So you think a bank’s losses would be less if they forgive the debt, than if they foreclose and resell the house? The town must be horribly distressed, if the lender figures they lose less money by forgiving $200K than by selling the house. Maybe they are doing this in very distressed areas, where foreclosures are soaring and buyers are so scarce, the bank knows it cannot find another buyer. But with so many buyers still in San Diego, thousands every month, I can see why banks here have not done this yet.
I am curious about the reasons this bank back east chose this course. What is the difference in that state vs. ours in regard to foreclosure laws, sales level, and so on? I’m also wondering why bank debt foregiveness did not become widespread, or used at all, in our last real estate downturn.
I think the borrower’s obligation to pay taxes on $200K could be almost as bad as making the mortgage payment on that amount. At a 28% federal tax rate, the borrower is looking at owing Uncle Sam $56K this year.
This housing bubble won’t be saved by one lender forgiving a little debt on a couple borrowers. We would need Washington Mutual to forgive $1 billion of unpaid interest income, and MBS holders to forgive trillions in loans. Very doubtful.
This housing bubble is already doomed by the new lending guidelines.