“Strategic” Default Question

[Coronita]

Dumb question… I was curious about the following scenario, and was interested in some comments on it.

Hypothetical situation:

1)Person X borrows $XXX as the entire loan amount to purchase a home from person A. There is no second mortgages…Just the loan from relative A to buy a home.

2)After property is purchased, person X strategically defaults on the home and refuses to pay.

Let’s say person A decides not to foreclose, and instead decides to just “eat the loan” and do a loan foregiveness.

Questions:

1)Person X still owns the home, correct?
2)Is person X’s loan forgiveness subject to any taxes?
3)What happens to relative’s A tax situation on the loan if he/she chooses to forgive the loan rather than try to collect/foreclose?

4)Do any of the answers to 1-3 change if person X and person A are related ?

[Cube]

If the hypothetical goal here is to have person A effectively buy person X a house, why ever foreclose or forgive the loan? Why not just have person X be in default to person A indefinitely? In fact, why not have person X pay the interest-only amount to person A (while falling in arrears on the full payment) and write of the payments against taxable income? And person A can probably gift most / all of that money back to person X (assuming spouses for each are playing too).

[Cube]

If the hypothetical goal here is to have person A effectively buy person X a house, why ever foreclose or forgive the loan? Why not just have person X be in default to person A indefinitely? In fact, why not have person X pay the interest-only amount to person A (while falling in arrears on the full payment) and write of the payments against taxable income? And person A can probably gift most / all of that money back to person X (assuming spouses for each are playing too).

[Cube]

If the hypothetical goal here is to have person A effectively buy person X a house, why ever foreclose or forgive the loan? Why not just have person X be in default to person A indefinitely? In fact, why not have person X pay the interest-only amount to person A (while falling in arrears on the full payment) and write of the payments against taxable income? And person A can probably gift most / all of that money back to person X (assuming spouses for each are playing too).

[Cube]

If the hypothetical goal here is to have person A effectively buy person X a house, why ever foreclose or forgive the loan? Why not just have person X be in default to person A indefinitely? In fact, why not have person X pay the interest-only amount to person A (while falling in arrears on the full payment) and write of the payments against taxable income? And person A can probably gift most / all of that money back to person X (assuming spouses for each are playing too).

[Cube]

If the hypothetical goal here is to have person A effectively buy person X a house, why ever foreclose or forgive the loan? Why not just have person X be in default to person A indefinitely? In fact, why not have person X pay the interest-only amount to person A (while falling in arrears on the full payment) and write of the payments against taxable income? And person A can probably gift most / all of that money back to person X (assuming spouses for each are playing too).

[DataAgent]

USA Today has an article this morning about strategic defaults:

“Starting in October, Fannie Mae says, strategic defaulters will be disqualified for new Fannie Mae-backed loans for seven years after their foreclosures. Fannie also says it will go to court where it can to recoup outstanding mortgage debt from borrowers who strategically default.”

http://www.usatoday.com/money/economy/housing/2010-07-19-defaults19_ST_N.htm?loc=interstitialskip

[DataAgent]

USA Today has an article this morning about strategic defaults:

“Starting in October, Fannie Mae says, strategic defaulters will be disqualified for new Fannie Mae-backed loans for seven years after their foreclosures. Fannie also says it will go to court where it can to recoup outstanding mortgage debt from borrowers who strategically default.”

http://www.usatoday.com/money/economy/housing/2010-07-19-defaults19_ST_N.htm?loc=interstitialskip

[DataAgent]

USA Today has an article this morning about strategic defaults:

“Starting in October, Fannie Mae says, strategic defaulters will be disqualified for new Fannie Mae-backed loans for seven years after their foreclosures. Fannie also says it will go to court where it can to recoup outstanding mortgage debt from borrowers who strategically default.”

http://www.usatoday.com/money/economy/housing/2010-07-19-defaults19_ST_N.htm?loc=interstitialskip

[DataAgent]

USA Today has an article this morning about strategic defaults:

“Starting in October, Fannie Mae says, strategic defaulters will be disqualified for new Fannie Mae-backed loans for seven years after their foreclosures. Fannie also says it will go to court where it can to recoup outstanding mortgage debt from borrowers who strategically default.”

http://www.usatoday.com/money/economy/housing/2010-07-19-defaults19_ST_N.htm?loc=interstitialskip

[DataAgent]

USA Today has an article this morning about strategic defaults:

“Starting in October, Fannie Mae says, strategic defaulters will be disqualified for new Fannie Mae-backed loans for seven years after their foreclosures. Fannie also says it will go to court where it can to recoup outstanding mortgage debt from borrowers who strategically default.”

http://www.usatoday.com/money/economy/housing/2010-07-19-defaults19_ST_N.htm?loc=interstitialskip

[Arraya]

If enough people strategically default that could work against the prime directive of keeping home values up and get overturned. Safety in numbers.

This will blow up in their face.

http://theautomaticearth.blogspot.com/2010/06/june-14-2010-trickles-floods-and.html
June 14 2010: Apart from the arguments about trickles and floods, such strategic default is very socially divisive, which means it will be easy to generate a mandate to prevent it in the future, whether or not doing so would violate existing contract terms. Those who expect contract terms to remain inviolate are likely to be very disappointed in many instances. Governments don’t ‘fight fair’. When push comes to shove, they are perfectly capable of changing the rules abruptly, and retro-actively if they perceive it to be necessary. After all, we are already witnessing the demise of the rule of law in many obvious ways. The rule of law exists only when the centre agrees to be bound by the same rules as others, and that is less and less the case all the time.

I think it wise to expect margin calls on a grand scale in the months and years to come. I also expect the less civilized methods of dealing with debt to resurface. In fact, they already are

[Arraya]

If enough people strategically default that could work against the prime directive of keeping home values up and get overturned. Safety in numbers.

This will blow up in their face.

http://theautomaticearth.blogspot.com/2010/06/june-14-2010-trickles-floods-and.html
June 14 2010: Apart from the arguments about trickles and floods, such strategic default is very socially divisive, which means it will be easy to generate a mandate to prevent it in the future, whether or not doing so would violate existing contract terms. Those who expect contract terms to remain inviolate are likely to be very disappointed in many instances. Governments don’t ‘fight fair’. When push comes to shove, they are perfectly capable of changing the rules abruptly, and retro-actively if they perceive it to be necessary. After all, we are already witnessing the demise of the rule of law in many obvious ways. The rule of law exists only when the centre agrees to be bound by the same rules as others, and that is less and less the case all the time.

I think it wise to expect margin calls on a grand scale in the months and years to come. I also expect the less civilized methods of dealing with debt to resurface. In fact, they already are

[Arraya]

If enough people strategically default that could work against the prime directive of keeping home values up and get overturned. Safety in numbers.

This will blow up in their face.

http://theautomaticearth.blogspot.com/2010/06/june-14-2010-trickles-floods-and.html
June 14 2010: Apart from the arguments about trickles and floods, such strategic default is very socially divisive, which means it will be easy to generate a mandate to prevent it in the future, whether or not doing so would violate existing contract terms. Those who expect contract terms to remain inviolate are likely to be very disappointed in many instances. Governments don’t ‘fight fair’. When push comes to shove, they are perfectly capable of changing the rules abruptly, and retro-actively if they perceive it to be necessary. After all, we are already witnessing the demise of the rule of law in many obvious ways. The rule of law exists only when the centre agrees to be bound by the same rules as others, and that is less and less the case all the time.

I think it wise to expect margin calls on a grand scale in the months and years to come. I also expect the less civilized methods of dealing with debt to resurface. In fact, they already are

[Arraya]

If enough people strategically default that could work against the prime directive of keeping home values up and get overturned. Safety in numbers.

This will blow up in their face.

http://theautomaticearth.blogspot.com/2010/06/june-14-2010-trickles-floods-and.html
June 14 2010: Apart from the arguments about trickles and floods, such strategic default is very socially divisive, which means it will be easy to generate a mandate to prevent it in the future, whether or not doing so would violate existing contract terms. Those who expect contract terms to remain inviolate are likely to be very disappointed in many instances. Governments don’t ‘fight fair’. When push comes to shove, they are perfectly capable of changing the rules abruptly, and retro-actively if they perceive it to be necessary. After all, we are already witnessing the demise of the rule of law in many obvious ways. The rule of law exists only when the centre agrees to be bound by the same rules as others, and that is less and less the case all the time.

I think it wise to expect margin calls on a grand scale in the months and years to come. I also expect the less civilized methods of dealing with debt to resurface. In fact, they already are

[Author]

Posts