superdrew said:LA Times Article

I found this article fascinating. What is the fatwallet perspective on this other than the It's morally wrong and pay your bills which I agree with. If this article got out widespread and people acted on it I think we would have an even more serious housing bubble burst.

Thoughts?The vast majority of the states in the country are recourse states, which means that the lender has the option of going after the borrower personally for the deficiency. So, should you choose to walk away from your property which has dropped in value, if the lender pursues a deficiency against you, you will still have to pay it. Please note that the amount of the deficiency will be much larger than the hit you would have taken by selling the property yourself. This is not only because foreclosure sales typically end up bringing in lower proceeds than a regular retail sale, but also because the lender will tack on default interest and enforcement costs. In theory, you can discharge the deficiency through bankruptcy. With the bankruptcy reform, however, it has become MUCH more difficult for borrowers to do so. This is especially true for the otherwise solvent borrowers -- you can no longer get a bankruptcy discharge of your indebtedness if you are otherwise able to make the debt service payments (this is an oversimplification but is generally accurate).

Further, quite a few states out there have non-judicial foreclosures, which allow lenders to accelerate the loan and to foreclose on the property in 5-8 weeks. Hence, in those states the borrowers would not have the ability to remain on the property for 12 months without making payments. Incidentally, some of the states with the lowest housing decelerations right now are also the same states with the easiest and cheapest foreclosure process and deficiency judgment process.

geo123 said:lorcha said:LA Times said:Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: "... people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties..."I'm not sure how it works in Cali, but Peter Viles, the author of the LA Times piece, needs a little education.Last I checked California's purchase money mortgages were generally non-recourse in nature (refis are recourse obligations), which is just one of the reasons that many areas in that state were hit very hard by the housing decelerations.

I wiki-ed recourse and no-recourse and got the basic idea. I do have a question:

- would the guy who told his story in the blog (bought house for $550K, current value at $350K, wants to simply walk away) be liable for the tax bill on the difference? I understand we don't know everything, but assume that this is his original mortgage, state is non-recourse, and the lender manages to recover $350K out of it.

Based on what I read in the article, it appears that he would be liable for a tax bill of $200K. Understandably, that is less than losing $200K, but still, a sizable chunk.

Am I right in my reasoning? TIA.

Wonder if the decrease in market value could be treated as a "casualty loss." For that result to obtain, the downturn in the housing market would have to be classified as a disaster within the meaning of the applicable code section.

Might make for an interesting argument in tax court. And could be an interesting policy choice should lawmakers decide to go that route.

IRS Topic 515.

blok said:Gotta love the fact we live in a country where you can borrow hundreds of thousands of dollars, not pay your debts and nothing happens. Some of the things you hear about seem almost criminal, am I wrong?

Pot meet Kettle!!

dmlavigne1 said:blok said:Gotta love the fact we live in a country where you can borrow hundreds of thousands of dollars, not pay your debts and nothing happens. Some of the things you hear about seem almost criminal, am I wrong?


Pot meet Kettle!!Oh, man.

Score: dmlavigne1 1, blok 0.

dmlavigne1 said:blok said:Gotta love the fact we live in a country where you can borrow hundreds of thousands of dollars, not pay your debts and nothing happens. Some of the things you hear about seem almost criminal, am I wrong?


Pot meet Kettle!!

right because i didnt commit to buying something its the same as walking out of hundreds of thousands of debt

codename47 said:Ya know there are 2 parties in every transaction, and you can't just excuse the banks for making billions of dollars in loans when they knew that they were making loans based on inflated appraisals and are being warned by other 3rd parties that loans are questionable or fraudulent and they simply don't care. There's plenty of blame to go around, but I wonder if we are nearing the end, the capitulation when people start saying "go ahead, make my day, forclose on me"

On a lot of the gimmick loans, like negative amort, interest only ARMs, etc, who really loses on the foreclosure? I think the borrower really has the leverage (no pun intended) in that situation, because it's not like they're losing anything but their interest payments. The bank, on the other hand, incurs even more expense and likely a sale at a price that won't even cover the loan.

I know I'm stating the obvious here, but people daring the bank to foreclose is probably a good tactic to obtain a more affordable schedule at this point. Sure there's hardship for the borrower, but the bulk of the financial pain is on the lender.

sjwaste said:On a lot of the gimmick loans, like negative amort, interest only ARMs, etc, who really loses on the foreclosure? I think the borrower really has the leverage (no pun intended) in that situation, because it's not like they're losing anything but their interest payments. I am a real estate investor, and I write mortgages all the time. But I will never, EVER write a mortgage where the mortgagor has none of his own money in the deal. This is exactly why. The borrower must have something to lose.

My absolute minimum that I have ever allowed a borrower to contribute to the transaction was $5k. Where did that number come from? Ask a real estate attorney how much it costs to do a foreclosure.

blok said:dmlavigne1 said:blok said:Gotta love the fact we live in a country where you can borrow hundreds of thousands of dollars, not pay your debts and nothing happens. Some of the things you hear about seem almost criminal, am I wrong?


Pot meet Kettle!!

right because i didnt commit to buying something its the same as walking out of hundreds of thousands of debt

You DID commit to buy, so your arguement is worthless. You signed the papers, gave a deposit, then wanted to make up an excuse to justify why the other party shouldn't hold you to the agreement that you freely signed. It's exactly the same situation morally.