The Upside-Down family: a scenario

[mydogsarelazy]

Hi All,

Since I live in Murrieta, I am trying to envision what will be happening to the finances of many of my neighbors. How about the following scenario:

2004: Joe and Jane Upside-Down buy a house for $450k. They use 100% financing, and their meager savings go into window coverings and a lawn. They have little debt except a car payment and an income of $80k.

2008: Reeling from high property taxes, high energy costs and the realization that their house is worth far less than they paid they want out.

They quit making payments, and after foreclosure the house brings $250k for the lender.

The Upside-Downs, now with $30k in credit card debt, become renters and try to stablize their finances.

Some questions:

1) Don’t they now have a $200k capital gain that they owe almost $50k in taxes on? What will happen when they can’t pay the IRS?

2) Should they declare bankruptcy or just go through foreclosure? How will the new bankruptcy laws work or not work for them if they do?

3)Tell me more about their situation. Don’t you think this kind of thing will be commonplace?

JS

[temeculaguy]

MDAL, I could easily be wrong but the cap gains is only for short sales, a repo will leave the original buyer with a judgement for the 200k loss to the lender not a tax gain, then bk dodges the judgement. Having never walked away or sold short, purely speculation from what others have told me. Lenders will likely never take a 40% loss on a short, they are being weenies on 10% shorts. From memory of the last cycle, VA haunts people for that loss, don’t know about private lenders.

You have pretty much predicted what will happen to your neighbors. There isn’t any good way out of this, that is why we are returning to having to qualify for loans. I ran their numbers on bankrate’s affordability calculator and with their income, factoring no debt other than a $300 car payment they qual for a max purchase price of 272k, had they stayed within their means they would be fine. Affordability calculators don’t use random numbers, they are formulas to predict successful repayment. They violated a fundamental economic rule and now the rule has come back to violate them. (that last one liner was for SD, ask and ye shall receive).

[temeculaguy]

MDAL, I could easily be wrong but the cap gains is only for short sales, a repo will leave the original buyer with a judgement for the 200k loss to the lender not a tax gain, then bk dodges the judgement. Having never walked away or sold short, purely speculation from what others have told me. Lenders will likely never take a 40% loss on a short, they are being weenies on 10% shorts. From memory of the last cycle, VA haunts people for that loss, don’t know about private lenders.

You have pretty much predicted what will happen to your neighbors. There isn’t any good way out of this, that is why we are returning to having to qualify for loans. I ran their numbers on bankrate’s affordability calculator and with their income, factoring no debt other than a $300 car payment they qual for a max purchase price of 272k, had they stayed within their means they would be fine. Affordability calculators don’t use random numbers, they are formulas to predict successful repayment. They violated a fundamental economic rule and now the rule has come back to violate them. (that last one liner was for SD, ask and ye shall receive).

[temeculaguy]

MDAL, I could easily be wrong but the cap gains is only for short sales, a repo will leave the original buyer with a judgement for the 200k loss to the lender not a tax gain, then bk dodges the judgement. Having never walked away or sold short, purely speculation from what others have told me. Lenders will likely never take a 40% loss on a short, they are being weenies on 10% shorts. From memory of the last cycle, VA haunts people for that loss, don’t know about private lenders.

You have pretty much predicted what will happen to your neighbors. There isn’t any good way out of this, that is why we are returning to having to qualify for loans. I ran their numbers on bankrate’s affordability calculator and with their income, factoring no debt other than a $300 car payment they qual for a max purchase price of 272k, had they stayed within their means they would be fine. Affordability calculators don’t use random numbers, they are formulas to predict successful repayment. They violated a fundamental economic rule and now the rule has come back to violate them. (that last one liner was for SD, ask and ye shall receive).

[SD Realtor]

I give it a 6… okay but not on par with any of the scooby do or hitler references.

I agree with you TG but didn’t post as I am not positive nor am I an accountant. It would seem to me that IRS treatment of a short sale will differ from a true foreclosure or deed in lieu of foreclosure depending on the short sale situation (original purchase money verses a refi or HELOC)

BK could be a good idea. There is a question about a deficiency judgement as well.

[SD Realtor]

I give it a 6… okay but not on par with any of the scooby do or hitler references.

I agree with you TG but didn’t post as I am not positive nor am I an accountant. It would seem to me that IRS treatment of a short sale will differ from a true foreclosure or deed in lieu of foreclosure depending on the short sale situation (original purchase money verses a refi or HELOC)

BK could be a good idea. There is a question about a deficiency judgement as well.

[SD Realtor]

I give it a 6… okay but not on par with any of the scooby do or hitler references.

I agree with you TG but didn’t post as I am not positive nor am I an accountant. It would seem to me that IRS treatment of a short sale will differ from a true foreclosure or deed in lieu of foreclosure depending on the short sale situation (original purchase money verses a refi or HELOC)

BK could be a good idea. There is a question about a deficiency judgement as well.

[one_muggle]

Affordability calculators don’t use random numbers, they are formulas to predict successful repayment.

Does this mean that with the return of actual risk estimates the number of jobs lost in RE, will be balanced by all the actuaries getting their jobs back? Jinkies.

-one muggle

[one_muggle]

Affordability calculators don’t use random numbers, they are formulas to predict successful repayment.

Does this mean that with the return of actual risk estimates the number of jobs lost in RE, will be balanced by all the actuaries getting their jobs back? Jinkies.

-one muggle

[one_muggle]

Affordability calculators don’t use random numbers, they are formulas to predict successful repayment.

Does this mean that with the return of actual risk estimates the number of jobs lost in RE, will be balanced by all the actuaries getting their jobs back? Jinkies.

-one muggle

[sdnativeson]

This was discussed on an prior thread some time ago, wish I could recall where. I was under the same assumption as you mdal, but if I remember correctly the ultimate outcome on the thread was the same as TG’s reply.

[sdnativeson]

This was discussed on an prior thread some time ago, wish I could recall where. I was under the same assumption as you mdal, but if I remember correctly the ultimate outcome on the thread was the same as TG’s reply.

[sdnativeson]

This was discussed on an prior thread some time ago, wish I could recall where. I was under the same assumption as you mdal, but if I remember correctly the ultimate outcome on the thread was the same as TG’s reply.

[sdnativeson]

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[sdnativeson]

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