Ryan’s Mortgage Blog:
The talk of the week on many sites is the proposed tax break for those facing foreclosure. Currently, if you own a home and it goes into foreclosure, you have to pay tax on the forgiven debt (which is considered income aka phantom income). For example, you owe the bank $500,000 on your loan, but your house is now worth only 400,000. The bank agrees to take the $400,000, and the government considers that $100,000 difference as income and you have to pay tax on that. The new mortgage debt forgiveness plans calls for the elimination of this tax. The House Ways and Means Committee has already approved this bill, and a vote on the House floor is expected soon. The proponents main argument is people shouldn’t be penalized twice when they lose their home “for no fault of their own”. The first penalty would be the loss of their house, but the question is should they face any more penalty in form of this tax that is currently in place? Some argue that they should receive this tax because it is their fault they borrowed the money and couldn’t pay it back. The grey area is that some people were “swindled” into getting into a bad mortgage and to an extent, may not be their fault if maybe the lender lied to them about something on the loan documents. But to argue that this is “no fault of their own” for a majority of these cases is ridiculous. The problem I see is that not everyone was swindled into these loans, and there are many other reasons why people can’t afford to make their payments. From what I understand this plan doesn’t determine who was “swindled” and who wasn’t. I always questioned this tax anyways, but now to get rid of it, I am not sure what kind of effect that would have. I feel we would have to pay for it somewhere else. I like the way one site put it…If a student took out a loan for college and flunked out a year later…should he not have to pay it back? Of course he does. The estimated cost of this foreclosure relief plan would be $1.379 billion over 10 years.
Now I am all for saving people who were “swindled”, and somehow I want to hold the mortgage broker/lender responsible and get them out of the business. I don’t have a solution yet…but I am working on one J . I don’t think all tax payers/government should have to help bail out all of these people because of a bad decision. I am sure there are hundreds of thousands of people who received mortgages in this same time frame who aren’t going into foreclosure, who were able to work through it. I feel there is a very small amount of incidents where people were actually “swindled” by the lender. I think there is a difference between being swindled and not understanding what you are getting yourself into, or even knowing what you are doing and taking the risk. Honestly….a person making $20,000/year 4 years ago could have gotten a $500,000 loan by putting only $50,000 down because they stated their income at $85,000/year. The lender told them they would only have to pay $2,000 a month for 3 years and than it would adjust after that depending on the market. So they went out and got a couple roommates to help pay the mortgage. Because they were only paying the interest, 3 years later their loan balance never changed and now their house is only worth $400,000 and the payment just jumped to $3,000 a month. They tried to raise rent on the tenants, but they moved out, now this person is stuck and is on their way to getting their house foreclosed on. One problem I see is the lender didn’t explain the seriousness of the matter when the 3 year adjustment comes and they probably knowing let them lie about their income without explaining the consequence or putting a stop to it. On the flip side, it was all in writing and it isn’t the lenders fault the house depreciated in value and you can’t find any tenants to rent to. So there is obviously two sides to this coin. Another major problem I see with this new plan is what will stop people from just turning in their keys and walking away? Something to think about.
Nobody was complaining about these “bad” loans when everything was booming. The more I look into it, the more I feel we can only do so much for these people going into foreclosure. I wish there was a way to determine who truly deserves some help and assistance and who doesn’t, but that is never going to happen. One good thing I am seeing is that these shady brokers and lenders are leaving the business and soon enough the good guys, like my company, will be here to pick up the pieces and help rebuild the housing/mortgage industry.
Please feel free to email me your opinion on this subject; I would like to hear from you. RBaker@PeregrineLending.com.