San Diego Housing Bubble News and Analysis

There is a HUGE difference between an original "purchase money" loan and a REFI loan, regardless of cash taken out or not.

In most cases, a purchase money loan is NON-recourse debt.
The loan is secured by the property only. You can walk, and it will be on your credit report for 7 years.
There is some talk of getting an IRS 1099 for debt relief, but it may not be true.

With a REFI loan, it is recourse debt, which means the lenders servicing unit can come after you for any loss and deliver the 1099 for any amount that is written off.

What could happen and what actually does happen is two different things.

The real question is what is the threshold of pain for a borrower with a 750-800 score who owes $600K on a home worth $400K.. at what point will a prime borrower walk ??

http://en.wikipedia.org/wiki/Nonrecourse...

...at what point will a prime borrower walk?

We'll know more it soon.

I would think that a prime borrower with a score of 800 would have put 20% down and had a non-toxic loan. On 600k to 400k they would be walking on 80k (plus sale commissions unless they sell it themselves). I could be wrong, but to me it seems like someone with 800 would be smarter than 100% financing.

Wouldn't a 100% loan with a 2- to 5-year teaser rate be the best way to go as a borrower? You get 2 to 5 years to see if your house goes up in value. If it does, you sell it and cash out. If it doesn't, you walk away, without much lost. With a 100% ARM, the borrower gets the chance to profit if the house value goes up and doesn't lose much if the house value goes down.

20% down loans were for suckers during the bubble (03-07) years.

Who said anything about a toxic loan ?

(There are actually plenty of high score borrowers that did get fooled into toxic loans)

100% financing was brilliant!
Mortgage interest is some of the cheapest money that you can get. There are people with high credit scores who financed 100% just because they could.

Their cash is worth more to them than the rate on a 20% 2nd.

Many people put money down only because they think they should. Others understand the OPM game and put thier cash to better use.

Many people who have paid principal into their homes are losing it all anyway. With an interest only loan, they would be walking away from less out of pocket cash.

The more cash they put down, the more they will be walking away from.

There is another major sticking point to non-recourse loans that I do not see getting discussed. I mostly sell real estate however I have done loans as part of my business. With loans I cautioned every client of mine regarding IRS form 8821 (I believe this is the right form no., I do not have a file in front of me to verify). Anyhoo this little gem is included in every closing package and basically gives the lender permission to pull your tax records at a later date.

If the borrower begins to default on payments and the lender surmises that the borrower exaggerated their income on the application then the lender can exercise the IRS form. If their exaggeration suspicions are verified then the lender has a fraud claim against the borrower. At this point I think you can throw the entire non-recourse status out of the window.

Gary awhile back I heard that the 8821 was basically a formality that was never enforced... until recently. Now I heard that lenders were indeed going to start pulling tax records much more in the underwriting process. This is just second hand where I heard this from but I was wondering if it is true. (I don't do loans so I have no clue)

SD Realtor

I've never used 8821. It's 4506 and 4506-T that get requested. They should be filled out at signing, especially lines 6, 7 and 9, and limited to the 1040 returns.

When these are dated, the 3rd party only has 60 days to request the tax returns. That is clearly in the instructions. I don't want my clients signing a blank form.

On a stated income or no doc loan, they cannot check income.
If self employed, they want to confirm that a schedule C was filed.

The Lender is charged with issuing the 1099 for recourse or non-recourse debt relief. I believe the IRS will step up enforcement and issue guidelines to lenders to "prompt" them to follow the IRS requirements and issue those 1099's. This is a great revenue opportunity.

In the case of non-recourse debt, refer to IRS Pub. 544, 2006 version, pages 4 & 5 "Foreclosures and Repossession".

If actually bankrupt per IRS Pub. 908 guidelines, insolvency as calculated by IRS standards will void the tax due on debt relief.

If sleepless still, add IRS Pub 525 for added rules and guidelines!

For the borrower that loses a house, a 1099 is known as "adding insult to injury"....

I'd be inclined to call it " just desserts" or "you reap what you sow from buying stuff you can't afford".

If you use Point software you will find both 4506 and 8821. You are correct in stating that the forms must be submitted within 60 days of signing.

This may be BS as the info is second hand but here is what I heard from someone who works inside at CFC. Lenders routinely pull IRS data a certain percentage of loans (checking income) to perform risk analysis. I also heard the percentage of IRS requests ramped up beginning in 2005 because they did not like what they were seeing. So although it appears these IRS forms are not the lender invoked "trump card" that can be submitted years after closing (such as I thought). In the end you do not know what data the lender has gathered immediatley after the loan closed.

BTW: I see nothing in the 8821 form that states the lender is precluded from using the information obtained from legacy tax forms to verify income. It's late and I am tired but I don't see it.

The IRS comes after you. Your mortgage company sends you a 1099 for what they loss on the property, and and you claim that as income on your taxes. That is why a go lawyer or accountant will tell you to stay in the house until the police come and kick you out. You should be able to get 10 months or so of "free" rent.

That is why a go lawyer or accountant will tell you to stay in the house until the police come and kick you out. You should be able to get 10 months or so of "free" rent.

Yup! And threaten to declare bankruptcy and sue the bank for predatory lending unless the bank pays to move you out.

sue the bank for predatory lending

I read somewhere that there are massive violations of TILA (Truth In Lending Act) in many of the subprime documentation. That makes the mortgages unsecured credit. Imagine what that will do to new mortgages!

Man you can't make this up. Illegals harvesting the CMO investors for cash. Doesn't get juicier than this!

He knows other undocumented immigrants who are refinancing their houses and getting cash out so they can return right away rather than waiting for their houses to sell.

http://www.azcentral.com/arizonarepublic...

Great post bsrsharma..

Once again either the American taxpayer or US corporations are left to pick up the tab left behind by illegals... un-friggen real.

I have had some seriously negative experiences dealing with these folks in the real estate business. I will post this information another day.

So how does an 'undocumented' person go about getting a loan? Do they 'borrow' someone else's identity? I hope my credit score isn't negatively affected because one of the undocumented decided to borrow my identity and then walk away from 'their' obligations.

Is 'negatively affected' too harsh of a term when used in the context of the undocumented? Perhaps I should have said 'non-positively affected'.

American taxpayer or US corporations are left to pick up the tab left behind by illegals...

Gary, A lot of these non-GSE grade papers were palmed off to foreign banks. They eagerly bought any junk that was marked AAA by the rating agencies. I don't think they will again buy US mortgage for a long time!

So how does an 'undocumented' person go about getting a loan?

I suspect a friendly broker sold one of the no-doc loans. No-doc loans to no-doc borrowers seems to be a perfect match!

let me make sure i understand this correctly... so whether they do a short sale or just walk away and let the bank take the house back, they are hit with a 1099? for some reason i thought it was just for a short sale that they got the 1099... should definitely be for both though! so someone who walks from a, say $100k loss, will probably be making payments to uncle sam for the rest of their lives on that approx. $38k tax bill?