I have received dozens of phone calls from California home owners as a result of my post Clarification Regarding California Non-Recourse mortgages.
Based on these phone conversations, I have come to the conclusion that there is a very frightening trend: real estate professionals (both loan officers and real estate agents) are offering advice based on "real estate urban legends" i.e. information that has been passed from person to person and is treated FACT but is completely unsubstantiated.
Three examples of these calls are:
A homeowner has lost 60% of the value on his investment property which has negative cash flow. The mortgages (a 1st and 2nd) were refinanced so they are no longer non-recourse. He doesn't have a hardship situation. His loan officer told him to to stop making the payments and let the home go to foreclosure to get out from under the mortgage debt. Urban legend advice. Foreclosure will release him from the obligation to repay on the 1st mortgage only (assumed to be the foreclosing lender) but the 2nd lienholder will have the right to collect a whopping $180k for up to four years - and they are pursuing these collections.
A homeowner with a valid hardship is selling his home as a short-sale. The home had been refinanced multiple times with some level of cash-out each time. His real estate agent told him not to worry about income taxes on the deficiency because "there is a federal law that says he doesn't have to pay". Again, urban legend advice. The Mortgage Forgiveness Debt Relief Act very clearly states that income taxes don't have to be paid on the "acquisition indebtedness" for a primary home. Income taxes DO have to be paid for the unpaid balance above the original purchase mortgage. In this case, the amount of phantom income will be over $250k.
Another homeowner with a short-sale. The approval clearly states that the 2nd lienholder retains their right to collect the balance due. The real estate agent told him not to worry about it. If the lender tries to collect, he can always file bankruptcy. Urban legend advice. In California, you must pass a "means test" to file a Chapter 7 bankruptcy if you earn in excess of approx. $75k per year. Most people will not pass the means test without their mortgage and will be forced in to a Chapter 13 bankruptcy (repayment plan).
To be treated as professionals, we must act as professionals. Due dilligence and research on the information we offer as fact should be the bare minimum standard of conduct. Equally important, clients making these crucial decisions should be emphatically urged to consult with the appropriate legal and tax professionals or the financial repurcussions could be devasting.
Wendy Cutrufelli
Your Real Estate Advocate
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