All those cash out refis, well, they did seem too good to be true at the time didn't they? Got a lot of people out of debt (or so they thought), paid the bills, bought nice Hummers and Tahiti vacations.... Well, there's no such thing as free money...
Refi loans could prove costly in foreclosure- Law allows lenders to go after personal savings as well as the house, unlike original mortgage.
Homeowners behind in their mortgage payments after hocking the house to pay for a major remodel or a new boat or car may be in for a rude awakening.
If they previously refinanced and their lender decides to foreclose, they may not only lose their house, but the bank also may be able to go after their other financial assets including stocks, savings and their paycheck.
And even if the bank doesn't go after their other assets, a foreclosure may mean a big tax bill from the IRS and state Franchise Tax Board for any shortfall between what the bank gets for the sale of the owner's home and the value of the loan.
"This is going to become a hot topic," predicts Bradford L. Hall, managing director of Hall & Co., CPAs in Irvine, who remembers the pain of foreclosures during the 1990s. "There's very little awareness of what can happen when you can't make your payments and are forced to sell your home for less than the mortgage balance or lose your home through foreclosure."
In California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower's assets once they obtain a court judgment.
"They can literally go after everything you have," Hall says.
July 10, 2006
One drawback to using the house as the piggybank: Losing the rest of your assets too, and an IRS tax bill to boot
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18 comments:
I say, GOOD! If you are stupid enough to refi your life away to keep up with the Irvine life style that you couldn't afford, than you get what's coming to you. And, a guy like me, who saved his money, will be down there at the auction buying your Lexus coupe for pennies on the dollar in a few months.
This is ABSOLUTELY the most overlooked aspect of walking away from a mortgage and the effects of the real estate bubble that most FB's know nothing about. I used to work at Home Savings of America in SD and we had a borrower with ten 1-4 unit buildings in 1993. He let the first one go back to the bank at a loss to the bank (not us) and was hit with a huge tax bill for recapture of depreciation and a 1099 for the forgiven debt. He couldn't pay, then the onerous IRS penalties and late charges kicked in, so he had to sell another 1-4 unit building in a declining market and couldn't. Eventually, he walked away from the 2nd 1-4 unit building and the tax bills doubled. It got worse because he had to rent his units for more than others could afford to because their cost basis was much lower since they had bought their units as REO. He later walked away from all ten buildings, went BK, and literally lost everything.
You will soon see this happen again BIG TIME, but it will be much worse this time for a myriad of reasons. From my peers in the Banking industry, I'm hearing that mtg. payments are increasingly being paid later and later. The increase in Prime on HELOCS and credit cards is starting to have an effect on equity-rich, but cash-poor borrowers.
Former RTC REO MARKETING ANALYST AT HOMEFED BANK in 1992
'Uknowwhoiam’ has a very good point. Banks do NOT want dead weight on the books! Talking with the annuities rep at my local bank last week and the subject got around to housing crash. She said that her bank, and all others she deals with, will usually move heaven and earth to work with the customer to keep SOME form of monthly payment coming in. Foreclosure in this market equals dead asset on the books, equals no income
for tax and fed bank ratings purposes equals: frowning bank examiner! On the other hand, when the borrower is actively paying something/anything on note, the entire amount owed is legally on the banks books as INCOME, even though the bank has only got a fraction of it in the till. Result, well I don't think bank examiners are ever happy, but at least they will be satisfied until the next time.
There are psychological issues at play. Even though consumers CAN continue to make payments on speculative investment properties, why would they want to if they see it declining in value month after month?
Easy example is the credit card industry. Many choose to walk away or file BK instead of paying $10-20 per month they are instead spending on pizza, beer, and NASCAR stuff.
MORAL: When the market appears hopeless, people will not react logically (make some payment) and instead react emotionally (walk away and let someone else hold the bag).
Agreed. Hoping the banks decide not to go after your other assets is not exactly a good plan. If you are falling behind on your payments then the majority of the time there is no "rescue" in sight. Getting a new high paying job? Inheritance? Interest rates going down? Tax breaks?
The future is NOT bright for people who are stuck in this postion. Going to the bank every month with some change in your hat to beg for some more time is not a winning plan.
I know of some people already who are facing increasing payments and cannot sell because thanks to the HELOC binge and dropping prices they are already underwater.
Many are INCREASING their debt to make ends meet. Going right off the cliff at full speed.
Uknowwhoiam: "If anyone here knows of a lender seeking legal action against the borrower after the foreclosure or surrender, I'd be interested in hearing it."
Aren't you forgetting about those wonderful, friendly folks who run private collection agencies? They will gladly buy rights to that judgement from the lender for ten cents on the dollar. The debtor will never shake these creeps until the statute of limitations expires.
Random Thoughts:
- In the recent past with a rising market, foreclosures were few, and banks could take a little loss to get it off the books.
- You can't get blood from a stone, so they are willing to cut their losses and minimize legal fees. Again with a rising market, their loss is not as bad on the REO sale.
- But, spring forward to a large number of defaults, non-paying loans, etc, and banks will have to take action. They will hire third party firms to troll through their non-performing loans seeing which stones have some blood left. They will then focus on these people, while writing off the rest.
- If anything, hitting up some people with other assets sends the message out that they are in fact coming after (some) people, to try and encourgage more to work it out rather than sending in the keys and walking away.
- As other have said, you don't want to make the bet on what they do.
Regards Renters as not second class citizens as opposed to homeowners with 100% mortgages:
*Both* classes are renters, heres why:
- For the renter, if you have other income producing assets that pay 100% of your rent, you are a renter. Yes, you are more flexible by renting the property, rather than renting the money.
- For the owner, you are a rentor unless you own it out right. Yes, you can rent money, and take the ownership risk/gain.
For anyone who doubts this, please read "The Millionare Next Door"
John Galt
Oops, on previous post should read:
Renters: *unless* you have income producing assets providing 100% of your rent...
The theory is you may rent, but if the money from the rent is produced from income assets, you are really an "owner", just choosing what to own.
From the millionare next door, you are not really "rich" unless you can live off your investments without eating into them.
"uknowwhoiyam said...
Aren't you forgetting about those wonderful, friendly folks who run private collection agencies? They will gladly buy rights to that judgement from the lender for ten cents on the dollar. The debtor will never shake these creeps until the statute of limitations expires.
While my own direct experience is limited to only 4 cases, the lender has never sought collection after the foreclosure or surrender.
With surrender, the typical agreement stipulates that the debt is settled."
Zombie collection agencies will buy old dead bankruptcies, foreclosures, etc for a fraction of a cent on the dollar in some cases. Then they will go after people years down the road, statue of limitations be damned! What you don't know helps them. My co-worker (not a deadbeat or con man) went through full bankruptcy
almost 10 years ago due to a medical emergency in the family.
Settled and closed by the court.
Still gets formal letters by collection agencies/lawyers TO THIS DAY threatening action (all illegal) unless he at least tries to arrange some form of payment.
He knows that he legally doesn’t owe them a dime! I wonder how many people in the same situation DON'T KNOW???
First,there is no IRS assessment if the debtor is insolvent.BK under IRS code is insolvency.
Second, many homeowners can wash everything in a BK,wash the second in a foreclosure and buy the property back after sheriff deed from the mortgage company for full price and financed by them. Only the stupid and honest get screwed.
The ex-REO analyst is back. I thought you had left!
Keep us informed.....
When I tell people the reality , which is basically what I have learned on this blog , they look at me with fright. The lack of awareness and logic is stunning.
>>>PS If you don't answer the door when the sheriff comes he will make a point of asking everybody in the neighborhood if they know where you are.
I just got an image in my head of someone trying to serve an individual in Queen Creek, Arizona, in a largely vacant neighborhood.
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