July 9, 2006 at 12:25 PM #6831
New foreclosure laws mean that if you refinanced or took out a HELOC, the bank can come after all your assets to recover the difference between the REO sales price and your morgage. Any shortage is reported to the IRS as income.
Big bad surprise.
Did anyone on this forum even know this? I didn’t. And if I didn’t know, I bet no one with a refinance or HELOC knows this either. It is not disclosed with the loan docs, is it? Big bad surprise for tens of thousands of Californians who think they can just walk away from their mortgage.
A few months later, the bank will seize their assets through the courts. The following year, the IRS bill shows up.
The exception is if you have *only* your original purchase mortgage. Then you can walk away from the house.July 9, 2006 at 12:31 PM #27954
Here’s a quote from the article, from a kindred spirit, advocating Sell now. My kind of guy…
Norm Bour, owner of Priority Plus Lending in Laguna Niguel, thinks there are some homeowners who should just cut their losses now.
“There are a lot of people who are homeowners who shouldn’t be, living day to day just to support the house,” he says.
“My advice to them: Sell.”July 9, 2006 at 12:32 PM #27955barnaby33Participant
Actually I think that there is no loophole even for a first. I remember about 6-8 months ago I started a thread on the new BK laws. I believe that the lender sends you a 1099 for the loss no matter what note its on.
JoshJuly 9, 2006 at 12:35 PM #27956yooklidParticipant
Is it safe to say that we are entering a new era of economic serfhood?July 9, 2006 at 12:49 PM #27958desmondParticipant
Poway- From what I know there are NO exceptions on what they call a “Short Sale”. Whatever “debt relief” the bank gives you- it is taxable. Also, if you give the keys to the bank in say January with a $50,000.00 debt relief you better make an estimated payment to the IRS in that quarter or you will get late fees tacked on! What happens with the IRS is another matter. They cannot go after certain assets and if you show a zero net worth then they could forgive the debt.July 9, 2006 at 2:47 PM #27963anxvarietyParticipant
Is it safe to say that we are entering a new era of economic serfhood?
Looks like the banks are going to spare no one this time around!! Pick up the lower, middle and upper middle classes, turn em upside down and shake shake shake!
Hopefully this whole 10-20 year recession will trim off alot of this stomach turning consumerism we’ve developed most recently… How long will it take for people to live within their means? Lots of dot com kids did it.. reality does’t care much about preserving the past… desperation heals!July 9, 2006 at 5:42 PM #27972
Continuing the train of thought…
In 2007, 2.5 – 5 million people will have ARM resets, according to my estimates ($ 1 trillion of ARMs at $200K – $400K each). These are mortgages made in 2003 – 2005 (5/1 or 3/1 ARMs). Payments on the 2003 ARMs will go up 50 – 70%, since rates were very low in 2003. Payments on the 2004 and 2005 ARMs will go up 40-50%. Prices today are at 2004 levels and next year will be at 2002 levels. Let’s say 30% of the ARMs were made in CA, so that’s several 100K to 1.5 million.
So we’ll have several categories of foreclosures and short sales:
1) first mortgage ARM holders, who are protected by the bankruptcy laws. Several hundred thousand to 1.5 million people in CA who cannot afford their new mortgage and must sell their homes in 2008. The home values will be LESS than they paid. The bank cannot come after them.
2) ARM holders who refinanced after 2003 – 2005 when they purchased the home. No protection.
3) Long time homeowner who refinanced to take advantage of lower interest rates. This is your frugal Home Depot manager or County building inspector, who took out a 15 year mortgage when rates went down. Also includes the high end appliance salesman who refinanced to a 30 year mortgage when rates went from 8% to 5.5%. None of these people ever took out a HELOC or refied the equity out. They are sitting on a stash of equity. When they lose their real estate dependent job, they must sell. Will they have enough equity to avoid a loss at foreclosure? Most will.
4) Long time homeowner who refinanced to take out equity. People who bought their homes in the 1980’s and had tons of equity in the mid 90’s, when refinanced it all out. No longer protected by the first mortgage laws, and having spent all equity, they are upside down. They refied to the limit of their 2003 appraisal. Home value in 2007 is below their 2003 refinance appraisal.
5) HELOC Joe Six-Pack. They put in the pool, remodeled, bought the Hummer, got Cindy that brand new Mustang convertible as a graduation gift, sent their kids to Harvard, all gratitude to the Housing Credit Card. Now the HELOC rate has gone up, the equity was taken out, and they are upside down at foreclosure.
6) Any others I missed?
So, we’ve got a lot of folks who will have their assets seized by the bank, the IRS billing them. I expect a wave of bankruptcies and the 40K people leaving annually will pick up to 120K in the peak year.
Eventually, by 2015, it will all calm down. Sacramento will work hard to make this state business friendly, and with the lower cost of living, employers will return, knowing they can get good employees to move here. Vacancies will be high, rentals and homes will be cheap, and traffic will be low. We will start the next boom cycle. All of us piggington people will be out buying up properties.July 10, 2006 at 2:49 AM #28005ybcParticipant
A lot of the mortgages are securitized and sold to investors – many of them overseas (especially Asian) investors. So sometimes the banks are off the hook. Although I read recently that some banks still have a high percentage (around 40% to 60%) of their asset in mortgages. With mortgages sold, I don’t know who will be responsible for the cleaning up (i.e. foreclosure, etc)…is the mortgages servicing companies responsible? But one potential chain effect is that once the defaults start, then these investors, who once perceive mortgage securities as safe government guaranteed bonds, will price mortgages with more risk — therefore the spread will increase, further driving up the mortgage rates. Now this only happens if the current safety brake, i.e. the mortgage insurance and guarantees fails to cover the full loss. So additional research can be done using mortgage insurance companies’ (PMI,http://www.pmigroup.com/ for example) and Freddie Mac or Fannie Mae’s data. If that safety machanism is breached, then just like the leeve was breached in New Orleans,the consequences will be severe.
If investors start to shoulder a lot of the loss, then we will likely have a credit crunch in residential mortgages, and that will further drive down prices, and hence starts the vicious cycle. Without that credit crunch, the likelihood of rapid steep price decline will be smaller. Don’t know if fed or the government will try to rescue.
And for those of you who are waiting to buy at a good price, better be prepared to come up with cash:-) becasue financing costs will likely be very high when the price is really attractive!July 10, 2006 at 8:48 AM #28007privatebankerParticipant
You forgot the best of them all, the “self-employed real estate investor”. This is a very well known type which breaks into two categories. 1. The experienced investor that has seen it all before and has transitioned out of their properties except for those that truly cash flow. 2. The amateur investor. These are the folks that do not have any investment experience and buy into all the hype with no acknowledgment to fundamental values. We’ve also seen these types buying tech stocks in 1999 & 2000. They refied or HELOC’d and bought another property with the cash out. They now own several properties and have very little equity. I think they are really starting to suffer now. Their ARMs are resetting and/or their HELOC rates are skyrocketing and their negative cash flow is getting worse and worse every month to handle. They brought the bubble up and are definitely contributing to it’s down fall from panic selling and foreclosures.
I don’t think the news can down play this predicament for much longer. We are certainly in a worse situation than we were during the tech bubble. The real estate/credit bubble has a lot of complicated webs to it that affect a lot more people than the tech bubble did. A recession is eminent.July 10, 2006 at 8:57 AM #28008
I think my landlord falls into category 1.
I spoke with a friend from North Dakota, and he said Californians are buying up lake properties at the Canada border, and the prices have multiplied in the last few years. He thinks it’s a great time to develop more lake front property. I told him to be careful, although I have no idea how long Californians will be flush with cash and able to bid up properties in the rest of the nation. As CA prices come down, they just won’t have the equity to go on those spending sprees.July 10, 2006 at 9:16 AM #28009picpouleParticipant
Yes, I knew this. In fact, I I posted about this on this website, at least in a reply to something.July 10, 2006 at 9:21 AM #28010
Someone told me that if you refinance with the same lender who gave you the purchase loan, that you are also safe under the non-recourse laws. Is that true?July 10, 2006 at 11:15 AM #28014AnonymousGuest
I thought I did everything right but I never considered this effect: I assumed that all mortgages, by definition, were secured by the property, and exclusively the property.
If they are not, then why do they specify an address? Why not just directly sue borrower for all assets? Surely shaking down a liquid bank account or stock portfolio is much easier than taking title to real estate during a downturn.
my situtation: bought in summer 2000, (thought it was annoyingly expensive for a not wonderful house!), 8.25% 30 year fixed.
Refied once into a 5.25 5year ARM, then when I saw the crap hitting the ventilation system, refi’ed again into a 5.25 30 year fixed (no points!). I felt like gloating on the last one that I caught just about the absolute bottom of rates.
Each time, no cash out.
Fast forward to 2006. Thanks to our Great Leader’s great committment to science I am unemployed for the first time in my life, literally since age 16. (I’m 38 and just married).July 10, 2006 at 4:14 PM #28038AnonymousGuest
This is not a new law. The purchase money deficiency rule has been in place a long time in California. It is the spread of 100% + financing through the use of home equity lines that will make this a problem in this round.
Home equity lines are not “purchase money” loans. Therefore, there is no deficiency protection for buyers.
Piggy back loans might be another matter. These are the 100% purchase financing vehicles everyone has been using to finance new home purchases lately. These might qualify as “purchase money” as the proceeds went to purchase the home, even though they are a second trust deed. Not sure where that legal issue has fallen as I am no expert on this civil code section.
As far as the tax bite goes, that’s an old problem too. There is as well bankruptcy/insolvency relief in the tax code that the article does not mention.July 10, 2006 at 6:58 PM #28046
2nd trust deeds are recourse loans. The bank can go after you.
IRS gets you whether it’s foreclosure or short sale. The difference is only whether the lender can come after you for any difference owed: in a short sale they can’t. But come on, how many lenders will agree to a short sale? If the short sale puts them more than $50K at a loss, I think they would rather sell the house at auction. Privatebanker, any thoughts?
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