Another thing the banks want to do is convert a non-recourse original purchase money loan to a recourse refi/2nd mortgage (sink the hook in deeper). On original purchase money loan, they eat the loss on foreclosure. On a recourse, banks have two options. They can pursue you for the difference between what they sold your foreclosed property for and what the loan value was for, or you can get 1099’d for loan loss forgiveness on the difference and they (banks) get to write that down on the taxes they would have to pay. The IRS tends to tread loan loss forgiveness as income.
NOTE:
1) I suspect that the bank will try to ‘game’ the difference in the foreclosure recovery amount and what they pursue you with or 1099 you for.
2) From what I remember, one of the ‘stimulus’ plan provisions was to forego taxing loan loss 1099s as income for a short period of time.
