His $90K is safe and he won’t get hit with a 1099. The fallout to him will be limited to a credit ding (more like dent).
As for what he should do – ethically – that’s another question. If you boil his deal with the lenders down to its essence, the agreement was that he will make certain payments over a certain period of time, and if he does not they can take the house. That’s the deal. And if anyone should know the ins and outs of these types of deals, it’s the lenders who do them everyday. Countrywide decided to go 95% LTV on this deal and now they are going to get pounded. Countrywide made a business decision and the deal is turning out bad. If this guy pledged his $90K, his 401K, his car, his baseball card collection, etc etc, as collateral for the deal, then those assets are in play. But that’s not the case here.
