Monday, September 03, 2007

Foreclosure: You Can't Always Walk Away

As the media continues to focus on the rising number of foreclosures there is often more involved then losing your home. In the Sunday LA Times there is a good article about The Tricky Tax that people who are trying to work out a short sale or are headed into foreclosure or other financial problems should read.

The author tackles the fact that you just might get taxed on the difference between the loan amount and what the bank receives at the sale as income and notes there is another little item homeowners should be aware of if they have refinanced their home... they may also have to pay back the difference to the lender.. especially if the loan was one underwritten by Fannie Mae.

This is true whether you have a short sale or actually go through the foreclosure process. I had it happen to a client back in the 90's with a short sale. The lender forced my client to sign a note before they would allow the short sale to take place. The lender had promised my client that they would not ding the client's credit if the note was signed but they did not keep their word. so if you get involved in any of these situations ... be sure you get something in writing about how they plan to deal with your credit report.

Too often people who get into trouble with financial matters don't understand that you may not be able to walk away and start fresh without consequences. While President Bush spoke about trying to mitigate the tax problem he did not address the possibility of having to pay the difference to the lender.


Anonymous said...

"they may also have to pay back the difference to the lender"

Is this what they call a "deficiency judgement"?

A friend of mine walked away from a condo in the early 90's. When he sold a different home approximately 3 years ago, he was hit with a lien form the bank for the condo. Ouch!!

Kaye Thomas said...

Anon- Yes... it is a deficiency judgment..

A Loan that you take out to purchase a home is a non recourse loan and it is not subject to a deficiency judgment.. However if you refinance then that protection goes out the window..

Anonymous said...

I did this in the 90's. Tried to negotiate with the lender (loan had been sold at least 3 times). They would not negotiate. I said I would walk (I had not refinanced). A balloon payment was on the horizon, and the condo was upside down by about 40%. Tried to sell - had it on the market for almost year - dropped price several times - almost no one looked at it. Finally, I moved out and leased the condo for a year, at a loss, then walked . Was able to duduct the loss. 7 years later, it is no longer on my credit. I did not want to do it, but I worked out fine for me. Bank held the condo for over a year.

Kaye Thomas said...

Anonymous- Thank you for your comment.. People really don't think this can happen to them... but it can. Sometimes lenders are not very smart about short sales vs the cost of foreclosing.

I'm assuming you were able to deduct the loss as it was a rental for a year.. otherwise you couldn't deduct against your personal residence.

That was another big problem in the 90's.. people had huge losses which were not deductible against a personal residence.. and that part of the law is not likely to change.

short sale kid said...


Have you closed any short sales successfully? I did a long interview with my short sale agent in Seattle. Pretty good stuff.

I'm seeing more and more interest and traffic to my little blog regarding short sales. The interest is definitely picking up...

Kaye Thomas said...

Short Sale- Haven't done a short sale since th 90's.. so far no need but I suspect I will have to brush up my knowledge soon as I know a few things have changed.

In the 90's I completed 4 short sales and tried to get others through without success.. as you know (nice web site) they are not as easy as people think.

One of the problems with short sales is that lenders don't want to talk with you until you get an offer and then many don't want to talk with you if you are not behind in your payments.. rather a Catch 22 situation.

I'm sure you will be getting a lot more questions.. even if some measures are taken to bail out some homeowners.

One word of advice.. be careful about what you say/do on your site as you do not have a license and CA frowns on real estate advice being given out by non-licensed people.. or fees being paid to non-licensed people for anything real estate related..

Anonymous said...

Kaye said that in a deficiency judgement a loan you take out to purchase a home is a NON RECOURSE loan and is NOT subject to a judgement. Is that in all states? Or just CA.

Kaye Thomas said...

Anonymous 5:20..
I don't know about other states but in CA a purchase money loan is considered to be a non-recourse loan... However lenders are claiming that some of the seconds(HELOCS) that were used along with the first as purchase money loans may be subject to a deficiency judgement as they are considered to be promisary notes.. There is a lot of discussion about this.. and the issue may wind up in court about the seconds..

If you have refinanced the loan and the lender does not get enough money from the sale to cover the loans then you may be subject to a deficiency judgement for the balance.

Many lenders are now requiring that the seller sign an agreement to make payments on any shortfall if the lender allows a short sale.. this is true with both purchase money loans and loans that have been refinanced.

I hope this answered your question.