost my job and only one income, we were afraid that the Sheriff will take the house putting us to embarrassment so we moved out and rent an apartment. My lender's mortgage insurance does not want to release the 2nd mortgage unless we sign a promissory note that we will pay back the deficiency judgment. I don't know why mortgage insurance is involved. We put 5% down to avoid PMI and now they said 2nd mortgage is own by mortgage insurnance. If I do short sale or foreclose the house am I qualified for section 580b and the IRS forgiveness law signed by Pres Bush?
Kevin May 13, 2008: Hi Bob, From what I understand, even before the Federal Bill was signed non-recourse loans in California were not subject to taxable income on dept forgivness. Is this also true for Califonia state taxes or would the bill before the State Senate have to pass to give that protection from California state taxes on non-recourse, puchase money loans? What about if it is an 80/20 with the same lender and both are purchase money non-recourse loans?
Anna May 14, 2008: I am sure that this is a pretty basic question compared to many,many others that I've read so far, but here it goes, nonetheless: We own a house in Florida. We have our first mortgage and also a HELOC. (The HELOC was not used for home improvements, and is interest only until God knows when). We are thinking about trying to short sale. We may be able to get the full balance of our first mortgage, but nothing for our HELOC. What happens to our HELOC, and do we have to obtain approval from them before doing a short sale as well? If we can't short sale, then both lenders will/may come after us? Also, thank you for addressing Rob the Scoundrel so efficiently and thoroughly.
Bettina May 22, 2008: I'm in collections for a HELOC funded by Countrywide ... the funny part of my story is that when I foreclosed, Countrywide MADE A PROFIT on the sale of the property. Probably the only one on the entire country! They still want me to pay the HELOC (14k) even though Countrywide has admitted they "normally write-off" Helocs that foreclose. I'm thinking seriously about bankruptcy (I wish I could stop crying!!) because I was told by a mortgage guru I know that I might only have to re-pay 40 cents on the dollar. Does anyone have experience with this? similar story? I'm in Michigan.
Robert Tindale May 22, 2008: My former primary home in Florida was vacated 16 months ago. Been on the market since then but no buyers yet. Currently live out of state. Home has a first mortgage of $295,000 and a HELOC of $327,000 for a total of $625,000. Original list price was $879,000 and now it is $687,000. In 6 months, my financial resources will be drained making payments on that one and my out of state home. Any recommendations for pursuing any options such as Short sale, Deed In Lieu of Foreclosure, Foreclosure, etc.? It looks like the HELOC (another lender other than the first lender) continues to be the problem. Any help recommendations?
Candy May 24, 2008: Can you claim the mortgage debt foregiveness on two properties? In 2006, a friend had one primary residence, then bought another. Unfortunately, it was right before the market took a dive and she couldn't sell either. She has used every penny she has to hang on to them, and just recently foreclosed on one. The other is near foreclosure, but would she be able to claim it for two residences?
aris May 30, 2008: hello there, i enjoyed reading your comments on rob lawrence...i believe that guy deserved it. my situation is this: we bought a 2nd home on las vegas 2 yrs ago I/O and just this year we decided to turn it into a rental. we're 3 months behind on d payment and already rec'd notice from ASC our loan servicer. We don't have any buyer yet, so most probably going to foreclose next month june. I believe the lender now is wells fargo. If my lender foreclose, are we gona be 1099'd? on my primary residence here in calif, my wife and i are also struggling to make monthly payments with Indymac our lender. We're also planning to foreclose but we had refi'd almost 2 yrs ago and took cash out $100k. If we foreclose, are we covered with debt forgiveness act or we're still pay whatever is the deficiency. pls advice. thanks. aris
julie May 30, 2008: I live in Washington State, We have a 1st mortgage of 380K and a second of 95K and at the current time our home is only worth 350K. We are not able to make our payments any longer as my husband lost his job. We are in the process of a short sale for the past 2 months and have not had any offers. Our bank WAMU has talked about renegotiating our loan but will not touch the 2nd. If we sell the house in the shortsale for 350K then the bank looses 130K how do I get them to drop the second and lower the interest rate on the 1st. Our rates are 7.6 on first and 11.25 on 2nd. Your suggestions are appreciated. Also If we continue with the shortsale and move out of the house prior to the sale are we still covered under the mortgage debt relief act if we are not currently living in the property? WE have lived here since 2005
angel June 4, 2008: I have all the conditions for short sales, deed in lieu, short refinance. I contacted the Countrywide loss mitigation dept., they told me they don't do short refinance. Suggest short sale, because deed in lieu I have to bring some money to negotiate and anyway your credit will be affected. I thought they can suggest the easy way for both, not "take a decision and tell us what do you want to do". Can you suggest how to proceed with this if I am more interested in keep the property, have no payments behind? Do I have to stop paying the mortgage and the maintenance?
Mike June 9, 2008: After buying my home last year, at around $520,000, it has since decreased in value to around 450,000. My original lender has sold my mortgage to another, and my new lender is offering me a buyout of $50K i.e. he will discount my mortgage by 50K if I refinance with any other lender! How will this 50K be calculated, as income? Does the mortgage relief act applies to my situation. If yes, do I need to prove that this discount is actually less than what the house is worth. Will an appraisal be enough? Finally, now that my home might be worth something, I'd like to get a home equity loan, does it have any tax implications. Will it affect my mortgage relief status? Thanks!
Becky June 10, 2008: My son recently went through a short sale with B of A. His HELOC of course was not paid in full - balance around $26,000. The collection department keeps calling him and threatening to place a judgement on him and freeze all his other credit cards. What is the best thing to do in this situation? Can B of A forgive the remaining balance or Is there anything he can do or anyone he can talk to that might be able to have the balance forgiven and then deal with a 1099. The collection agency keeps hounding him and keeps threatening - are they just using scare tactics?
john mangelli June 11, 2008: Good advice. Im a NY attorney practicing foreclosure defense for 12 years. Im amazed at all the short sale experts. Experts at con. I try to tell my clients that the only person who gains in a short sale is the broker. I also try to tell people that mortgage brokers now modification experts were the same people that lied to them to get the loan. They have no experience and dont care about the client.
Barbara June 18, 2008: Does the Mortgage Forgiveness Act apply in California? I'm hearing mixed informations. Is Deed in Lieu better than 'foreclosing' ? From what I've read, Deed in lieu is suppose to be faster and better all around - lender and borrower.
Cami June 25, 2008: My husband and I had to short sale our home in Oct. 2007. Our lender put the remainder of the loan (50k) into an unsecured loan that we are paying on monthly. I was told that there was a forgiveness program that would either wipe out the loan entirely or at least help negotiate better terms for repayment. So my question is this: Is there really a program of that nature, and if so, where do I get more information about it?
abigail July 5, 2008: I live in California and recently got an offer on my house but it would be short sale. I owed $632 a on the first and $25 on the second (HELOC) The offer is $560k. Do you think the lender (indymac) lender would forgive the balance ? on the 1st and second? and do i qualify for the Debt Forgiveness.?
susannah Aug. 1, 2008: I live in Southern CA with my husband and seven children. We have an 80/20 loan through separate lenders which we are having difficulty paying. They will not negotiate unless we miss payments; we asked. To complicate matters, we also need a bigger house, but are upside down by about 100K. We must pay less, but we need more room. The best alternative seems to be to purchase a second home, and to short sale on the first. Must we continue to live in the first house until the short sale is final, to count it as a primary residence for relief purposes? And if so, would this in any way jeopardize our second residence, by not homesteading it immediately? Please help. We desperately need information, and from what I've read on this site you are knowledgeable AND a straight shooter: a rare combination. -Susannah
Nix Aug. 3, 2008: We had our house, which was our primary residence up for sale for 18 mos with no sale reducing the price by 69,000. We ended up renting with option to someone for 15 mos who is now moving out by the end of the month and not exercising the option. We have the house back on the market at $21,000 less than the option price. We expect to have a short sale but my question is how do the tax implications apply now that it is a rental property instead of our principal residence? We took out the HELOC to purchase our current primary residence. Thanks. By the way I am in Illinois.
jesse Aug. 13, 2008: I was laid off in May in CA. I am upside down by about 105k on my primary residence. I have managed to stay current on my loan however it is due to go up next month and I am out of money. I was thinking about asking them about possibly delaying 2-3 months of payments and tacking it on to the end? (I am actively looking for another job and can pay the loan if I start working again) 1) would that affect my ability to participate in HR5830 or the other newly passed regulation regarding not being held liable for paying tax on the short sale if that is what it comes to? Also, if HR5830 passes I heard that they will attach a second onto the first loan in case the value ever goes back up enough to recoup the modified difference? @Jesse - I'm not sure that there are across the board guarantees with HR5830. Deferring payments on a loan shouldn't impact the debt forgiveness issue, assuming that it meets the other criteria.
Monica Aug. 18, 2008: How does debt forgiveness work for real estate investors? If i forclose on a home will my debt be forgiven? @Monica - No. It only applies to a personal residence.
john Aug. 23, 2008: yes, monica said what i would say... please answer this questions.. thanks
EBONY Aug. 28, 2008: HI can someone please help me with this? In July 2007 I bought my home for 470,000 it appraised at 630,000. We are no longer able to pay the mortgage and are in the process of completing a short sale. I have an 80/20 loan with where as the biggest loan will be completely paid off but the 2nd lender wants me to sign a prommisary note becfore they agree fully to the short sale. I owe 470,000 the short sale is for 380,000 which leaves a balance of roughly 90,000. The 90,000 will have to be paid off in 10 years. With my financial status that is not physically possible. Will filing BK cover that remaining balance if I had no other choice? @Ebony - If you file BK, there may not be need for the short sale. You can also use the threat of the BK to get the 2nd to forgo the deficiency.
EBONY Aug. 28, 2008: Also does anyone know which states are debt forgiving? Im being told Maryland is not one.
Paula Sept. 3, 2008: debt relief act and 2nd residence
John Sept. 9, 2008: Can anyone point tme a good direction? I have a mortgage on my florida home for $190,000 and a second mortgage for $109,000. My home was appraised at $530,000 two years ago, but now is $180,000. I need to refiance because my adj, rate just went up. Is there a debt. forgiveness program that can help me?/ I don't want to sell my house but can't refinance. I have great credit, and live in south Florida. @John - your first step is to call the lender and see what loan mod options they can offer you.
John Sept. 9, 2008: Can anyone point tme a good direction? I have a mortgage on my florida home for $190,000 and a second mortgage for $109,000. My home was appraised at $530,000 two years ago, but now is $180,000. I need to refiance because my adj, rate just went up. Is there a debt. forgiveness program that can help me?/ I don’t want to sell my house but can’t refinance. I have great credit, and live in south Florida. Owe a total of 299,000 for first and second mortgage. @John - You have to start with the existing lenders and see what they are willing to do with a loan mod. No one will refinance those loans.
Mike Sept. 27, 2008: Re: mortgage debt forgiveness. Federal - principal residence only Californai - principal residence only. "The Mortgage Forgiveness Debt Relief Act of 2007 (the Act) excludes from the gross income of a taxpayer any discharge of indebtedness income by reason of a discharge of qualified principal residence indebtedness occurring on or after January 1, 2007, and before January 1, 2010." Sorry to you investors.
sarah Sept. 30, 2008: Bob, how does the Act affect the people who are taking advantage of the current economic crisis by participating in a buy and bail scheme? Someone we know bought a new house (bigger, better and cheaper) and moved into it 2 months ago with the intention on letting the other one go into foreclosure. They have stopped making payments to the mortgage company and the property taxes are deliquent. Now the realtor is marketing the house for $60,000 less than what they owe and stating "subject to bank approval of a short sale" on the listing ticket. If the house sells as a short sale or if it goes into foreclosure will they be held responsible for anything? Im sure that they would probably quailfy for "insolvency" because they depleted all of their resources for the down payment on the new house. The loan is a purchase $$ loan because they never refinanced due to a large prepayment penalty. It seems so unfair that the new act may actually protect them despite their dishonesty. Thanks. @Sarah - the law doesn't take intent into account. While it may not seem fair, think of it in terms of the presumption of innocence.
Mary Sept. 30, 2008: Question - We are going thru short sale and I'm trying to figure out 'qualified indebtedness' as it relates to the 1099. We did pay off a car with part of the cash out refinance but we also put thousands of dollars into building a pole barn. How do I prove that the cash we took from the refinance went to home improvements so it isn't taxed? Thanks, Mary @Mary - Receipts.
Lisa hanson Sept. 30, 2008: IT IS MY UNDERSTANDING THAT THE MORTGAGE LOAN FORGIVENESS WILL GO INTO EFFECT AS OF OCTOBER 1,2008. I AM A HOMEOWNER AND MY PROPERY VALUE HAS DROPPED BY 200,000. I HAVE HAD SEVERAL FINANCIAL BURDENS OVER THE PAST YEAR. I AM NOT BEHIND AND AM MAKING MY PAYMENTS. I DON'T KNOW HOW MUCH LONGER I WILL BE ABLE TO KEEP MAKING THEM. I HAVE BEEN SCRAPING BY, BY WORING OVER-TIME. THERE HAS NOT BEEN ANY OVER-TIME AND IT IS NEVER A GUARENTEE. DO I HAVE TO BE BEHIND TO QUALIFY FOR THE LOAN FORGIVENESS OR DOES MY SITUATION MEET THE REQUIREMENTS. MY MORTGAGE COMPANY HAS BEEN NO HELP AND I WOULD LIKE SOME DIRECTION TO HELP GET MY MONTHLY PAYMENT DOWN. @Lisa - the loan forgiveness law is in effect now. The latest economic recovery law just went into effect, but there are no guarantees for individual homeowners. Talk to your lender again and ask them what options they can offer you. What state are you in?
Holly Oct. 7, 2008: My husband and I bought our home in Georgia in 2006 for $250k. We took out a 80/20 mortgage that has since been sold to 2 different mortgage companies. We now have to move out of state, and I am sure our property value has decreased below what our current principle is. How should we approach this? Should we wait until we actually list our house on the market and see what our offers are before we approach the lenders for a short sale? Or should be get it appraised now (pay out of pocket for the appraisal) - and ask for some sort of readjustment? And which lender (or both) should we approach first? @Holly - Talk to the lenders now.
Freda Oct. 16, 2008: Calif: My house is going into foreclosure soon. My husband had a stroke that left him paralyzed, he is 71 and I will be 64 in a couple of months. Because of my husband's illness, I can no longer work outside the home. This has caused us to lose more than half of our combined income. Will our situation be considered elegible for debt forgiveness, if so, what steps do I take to keep our home? His condition has depleted all savings and the only income now is social security and a small pension.
Bob Oct. 21, 2008: Freda, the first thing is to call your lender ans see what they can do. If you have any equity, you could also look into a reverse mortgage. Start with Wells Fargo. If you have any questions, feel free to email me at bobwilson@gmail.com or call me at 858-382-5820.
T. D. Nov. 17, 2008: My situation is a little complicated, but I am hoping you can give me some direction. Here it is: In Dec. 2007, I purchased a home in a nearby city (within CA) under the promise of a job transfer for my significant other. The transfer fell through, but the home was already in escrow. I attempted to live in the home and do a 2 hour commute, but it became too much of a strain, so I moved back to the apartment I lived in previously. Shortly thereafter, my significant other lost his job, so we have been unable to make the payments, nor have we had any luck finding a renter. We are at the start of the short sale process now. So, I am wondering, because I haven't owned the home for two years, can it still qualify as a principal residence, given the fact that it was not a rental property either? How does the 2 year rule apply if you haven't owned the home for that long? If not, would claiming insolvency be an option for tax purposes? Finally, at what part of the short sale process should I consult an attorney? We are using an outside company to handle the short sale. Thanks for any advice you can give.
Brian Nov. 19, 2008: The whole idea of debt foregiveness really upsets me. If someone bought a house for $500,000.00 and now its worth $300,000.00 the bank should give them the difference because they can't pay that much or don't want to anymore. Sorry but you should be foreclosed on and if you want to buy it for 300K then put in a bid like everyone else, if you keep helping the idiots then the economy will NEVER recover, look at Russia, communism doesn't work. When I bought my car I lost 20% of value as soon as I bought it, so does Lexus owe me 12,000.00. I think so it's only fair right. Or the plasma TV I bought two years ago I can get for $3,000.00 cheaper, I think SONY owes that to me too. If you start down this road where does the GREED stop, sorry if you lose your home but someone else will love it just as much as you and they will most likely pay the bill and not hurt the economy more.
Chuck Dec. 30, 2008: hey bob, i'm in a similar situation as everyone here and would also like some form of advice or suggestions. i purchase my house in 2005 for $350k. i refied it in 2006 and took out a second loan at $65k. now i owe $356k on the 1st mortgage and $65k on the second totalling up to $421k. i love the house and i do not want to lose it. can you email me so that i can tell you my situation and what i proposed to do to keep my house. please contact me ASAP thanks. PS: i only have until jan 19, 2009 before they put me into the foreclosure process.
Noe Jan. 1, 2009: Hi i lived in a house in california for 4 years. did a cashout refi and took out 170k and bought a house in Texas. shortly after i moved to texas and rented my house in california. the property in california its worth 300k and i owe 475k. Im planning on doing either a short sale or just letting the house go. would I qualify for the debt forgivess act law since its not my primary residency any more but its was back then when I did the refi? can any one give me a good advise on what shoud I do? short sale or forclosure? would I have a tax problem if I do not qualify for the debt forgivess act? Help please
Barbara Jan. 27, 2009: I have lived in North. California 12 years. Always paid on time. Taxes too. I owed 120,ooo when i first bouth the house. Through medica situations, grave medical sitations and losing my job I now owe $460000. I am on a fixed adjustable. Because I have lost my job and have to have spine fusion surgery I will not be able to keep up the payments. I am upside down on my mortgage (lost 275000) on the house. I have severely disabled sons at home from a stroke and motorcycle accident. After this month we can't pay anymore. Should I stop paying and let the foreclosure happen. I want to save my home so my son has a place to relearn to walk again after his amputation. We are very good people in a far different world then we ever expected. Should we prepare for the worst?
jason Feb. 2, 2009: I have a condo in sf. I lived it in for 2 yrs. We decided to buy a bigger place. Now the condo is a rental. Im out about $1000 a month. Since I did live there for 2 yrs, am I still covered by the debt forgiveness act? thanks! (have not refied)
Marissa Feb. 3, 2009: I purchased home under FHA in 2005, got married 2007 and we needed to upgrade in 2008 due to new birth and combined family. My original home was 3 bedroom 1 bath we are family of 8. My husband had his own home as well (not FHA but we rented that out when we married and still own but would like to sell it get it out of our finances rent is not income just enough to pay mortgage "risky" but needed) We qualified for another FHA on our new home of 5 bedroom 3 bath because we met a "clause" in FHA that we needed to upgrade to the increasing size of our family. We sold my home and I took a loss because under the FHA clause we had to sell before the purchase of the new home. Does this qualify me for any type of relief in the debt forgiveness? AND do we still qualify for the Tax credit ($7500) because we are still under the FHA loan for first time home buyers of course??

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