On Good Morning America a couple of weeks ago, they aired a story of a website adovocating walking away from your home. When I watched this story, I was amazed at the misinformation that was being given by GMA regarding this topic. In this segment they interviewed a homeowner, who is a single mother living in Washington, D.C. This woman had applied to her lender for a loan modification and was denied. The woman explained how finances were tight and she had cashed in her 401k to make ends meet. She felt like she was at the end of her rope and therefore, she was contemplating walking away from her home and letting the property go to foreclosure. The story continued, saying that the Mortgage Bankers Association had walked away from a multi-million dollar commercial building and let it go into foreclosure. So, because the Mortgage Bankers Association walked away from a multi-million dollar property, it is ok for a homeowner to walk away also. There was also an attorney from Phoenix, Arizona who is also adovating this practice of walking away from your home.
The story continued to say that 1 in every 5 homeowners in the United States is upside down on their mortgage. Just recently a new report says that 1 in every 6 homeowners in the United States in default of their mortgage. Here in Riverside County, California the stastics are 1 in every 4 homeowners is facing foreclosure. These numbers are alarming! So, with these numbers of homeowners in trouble and facing losing their homes, what if everyone walked away from their home? What would happen? Well let's look at the recent past. In the last two years, because of the melt down of the option ARM loans, homes that were foreclosed on rose tremendously. It caused the stock market to drop. People stopped spending money. Businesses cut back. The unemployment rate rose to double digits. A number that hasn't been seen in decades. Because of the already foreclosed on homeowners, the United States is in a recession. In fact it is global!
Now, back to the question. Should every homeowner, who is upside down on their mortgage walk away from their home and let the bank foreclose? Just to stick it to the "Big Banks"! Because they deserve. Never mind, the difference between right and wrong. The results would be disasterous at best. The ones that would end up getting hurt by that action would be everyone. Our economy would crumble to the ground. Not only would it destroy the banking institutions, but it would destroy every business and therefore, no one would have a place to work. This story was irresponsible! There is another solution to this problem that was never discussed. Short Sale!
I know. Some people say that the only ones that benefit from a short sale is the bank and the Realtor. Quite the contrary. The homeowner benefits more than anyone. There are several reasons. One, there are deficiency laws, which vary from state to state. Here in California, we have Anti-Deficiency Laws, which protect the homeowner from the bank pursue the collection of the debt after foreclosure. These laws vary on the circumstances. In California, if the mortgage is a purchase money loan and it is your principle residence you could be protected against collection after foreclosure. However, if you have re-financed the loan, you could be pursued after foreclosure by the lender to pay back the debt. I suggest you seek legal counsel to know for sure. In a short sale, a settlement could be negotiated with the lender as a release from the defiency. Especially with 2nd mortgages, such as home equity lines of credit, the lenders are pursuing homeowners after foreclosure.
Second, there are tax consequences. The IRS sees any debt relief as income. President Bush, before he left office, signed the Debt Relief Tax Act of 2007. In this bill you will not be taxed for any mortgage that has been foreclosed on or sold on a short sale from January 1, 2007 through December 31, 2012, if it is your principle residence and the debt was purchase money. newsroom/article/0,,id=174034,00.html If you have re-financed your home loan and took cash out, you could be taxed. California was going along with the Debt Relief Tax Act of 2007 and not taxing the deficiency. But as of January 1, 2009, California is taxing any debt forgiven for the homeowners. Therefore, if you let bank foreclose, your tax liablity could be greater than if you did a short sale. An example was a property in Menifee, CA that went to Trustee's Sale. The amount of the combined loans, 1st and 2nd, was $328,000. The lender did not have an opening bid. An investor bought the property at the Trustee's Sale for $109,000. The investor then put the property on the market for $159,900. It sold. The investor made a profit of $59,900. Therefore, because the property was sold at the Trustee's Sale for $109,000, the homeowner's deficiency is $219,000. If this property is re-financed money or an investment property, the homeowner could be taxed on $219,000. Had the homeowner sold the property by short sale at the same price as the investor, the homeowner's deficiency would be $60,000 less. This would be quite a difference in tax liability. I suggest you consult with a knowledgeable CPA about the tax liablities before you make a decison to walk away or short sale.
Third reason to short sale is that the homeowner would be able to buy another home sooner. The lender guidelines say that a buyer can purchase after two years from short sale and three to five years from foreclosure. As the lenders are supporting more short sales, I believe that the lender will look more favorable to someone who sold their home by short sale, than just walking away.
By walking away from your home, you would be hurting everyone around you. Your family, your friends, your neighbors. Walking away does not punish anyone. It would be devastating and would destroy your quality of life and others.
Before making any decision to do a loan modification, short sale, or foreclose, please find out the facts. You can go to www.makinghomeaffordable.gov to get free counseling or contact me. There is never any obligation to find out the facts.
Be Blessed Today and Everyday!