Monthly Archives: May 2009

One man's mortgage meltdown

foreclosures-shortsales, Real Estate-Purchases

I love the NY Times web site’s most emailed list. It was there that I clicked on a story called My Personal Credit Crisis. The story was actually a book excerpt from Times writer Edmund Andrew’s new book called “Busted: A reporter’s look inside the mortgage meltdown.”

The story goes into excruciating detail of how Mr. Andrews got series of  “liar loan” to buy and then refinance a house, ran up $50,000.00 in credit card debt and used the $10 overdraft protection feature on his checking account almost daily. I would be embarrassed to admit doing some of this stuff, but he doesn’t seem terribly worried about it. Most of the comments by readers on this site are less than sympathetic.

The book provides a rear view mirror look at how easy it was to get “no doc” and “stated income” loans. My favorite part is when he tries to apply for a loan modification with Chase because he can’t make his payments no one from Chase will call him back. When he finally gets in touch with Chase, they can’t help him because he’s not 90 days in default on the loan. Now that’s real life for you.

Stripping of foreclosed homes continues

foreclosures-shortsales

This story in the Daily Herald talks about how foreclosed homeowners are taking fixtures like copper wire, appliances and toilets from homes before they leave (notice the fireplace torn out of the wall in the picture). The answer to this problem is “cash for keys.” The foreclosing lender offers cash that’s paid after the owner turns over the keys and the property is checked. A Phoenix real estate agent (who’s one gutsy hombre) was charged with selling fixtures from a foreclosed home on Ebay.

Lenders seeking money back after short sale

Bankruptcy, foreclosures-shortsales

Short sales of real estate are everywhere now. A short sale happens when there are not enough funds to pay the existing mortgage holder, so the seller and the lender agree that the mortgage can be paid short.

After closing, the shorted lender can either:

1. Issue a 1099 to the seller for the amount forgiven (which is then taxable to the seller as ordinary income, unless it was a primary residence).
2. File a deficiency judgment lawsuit against the seller for the unpaid amount (this rarely happens).

This WSJ story discusses how many lenders are asking the seller in a short sale to sign a promissory note for the amount unpaid in a short sale. Then the lender files suit under the note for the unpaid amount. This is happening primarily in cases where the seller has other assets that can be used to pay the shortage and with investment properties.

I have not had a lender ask the seller to sign a note in a short sale. Nor have I seen a seller sued for a deficiency judgment. So far, lenders have 1099’d the seller for the amount unpaid.

The 1099 can cause a cascade of tax problems. The sellers only relief may be to file bankruptcy to get rid the income from this “cancellation of debt.”