MDAL, I could easily be wrong but the cap gains is only for short sales, a repo will leave the original buyer with a judgement for the 200k loss to the lender not a tax gain, then bk dodges the judgement. Having never walked away or sold short, purely speculation from what others have told me. Lenders will likely never take a 40% loss on a short, they are being weenies on 10% shorts. From memory of the last cycle, VA haunts people for that loss, don’t know about private lenders.

You have pretty much predicted what will happen to your neighbors. There isn’t any good way out of this, that is why we are returning to having to qualify for loans. I ran their numbers on bankrate’s affordability calculator and with their income, factoring no debt other than a $300 car payment they qual for a max purchase price of 272k, had they stayed within their means they would be fine. Affordability calculators don’t use random numbers, they are formulas to predict successful repayment. They violated a fundamental economic rule and now the rule has come back to violate them. (that last one liner was for SD, ask and ye shall receive).