Strategic Default Questions

[monty15]

Strategic Default Questions:

I'm seriously considering a Strategic Default on my mortgages, but I have some questions regarding the foreclosure process before proceeding...

Also, in case the Strategic Default title doesn't mean anything to you -- it refers to home owners who can afford to make their mortgage payments, but choose not to. Looking at the 10+ year financial analysis of staying in the home, or taking the credit hit and walking away now, Strategic Default is my best financial option.

My situation;
-Bought house for $320K in Northern California in Fall of 2005

-Received 80/20 purchase money loans from the same bank to obtain the house (no money down)

-80% loan interest only for 7 years (resets to fully amortized over 23 years in fall 2012), 20% loan interest only for life (30 years)

-Home now worth ~$100K (underwater by ~$220K), and no signs of increasing in value anytime soon. If my home increased in value 5%/year, in 10 years it would only be worth $163K, and I'd still owe close to ~$300K due to the amortization schedule -- that's still ~$137K underwater in 10 years!

Questions;
1) Knowing that California is a non-recourse state, what are the chances the bank would opt for a judicial foreclosure as opposed to non-judicial foreclosure (judicial meaning, they would take me to court and sue me for the balance owed on the mortgages and/or deficiency payments for the ~$220K I'm underwater)?

2) What are the chances the bank would work with me on a Short Sale or Deed in Lieu of Foreclosure?

3) Are there any tax implications of doing a foreclosure, short sale, or deed in lieu of foreclosure for my situation?

4) Anybody have any advice on what to tell the bank once they start calling me asking why I'm not paying the mortgages (I have no hardships, and can afford the payments -- do I just tell them I'm exercising a Strategic Default? Will that trigger them to seek out a judicial foreclosure??)???


Closing thoughts
The only thing that makes me nervous about a Strategic Default is whether or not the bank can/will come after me for deficiency payments if/when they foreclose (not sure how likely/possible this is, but it makes me VERY nervous since I can afford to pay the mortgages). I think the only way they can do this is with a judicial foreclosure, but not sure if the banks are doing these on people with situations similar to mine (I certainly hope not!)...

Any feedback you can provide is greatly appreciated! I just need a little more information before I take the plunge and stop paying my mortgages!

[faith]

Strategic Default Questions:

I'm seriously considering a Strategic Default on my mortgages, but I have some questions regarding the foreclosure process before proceeding...

Also, in case the Strategic Default title doesn't mean anything to you -- it refers to home owners who can afford to make their mortgage payments, but choose not to. Looking at the 10+ year financial analysis of staying in the home, or taking the credit hit and walking away now, Strategic Default is my best financial option.

My situation;
-Bought house for $320K in Northern California in Fall of 2005

-Received 80/20 purchase money loans from the same bank to obtain the house (no money down)

-80% loan interest only for 7 years (resets to fully amortized over 23 years in fall 2012), 20% loan interest only for life (30 years)

-Home now worth ~$100K (underwater by ~$220K), and no signs of increasing in value anytime soon. If my home increased in value 5%/year, in 10 years it would only be worth $163K, and I'd still owe close to ~$300K due to the amortization schedule -- that's still ~$137K underwater in 10 years!

Questions;
1) Knowing that California is a non-recourse state, what are the chances the bank would opt for a judicial foreclosure as opposed to non-judicial foreclosure (judicial meaning, they would take me to court and sue me for the balance owed on the mortgages and/or deficiency payments for the ~$220K I'm underwater)?

2) What are the chances the bank would work with me on a Short Sale or Deed in Lieu of Foreclosure?

3) Are there any tax implications of doing a foreclosure, short sale, or deed in lieu of foreclosure for my situation?

4) Anybody have any advice on what to tell the bank once they start calling me asking why I'm not paying the mortgages (I have no hardships, and can afford the payments -- do I just tell them I'm exercising a Strategic Default? Will that trigger them to seek out a judicial foreclosure??)???


Closing thoughts
The only thing that makes me nervous about a Strategic Default is whether or not the bank can/will come after me for deficiency payments if/when they foreclose (not sure how likely/possible this is, but it makes me VERY nervous since I can afford to pay the mortgages). I think the only way they can do this is with a judicial foreclosure, but not sure if the banks are doing these on people with situations similar to mine (I certainly hope not!)...

Any feedback you can provide is greatly appreciated! I just need a little more information before I take the plunge and stop paying my mortgages!

Here's the link regarding IRS Debt Forgiveness Law to answer about tax implications.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

In California there is what we called CCP Section 580b which states:

580b. No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate foryears therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser. Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgmentshall lie at any time under any one thereof if no deficiency judgmentwould lie under the deed of trust or mortgage on the real propertyor estate for years therein.

You have to have a purchase money mortgage, never refinanced and a primary residence where you live at least 2 years. The bank only accepts Short Sale or Deed in Lieu due to financial lhardship meaning you can not afford to pay the mortgage, loss your job, divorce, disability.

There is OBAMA HAMP program and here are the guidelines, see link:
Obama HAMP - Home Afforable Modification Program | Obama Modification Program | and read it to see if you meet the criteria, if not, your last resort is to walk away. But this is for you to decide, remember also the damages to your credit score. Foreclosure is minus 400 points, takes 7 years to buy another house. Short Sale is around 60 points and you can buy another house again in 2 years. Deed in Lieu is the same with foreclosure you need to tell your bank that the payment is unbearable, your payment will adjust and that you are underwater by let's say $300k, you can not handle the stress and would like to give back the house to them. It is not wise to tell the bank the strategic default, you can start giving them hardship, stress out, financially unstable, don't give them ammunitions to fire back at you. If you bank with the same lender, I suggest to move your checking and savings acct to a credit union. But don't close the account yet just leave it active, have about $30 to the account.

Hope this helps and God loves you and bless you.

[jakelabry]

Strategic Default Questions:


2) What are the chances the bank would work with me on a Short Sale or Deed in Lieu of Foreclosure?

Answer - not a snowball's chance in hell. Short sales and DILs both require you demonstrate hardship and you don't have one by their definition. Losing value on a property you bought to live in doesn't cut it by their standards or anybody else's probably.

4) Anybody have any advice on what to tell the bank once they start calling me asking why I'm not paying the mortgages (I have no hardships, and can afford the payments -- do I just tell them I'm exercising a Strategic Default? Will that trigger them to seek out a judicial foreclosure??)???

Let me see - would I tell someone I borrowed money from that I no longer intend to repay them because I gambled that the collateral I invested in would never lose and always gain value? That I could pay, but won't because I have no skin in the game having made no down payment and the only loss will be theirs? Uh, no - I wouldn't tell them that.

My Final Thoughts - I believe in many cases, walking away from an upside down mortgage on a house that will never recover in value, is the only intelligent move for overburdened, desparate homeowners. People who's homes have not only lost hundreds of thousands of dollars in value, but who have lost income, jobs, their health. In fact, I believe that the only way our economy will recover is if this housing bubble finally pops and the government stops propping up (or trying to reinflate) the cost of housing. Until the median income once again tracks with the median home value, then we ain't going nowhere. This means many more people will lose homes and banks will lose billions but I'd rather rip the bandaid off then peel it off slowly. I can't feel much sympathy for strategic default but I won't judge it as long as those who "practice" it accept the consequences of their actions. Your credit score will take a hit, there may be no federal tax implications but the state of CA will bill you, and you won't be able to buy another home for anywhere from 2 to 5 years. I think you're getting off easy and if you don't, then read some of the truly heart breaking stories on this website.

Good luck to you.

[underwater_vallejo]

Closing thoughts
The only thing that makes me nervous about a Strategic Default is whether or not the bank can/will come after me for deficiency payments if/when they foreclose (not sure how likely/possible this is, but it makes me VERY nervous since I can afford to pay the mortgages). I think the only way they can do this is with a judicial foreclosure, but not sure if the banks are doing these on people with situations similar to mine (I certainly hope not!)...

Any feedback you can provide is greatly appreciated! I just need a little more information before I take the plunge and stop paying my mortgages!

Hi Monty,

I'm actually in the same boat you are and will stop making payments next month. I purchased with an 80/20 but later refinanced for a better rate (no cash out) which made both my loans recourse. I bought for $400,000 with a first mortgage for $340,000. The place is now worth about $150,000.

The first lender will foreclose and, thanks to California's one-action rule, won't be able to come after me for deficiency judgment. The second mortgage will get nothing so they'll obviously try and come after me for the unsecured debt. I'll try and see about negotiating for 20-30% of debt which is more than they'll get if they sell to a collection agency.

In your case, it sounds like both your loans were purchase money, so even though the second lender will get nothing, my research suggests they're basically out of luck and won't be able to come after you with a deficiency judgment. Don't be fooled: they'll try and will certainly try and intimidate you by suggesting they can, but I don't think that they can legally do anything.

Best of luck on your walk.

[TexanMommy]

Can you drag out the process as long as possible and then pay cash (with the $ saved) for a smaller home prior to the foreclosure sale? At least then you wouldn't have to stress as much about the FICO hit.

[monty15]

Faith;

Thank you so much for your response! I think I understand a bit more regarding the deficiency payment situation on a foreclosure involving purchase money loans for people in my situation. Sounds like I'm covered, but I'm still not sure about the Judicial vs. Non-Judicial foreclosure, and when banks have the ability and the need to go after the Judicial foreclosure...

Also, I really appreciate your feedback on what to say to the bank when I do default on my mortgages -- you described my mental state perfectly! I can't stand to keep paying these huge monthly payments when I'm trapped in ~$220K underwater mortgage. The stress is unbearable -- seeing the state of my neighborhood today compared to 5 years ago...what a joke. This is not a place I want to keep plunking down my hard earned cash for when I see investor after investor swooping in and purchasing homes exactly like mine for $85K in cash... And to think, back in 2005, this was the smallest most inexpensive home in the area -- no more than 850 square feet! Now look at what $320k can buy -- practically a mansion in comparison! I want my $320K mortgage payments going to a house that is worth $320K, not $100K! The worst part of the situation is, when I bought back in 2005, it was supposed to be a 2 year deal -- buy and gain some experience in owning property, then sell and figure out where I really wanted to settle down... Terrible, TERRIBLE mistake. It has cost me my sanity for the past 3 years.


jakelabry;

Thank you for your honesty. Assuming the bank exercises its right to a non-judicial foreclosure, and the only thing that happens to me after a strategic default is a damaged credit score and a tax bill from CA, I am truly fortunate... My parents are not so lucky -- being 60+ years of age, and my dad having lost his job over 2 years ago to an oversees service provider, they have been bending over backwards trying to get a loan mod with little success. I truly feel horrible for people who are forced into a short sale, deed in lieu of foreclosure, or foreclosure because of extenuating circumstances such as unemployment, health issues, etc. It's unfortunate that the government didn't use the bail out money to reset some of the more underwater loans back in 2007 - 2008 (not sure if that was even possible) -- if we were in normal times (pre-2005), people who could no longer afford their mortgages could just sell their house and move on with their life (no need for loan mods, short sales, etc). What a waste of money -- the banks have been practically useless helping homeowners who are truly in need... I'll be ecstatic when this housing bubble finally bursts for good, and home prices and their associated mortgages are in line with incomes and reality (I think we're getting pretty close, just need the last of the underwater mortgages to be deal with, so the housing market can finally get back on its feet).


underwater_vallejo;

I'm not too far away from you, so I can't say I blame you for walking away from a home in your town (for others unfamiliar with the area, it's not a very safe place to live...). Thanks for your input. I'm glad to see somebody else around here thinking about their financial future given the current housing crisis we're in.

Question for you; are you at all concerned about the bank pursuing a judicial foreclosure? At this point, that's the only thing holding me back from not making any further mortgage payments. I guess if the bank did pursue a judicial foreclosure, and won, I could always go the bankruptcy route to avoid paying the mortgages, lawyer fees, etc. (wow, I sound so pathetic... I never in my wildest dreams would have ever guessed I'd be thinking about any of this -- I really cannot believe the state we're in). Any thoughts on the possible tax payments to CA if you do successfully foreclose on your home? I'm not sure I really understand this piece of the process yet.


TexanMommy;

That's a great point, and I think that's exactly what I'm going to do. If/when I do decide to stop making the mortgage payments, those dollars are going straight into a savings account. I estimate I'll save ~$8 - 10K per year by renting instead of staying here. If I can't purchase a home for 7 years, then that's $56 - $70K in a down payment I can use to secure a home when my credit score is whole again. Hopefully by that time, house prices will reflect where they should be in relation to incomes and the market, and we'll never see another housing crisis like we see today. Also, comparing this situation (saving money for a down payment 7 years from now) vs. where I'd be if I stayed in my home -- I'm guessing I'd still be ~$150K underwater 7 years from now, living in a 800 square foot home in a terrible neighborhood (not somewhere you want to raise a family, believe me) with no money in a savings account -- walking away now just makes that much more sense... In 7 years, for not much more than I paid for my current shack, I can probably afford a 1,500 square foot single family home with a back yard, garage, no HOA dues, in a decent neighborhood, and have a smaller mortgage payment as I do now due to the cash down payment I will have saved over the previous 7 years... This is starting to make very clear financial sense!

==================
I just want to say thanks again for the responses, and I really hope that people in similar situations to my own, or worse (facing foreclosure due to extenuating circumstances), eventually find a way out of this huge hole we're all in. Until we're all out, I can't honestly say the current housing crisis is over.

[shasta_steve]

Monty I really don’t think you have much to worry about as far as the bank or taxes. You have what is a purchase money loan and in California that will have to be non-judicial. As far as California taxes you will not have anything to be worried about at all either. California is a non-recourse state and the balance on the loan is considered the selling price. There will be no taxable forgiven debt. The bank may issue you a 1099C but it will not be correct if they do. If they do issue and 1099C, and the probably will, then contact them to get them to correct it. If they will not correct it, and the probably won’t , then you just need to do your taxes on paper telling the Franchise Tax Board that the 1099C is incorrect and the bank refuses to correct it. I am far from an expert on this but I will be going through the same thing shortly and I have been in contact with a couple of tax advisors. Don’t stress too much. The sun will come up tomorrow. At least that is what I keep telling myself.

[monty15]

shasta steve;
Thank you for the insightful reply. I was not aware that in this type of foreclosure there is no "forgiven debt" that can be taxed. I remember reading about the "debt forgiveness act"(name?) and that the program, which forgives home owners from paying taxes on forgiven debt, has been extended until the end of 2011 (I think that program applies to short sales? My memory escapes me...).

As for the non-judicial foreclosure on non-recourse loans in California, I actually talked to a Real Estate broker today regarding my situation, and he said exactly the same thing -- the banks only foreclosure option in CA for this type of non-recourse loans is via a non-judicial foreclosure (what a relief).

I'm feeling much better about my personal situation (there is a bit of a moral dilemma here, but I have to look out for my best interest, not the bank's) -- thanks again for those of you who've provided feedback. Hopefully other forum members can get something out of this thread. I'll officially be missing my first payment later this month.

[shasta_steve]

I am in the same boat. My first mortgage payment will be officially late in a week. It will be the first time in 16 years and 4 houses that I ever have been late. I have a little bit of a moral dilemma too because this house was my home and I turned it into a rental but in the end I am looking about for my best interest the same way they would. I am not sure if the non-taxable forgiven debt applies to short sales in California or not. As far as the Federal mortgage forgiveness act it would not apply in your situation because just like California the bank has no debt to forgive. In California the bank gets the property and you get bad credit on a purchase money loan that was purchased as your primary residence. Even if you later convert the property to a rental it still stays non-recourse under the same rules. Good luck.

[underwater_vallejo]

underwater_vallejo;

I'm not too far away from you, so I can't say I blame you for walking away from a home in your town (for others unfamiliar with the area, it's not a very safe place to live...). Thanks for your input. I'm glad to see somebody else around here thinking about their financial future given the current housing crisis we're in.

Question for you; are you at all concerned about the bank pursuing a judicial foreclosure? At this point, that's the only thing holding me back from not making any further mortgage payments. I guess if the bank did pursue a judicial foreclosure, and won, I could always go the bankruptcy route to avoid paying the mortgages, lawyer fees, etc. (wow, I sound so pathetic... I never in my wildest dreams would have ever guessed I'd be thinking about any of this -- I really cannot believe the state we're in). Any thoughts on the possible tax payments to CA if you do successfully foreclose on your home? I'm not sure I really understand this piece of the process yet.

Hi Monty,

No, I'm not worried about judicial foreclosure at all. It may happen to a Hollywood star with sizable assets of $1 million plus, but to go after a middle-class or even upper-middle-class family just won't happen in these economical times. A bank that was bailed out by taxpayers going after the little guy? Hell, the media coverage alone would decimate the bank's bottom line. No way. No how.

As far as taxes, yeah, I'll probably be on the hook in CA for cancellation of debt. Again, though, it sounds like in your case you had purchase money loan(s), so you're in the clear. The banks may send you 1099-c's, but you can basically disregard them based on what the CA Franchise Tax Board has defined.

[military mama]

In California the bank gets the property and you get bad credit on a purchase money loan that was purchased as your primary residence. Even if you later convert the property to a rental it still stays non-recourse under the same rules. Good luck.

Shasta Steve - do you have a place I can go to find where it says that converting a primary home to a rental doesn't change the loan from non-recourse to recourse? We were told that if we start renting our home, it becomes a recourse loan. If you have the statute or a reference, that would be GREAT because we'd love to hear that news.

[shasta_steve]

I have to go to work right now but I will look for it tonight. I found it the other day because I am in the same boat. I knew I should have saved the link. In a nut shell your loan remains recourse or non-recourse depending on what the facts were when you took out the loan. Of course if you borrow money later then things could change. Sorry I don't have more time to look it up but I need to get to work.

[shasta_steve]

Sorry had a long day. I am having a hard time finding where exactly where I read it. I did find this but the one I read before explained it better. Before the one said that recourse or non recourse was determined by what the property was when the loan was taken out. Property later converted did not change the original loan agreement.


activerain.com/blogsview/196817/Tax-Consequences-of-Foreclosure

"Tax Consequences: NON-RECOURSE LOANS
Non-recourse loans include typical California purchase loans used to buy an owner occupied residence of up to 4 units.
State Law protects borrowers from personal liability on a purchase mortgage for a home which they occupy at purchase. (If the borrower later converts the home to rental, he is still protected.) The State has put the risk on the lender; the most a lender can do is take back the house. This law applies to properties of up to 4 units, and applies only to loans used to purchase the property.
Purchase loans include bank loans and seller carrybacks.
Some cases allow the same protections for refinances IF there is no cash paid out to the borrower, or if any cash paid out is used for property repairs or improvements.
If the loan falls within this statutory protection, it is a non-recourse loan. Other loans may be non-recourse by their terms.
[Special rules may apply to VA and FHA loans.]
The tax consequences of foreclosure, , or short sale on a non-recourse loan are simple: the property is taxed as if it were sold for the total outstanding amount of the loan (or sales price, if higher). Taxability of the gain and deductibility of the loss depend on the nature of the property."

[military mama]

"Tax Consequences: NON-RECOURSE LOANS
Non-recourse loans include typical California purchase loans used to buy an owner occupied residence of up to 4 units.
State Law protects borrowers from personal liability on a purchase mortgage for a home which they occupy at purchase. (If the borrower later converts the home to rental, he is still protected.) The State has put the risk on the lender; the most a lender can do is take back the house. This law applies to properties of up to 4 units, and applies only to loans used to purchase the property.
Purchase loans include bank loans and seller carrybacks.
Some cases allow the same protections for refinances IF there is no cash paid out to the borrower, or if any cash paid out is used for property repairs or improvements.
If the loan falls within this statutory protection, it is a non-recourse loan. Other loans may be non-recourse by their terms.
[Special rules may apply to VA and FHA loans.]
The tax consequences of foreclosure, , or short sale on a non-recourse loan are simple: the property is taxed as if it were sold for the total outstanding amount of the loan (or sales price, if higher). Taxability of the gain and deductibility of the loss depend on the nature of the property."

Thanks Shasta Steve. I really appreciate it. We were told it changed so this is good news.

[military mama]

Thanks Shasta Steve. We were told it would change to a recourse loan so this is good news for us!

[ValleyDweller]

Good thread!

I'm in a similar position in CA. I'm a military officer, being reassigned to east coast and ~120K upside down right now.

There are 3 laws that are greatly in your favor right now...

1. CA's non-recourse law cited above. And I agree w/ other poster that the law talks to "original intent" of the loan, so if you do decide to rent it out for a while, you shouldn't have major issues w/ that....although that may create some issues w/ tax consequences, etc.

2. The Debt Forgiveness Act of 2007. There is "debt forgiven" in any of these situations foreclosure/short sale/deed in lieu. As long as you fit the guidelines given, you should be good to go (at least through 2012):

http://ww.irs.gov/individuals/article/0,,id=179414,00.html

3. CA recently followed suit w/ federal govt and governator recently signed (April of this year...) a similar debt forgiveness act for CA which should shield you from taxes in CA:

News Release 10-22: California Enacts Mortgage Forgiveness Debt Relief

I'm in similar position as monty. I can afford it, but I'm moving in 2 months and am not interested in pushing my retirement funds and kid's college $ onto the table in order to sell. So, it's going to be an interesting attempt at a short sale soonest....then...?

You may want to consult w/ a real estate attorney for some peace of mind. Ask around or look for one who does "consumer advocacy" real estate law. Heck, even if you spend $1000 to have him look over your documents and chat with you, with something this important, that's "sleep well at night" money!

I'm still looking for quality feedback on how much of a dinger your credit score will take, and I'm pretty convinced it's not the same for everybody. It will obviously depend on other factors on your record, but this article seemed fairly convincing:

How foreclosure impacts your credit score - Apr. 22, 2010

I think 200 is probably a reasonable guess. Which is just fine if I'm not 120K poorer!

[monty15]

Thanks for the update ValleyDweller!

I was actually working on a short sale for a few weeks, but recently backed out when it came time to submit all the paperwork to the bank (2 months bank statements, pay stubs, 2 years tax returns, hardship letter). I didn't feel comfortable submitting the documents because;

1) I really don't have any financial hardship (meaning, I can afford my mortgage payments)
2) I don't want to give the bank any financial info for reason # 1 above...

Anyway, I'm moving on from the short sale process and am looking forward to getting the foreclosure process underway instead. I'm about 2 months late at this point, and just waiting for an official NOD. I'm getting 4 phone calls a day from the bank for the past 3 weeks, but I haven't picked up the phone once...

[tryingtostay]

Anyway, I'm moving on from the short sale process and am looking forward to getting the foreclosure process underway instead. I'm about 2 months late at this point, and just waiting for an official NOD. I'm getting 4 phone calls a day from the bank for the past 3 weeks, but I haven't picked up the phone once...

Monty,

I was here a LONG time ago, and pop in every now and then to read posts.

this was my timeline for my SoCal home:

Nov 2008 we stopped paying.
Dec the calls started. I used caller ID and didn't answer them.
calls kept coming... (search for my screen name for more details).

we moved out April 2009, I was sooo nervous that any day the lender would come knocking on my door. I didn't want to deal with that with my infant and 2 other kids. I just ignored phone calls from the bank. I think we got a flyer on our door once to call them. Which means someone was scoping out our house to see if we lived there. That made me nervous, too.

I think our NOD finally came in August (10 months no payment), which put the auction in Oct .
I answered the phone in Sept, 2 weeks before the auction was suppose to be. I did not tell the guy in India we had left long ago. He asked why we weren't paying the mortgage. I said we had a lot of bills (which is always true...). He said the auction was marked for Oct.

We called the utilities and told them the house was to be auctioned Oct 31st and to turn everything off (we kept the power on to water the grass for the HOA requirements after we left).
we stop paying the HOA.

we get a letter from the HOA in Jan for late payments. We call them to tell them the house was auctioned off in Oct. they looked it up with a title company and it was not. We called the mortgage company and they said we had been put into a loan mod plan. They said the new auction date was in a couple of days but since they had not received any loan doc papers we could stop the auction if we needed to and submit the papers immediately. So they were willing to move the auction even further. I said no.

FINALLY Feb 2010 our house was auctioned off. So 14 months later....

we opted NOT to do a short sale because we had a nonrecourse loan and did not want to possibly have the bank manipulate the wording and for us to have a recourse loan with a short sale.

[miked2023]

Is there a limit though on the forgiveness act? I'm confused by this:

News Release 10-22: California Enacts Mortgage Forgiveness Debt Relief

Here's what I don't get: The new law, SB 401 (Wolk), allows most taxpayers to exclude canceled mortgage debt income of up to $500,000 on their principal residence. The limit is $250,000 for married/registered domestic partner (RDP) individuals filing separately. It applies to debt forgiveness in 2009 through 2012 resulting from a foreclosure, "short sale," or loan modification of a taxpayer’s qualified personal residence.

So if your house cost more than 500K you have to pay taxes on the diff ???

THANKS!

[4closencali]

Is there a limit though on the forgiveness act? I'm confused by this:

News Release 10-22: California Enacts Mortgage Forgiveness Debt Relief

Here's what I don't get: The new law, SB 401 (Wolk), allows most taxpayers to exclude canceled mortgage debt income of up to $500,000 on their principal residence. The limit is $250,000 for married/registered domestic partner (RDP) individuals filing separately. It applies to debt forgiveness in 2009 through 2012 resulting from a foreclosure, "short sale," or loan modification of a taxpayer’s qualified personal residence.

So if your house cost more than 500K you have to pay taxes on the diff ???

THANKS!

the 500k quoted is for the 'forgiven debt'....ie you owe 1.5m and the house sells for 900k...you are on the hook for 100k in taxes.

[justlivejustbe]

Strategic Default Questions:

4) Anybody have any advice on what to tell the bank once they start calling me asking why I'm not paying the mortgages (I have no hardships, and can afford the payments -- do I just tell them I'm exercising a Strategic Default? Will that trigger them to seek out a judicial foreclosure??)???

It has been some time, but I wondered if you have an update to what happened with your situation. I'm in a similar situation now and I came across this thread looking for "what to say to the bank". What did you say to the bank? How did the whole process go?

[monty15]

Hi justlivejustbe,

So, to directly answer your question, I literally didn't talk to the bank one time. I didn't pick up the phone when they called, I didn't call them, and I never returned their calls when they left messages.

It's been about 15 months now since my home was officially foreclosed on. I can tell you one thing, I'm RELIEVED that the situation is over. For about the first 4 months after the foreclosure, I had different collection agencies trying to get me to pay back my 2nd mortgage (was with the same lender as my first), but I would send them letters disputing the debt and they went away.

In retrospect, I don't regret anything, and wish that I would have started the process sooner. Let me know if you have any other questions, and good luck.

monty

[justlivejustbe]

Thanks for your reply. One more question.. how is your credit situation now?
I plan to read through your thread to see what else I can learn. And I started my own to see if I can provide value to anyone else.
Walking Away in Oakland

Thanks again!

[monty15]

Credit was around 780 when I missed my first payment. It didn't take long for it to sink down to about 615 or so. Now, my scores are about 690 and on the rise.

Good luck with your walk, and let us know if you have any other questions.