Blog

The Mortgage Debt Relief Act of 2007 is set to expire!!

The window is closing rapidly on one of the most important tax-relief provisions enacted by Congress during the housing crisis to help financially strapped homeowners. Time is running out to Short Sale your house. Although the 2007 law that allows taxpayers to exclude from income the amount of debt that is forgiven or canceled by their lenders doesn’t expire until Dec. 31, it’s likely to take every bit of the coming months to persuade your bank to either foreclose or allow you to sell your house for less than it’s worth (Short Sale).

While owners who are struggling to hold onto their homes shouldn’t throw in the towel solely because of the pending tax bite, it is certainly something to consider.

Under the tax code, borrowed money need not be reported as income because you have an obligation to repay. But if the lender subsequently cancels what you owe, the IRS requires that you report that debt as income because the duty to repay it no longer exists. So, if you owe $250,000 and your lender forgives $50,000 of that debt in a $200,000 refinancing, that $50,000 is considered income. If your combined federal and state marginal tax rate is 36 percent, you would owe $18,000 in taxes.

Under the Mortgage Forgiveness Debt Relief Act of 2007, though, taxpayers are allowed to exclude from income the discharge of debt on their principal residence when they do a short sale— at least until 2013.

So when your lender agrees to a short sale, there is no tax on the difference between the selling price and the amount you owe. When your lender forecloses, there is no tax on the canceled debt. Even when you refinance at a lower loan balance, there is no tax on the difference between what you owed on the old loan and what you now owe on the new one.

But unless Congress extends the law — and there is no indication lawmakers are even thinking about that — all residential mortgage debt relief that takes place on or after Jan. 1, 2013, will once again be considered taxable income.

Why worry about this now, Because the timelines on debt forgiveness decisions by lenders are absolutely horrendous.

Of course, each state has a different timeline. But the shortest is 463 days in Minnesota, according to Lender Processing Services. So the tax absolution window may already be closed for foreclosures.

There are no hard-and-fast numbers when it comes to short sales or loan modifications. But they also can be long, drawn-out transactions.

According to a nearly year-old survey by Equi-Trax Asset Solutions, a Santa Barbara, Calif., analytics company, it can take anywhere from four to nine months for underwater borrowers to persuade their lenders to sign off on a deal in which the lender will net less than what the borrower owes (Short Sale).

Eighteen percent of the 600 agents polled said short sales can be closed in less than three months if the stars line up just right. But almost 10 percent said these transactions require more than 10 months to complete.

There are many factors besides a tax break to consider when deciding whether to give up your house. What will a foreclosure or short sale do to your credit score? How long will you be precluded from buying another house? Will the extra income push you into a higher tax bracket? How long will it take before the amount I owe is on par with what is owed? Is it worth being tied down to one property for many years or should I just short sale and be back in the market within 2 years and probably buy more house for way less.

Consequently, as always when it comes to such matters, you should consult a tax professional before making any decisions.

At Trinity Homes & Investments we discuss all available options with our clients before deciding which course of action to take.  Our mission is to find dignified solutions to foreclosure.

I have read several news and Blog pieces about 2012 being the bottom of the market and how the best time to purchase a home is now. In good conscious I cannot sit idly by without voicing my opinion.

The news and columnists have based their analysis on the low number of inventory currently on the market for sale and the fact that it is 22% less than this time last year. They further site a 30% increase in property searches on Realtor.com which is one of the top search websites where consumers make purchase decisions. The reporters further substantiate their point by stating that interest rates are the lowest they have been since the great depression. Well folks, I am here to let you in on a few things. I am a distressed property real estate broker and live in the numbers and happenings on the ground. Last year alone I personally closed $17 Million in real estate. More than three quarters of my sales were short sales and bank owned property sales. My job revolves around tracking properties that have defaulted on their mortgage payments and listing the property for sale before it ends up in foreclosure. When properties do end up going to foreclosure the banks also contacts me to sell the properties back into the marketplace as a bank owned property. This is also known as a REO (Real Estate Owned) property.

In dealing with the lenders on a daily basis I have the ability to see how many mortgages are current or behind in any part of California. The numbers are staggering! One in three properties in San Diego County is currently underwater (owe more than what the property is worth).
Many of you may have heard of the “Mortgage Debt Relief Act of 2007” which is set to expire at the end of 2012. This means that anyone wanting to do a short sale has until the end of this year to get it done to avoid the enormous tax and deficiency implications. As homeowners scramble to do short sales, the banks are absolutely inundated with files. Banks have increased their loss mitigation departments to handle the amount of short sale requests as the deadline draws near.

So to shed further light on the subject of a “recovery,” I would have to say that the reason there is a 22% decrease in inventory on the market for sale is due to the “Robo-signing” debacle which simply held up the foreclosure process for a few months. Furthermore, the lenders have started issuing three month extensions to foreclosure sale dates rather than the standard 30 day extensions. The numbers are artificially adjusted to modify the supply and demand ratio. Also, the news columnists have stated that the average nationwide sales price has started increasing and the market is recovering. This is not quite correct because the number of higher end distressed sales has dramatically increased. In other words, if 100 homes sell at $200K and 900 homes sell at $500K, the average home price may have increased.  However, what they are not saying is that the home that is currently selling at $500K was purchased in 2005 for $900K.  See how they are messing with the numbers. Just because the average nationwide sales price has increased, does not mean we are recovering.

So I would maybe agree that the lower end has reached the bottom whereas the middle and higher end have room to fall.  Far be it from me to state that 2012 is the “Big Housing Recovery.” New young families or recent college graduates will also add to the lower end recovery as they will need to purchase in this range.

The number of Baby Boomers now wanting to downsize will further hamper the prices of the middle and higher end as they add to the supply. There are currently 30 million Americans in this segment of the market.

The FED made an error in judgment a month ago when they stated interest rates would remain low through the end of 2014, which took away the immediate driving force to purchase now. If interest rates would remain low for an extended period of time, why would anyone be in a hurry to purchase when they know how much shadow inventory the lenders are sitting on?

As the world has become a global economy, few have shed light on the fact that China has begun their housing crisis with more than half the cities reporting huge decreases in home prices. This may have an influence on our economy further down the road as this may affect the cost of consumer goods locally.

Gas prices are at an all-time high and could further contribute to inflation and gyrations in the consumer price index.

Unemployment is still stubbornly above 8% and steam rises from the printing presses at the Fed.

I don’t know folks. Recovery 2012?  I am not so sure. And over the years I have learned that in the long run it pays to be honest rather than bending a situation for personal gain. There is a reason I am renting right now. Though the rents are higher, cash will soon be back on the thrown to be crowned King. Don’t be in any hurry to purchase unless you find a great deal.

This is my honest humble opinion.

LPS Applied Analytics recently announced that there are $464 Billion in mortgages currently in Foreclosure and that Americans are now behindon mortgages worth $1.4 Trillion. Several economists believe thatsomething really bad could be coming down in the coming months. Infact, leading economists are warning of a new financial crisis brewingthat could possibly be worse than the crisis we faced in 2008 and thatwe could see a collapse of some BIG U.S. banks.

Chris Whalen, the Managing Director for Institutional Risk Analytics stated recently in a Politico article, "Non-payment by borrowers andmounting foreclosure backlogs are creating the conditions for thecollapse of some of the largest U.S. banks in 2011."

Many say that there are banks too big to fail an that we cannot allow them to. But we know now that T.A.R.P. didn't work. Those 6 or 7"too-big-to-fail" banks control over 1/2 of all deposits and most ofthose were made even larger by T.A.R.P. But there's another issue withthe smaller Savings and Loans that exist in our communities. When thoselittle banks face both residential and commercial mortgages failing, wemay see a wildfire spread of enormous consequences that the Fed won'tbe able to contain.

Several government and large banks stated this week that they were going to freeze foreclosures for the next few months. This is great forhomeowners during the holidays and comes as good news to thosehomeowners wanting to do the honorable thing and try every option theycan to keep from going into foreclosure. However, with loanmodifications being rare and/or unappealing, this is only prolonging theinevitable and making it worse. Case in point, if you make $115,000income a year and you owe $550,000 there's no rework for that scenariounder the President's program that will makes sense. And what happensin the first few months of 2011 AFTER the freeze is lifted and all thosestalled foreclosures start moving forward again? With an average of180,000 to 200,000 foreclosures a month, how are we going to accommodatethe flood of a million or more homes hitting the market? The good newsis that the freeze may help many who are conducting Short Sales ontheir homes and who are feeling the time crunch.

Time will tell, however we should all be looking to the horizon because a huge storm is looming and time is running out!

By the way, if you or someone you know is at risk of losing a home to foreclosure, please know that there are new options available to avoidthis devastating occurrence. And know that there is someone here you cantrust to help. As a Certified Pre-Foreclosure Specialist, I understandthe ins and outs of Short Sales and Loan Modifications. I am also aWachovia and World Bank trained Pre-Foreclosure expert and well educatedin the Government’s new H.A.F.A. and H.A.M.P. programs for helpinghomeowners facing foreclosure.

CLICK HERE TO AVOID FORECLOSURE

Are you a buyer looking for a home?

CLICK HERE TO SEARCH ALL AVAILABLE HOMES

CLICK HERE TO READ WHAT OTHERS HAVE SAID ABOUT MY SERVICES!