I’m sure you’re all aware that in CA, a buyer of property getting a loan signs a “promissory note” on behalf of the beneficiary lender and then the lender’s “trust deed” on that note. This “trust deed” is recorded with the County Recorder and is the only security instrument the lender has to collect the note. This instrument entitles the lender to a timely right of non-judicial foreclosure.
On recourse paper, the lender is entitled to sue the trustor for any deficiencies it suffered after foreclosure and reselling the property. The vast majority don’t, because they don’t feel they can collect a judgment, so they write the debt off and issue an IRS Form 1099 showing the deficiency amount as “phantom income” to the defaulting trustors.
There is no “morality” or “promise” involved here. The transaction is purely business. The trustor DID sign a “Promissory” Note but that note is protected by the security instrument they also signed. If the lender decides not to avail themselves of this protection, as is their right, one way or the other, then they ran up their own deficiency damages.
This may be one reason why the IRS and FTC are temporarily suspending counting the 1099’s issued by the REO lenders as “phantom income” toward the defaulting taxpayer. I don’t work in RE at present. I have done two short sales, one in ’90 and one in ’92. Both of these sellers got 1099’s and had to claim the “phantom” income on their tax returns.
It is the lenders who are allowing the trustors to indefinitely “squat” and run up their own deficiencies as a consequence. We are all paying them to do this with the government bailout $$. That’s what’s so wrong about this situation.
Morality has nothing to do with it. If you give people cash, they will take it. If you give people free housing, they will take it. Esp. if they are broke and have nowhere to move their families.
