Foreclosure Impact
The decline of property values over the last few years, coupled
with economic recession, has created a wave of foreclosures which
have flooded the market. Homeowners who were unable to keep
up with mortgage payments and property taxes had few options,
especially when late or missing payments started.
The effect of the foreclosures has been described as a wave,
where more and more properties and homeowners are effected.
Worse yet, the financial impact of foreclosure persists long after
properties have been foreclosed. For example, some homeowners
have been saddled with persistent debt (so-called "recourse"
loans not wiped out after the foreclosure) and heavy credit score
hits, often preventing the homeowner from obtaining any
consumer loans for many years.
In the event the debt was wiped out from the foreclosure, the
homeowner received a 1099 tax statement from the lender for the
amount unrecovered, plus interest and penalties. Normally, the
IRS considers this as income, with taxable consequences.
Therefore, after foreclosure, you had either persistent debt to pay
off, or tax consequences from forgiven debt.
New Government Legislation and Programs
Fortunately, there have been a number of initiatives in the last few
years to mitigate the impact of loss of income and financial
hardship on homeowners, and to provide a number of more
attractive, consumer-friendly options to foreclosure.
These programs include tax exemption for debt forgiveness, loan
modification, homeowner assistance, and short sale incentives.
The following section summarizes the programs now available.
The decline of property values over the last few years, coupled
with economic recession, has created a wave of foreclosures which
have flooded the market. Homeowners who were unable to keep
up with mortgage payments and property taxes had few options,
especially when late or missing payments started.
The effect of the foreclosures has been described as a wave,
where more and more properties and homeowners are effected.
Worse yet, the financial impact of foreclosure persists long after
properties have been foreclosed. For example, some homeowners
have been saddled with persistent debt (so-called "recourse"
loans not wiped out after the foreclosure) and heavy credit score
hits, often preventing the homeowner from obtaining any
consumer loans for many years.
In the event the debt was wiped out from the foreclosure, the
homeowner received a 1099 tax statement from the lender for the
amount unrecovered, plus interest and penalties. Normally, the
IRS considers this as income, with taxable consequences.
Therefore, after foreclosure, you had either persistent debt to pay
off, or tax consequences from forgiven debt.
New Government Legislation and Programs
Fortunately, there have been a number of initiatives in the last few
years to mitigate the impact of loss of income and financial
hardship on homeowners, and to provide a number of more
attractive, consumer-friendly options to foreclosure.
These programs include tax exemption for debt forgiveness, loan
modification, homeowner assistance, and short sale incentives.
The following section summarizes the programs now available.
David Jordan
Green Real Estate Consultant
Realty World Northern California
Direct: 408-315-9002
E-Fax: 408-521-9190
Email: djordan@cruzio.com
Green Real Estate Consultant
Realty World Northern California
Direct: 408-315-9002
E-Fax: 408-521-9190
Email: djordan@cruzio.com
Tax Provisions
In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act, which exempts individuals from federal tax
obligations for purchase money loan debt forgiveness under certain conditions. Mortgage Debt Relief has been
extended through December 31, 2012. The State of California passed SB 401, a similar statute exempting
individuals from state tax obligations. Click here for a detailed set of examples and explanations from a CPA.
Refinancing
Available to homeowners with GSE (Fannie Mae or Freddie Mac) owned or backed loans, this program allows
homeowners to replace their current loans with new loans at lower rates and/or more favorable terms.
Home Affordable Modification Program (HAMP)
Designed to provide incentives for lenders and homeowners to keep homeowners in their homes through loan
modification, including rate reduction and principal reduction. Some second loans may also qualify. In reality,
few homeowners are able to secure loan modifications from their lenders. For those who do, the rate of
subsequent default is fairly high. Lender participation in the program is voluntary.
Home Affordable Foreclosure Alternatives (HAFA)
If loan modification is not a viable option, HAFA allows homeowners to get guarantees from lenders releasing
loan liability, specific processes and time frames for short sales that benefit consumers, and $3,000 of relocation
assistance. Currently the provisions apply to non-GSE lenders, however, the directive is expected to be
amended soon to include Fannie and Freddie owned or backed loans. In the past, short sales took many
months to close escrow, frustrating sellers and buyers. The new HAFA guidelines give lenders 10 days to
respond to short sale contracts.
Impact of Short Sale Vs. Foreclosure On Your Credit Score
In addition to the financial and tax implications of choosing between foreclosure and another alternative such as
a short sale, you should assess the impact to your credit score. The calculation of your credit score, or "FICO",
is based on a private proprietary formula, although certain guidelines have recently been published. Factors to
consider are late and missing payments, and whether a deficiency judgement is recorded, or a short sale,
which may be recorded as "paid as agreed" or "paid as less than agreed".
In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act, which exempts individuals from federal tax
obligations for purchase money loan debt forgiveness under certain conditions. Mortgage Debt Relief has been
extended through December 31, 2012. The State of California passed SB 401, a similar statute exempting
individuals from state tax obligations. Click here for a detailed set of examples and explanations from a CPA.
Refinancing
Available to homeowners with GSE (Fannie Mae or Freddie Mac) owned or backed loans, this program allows
homeowners to replace their current loans with new loans at lower rates and/or more favorable terms.
Home Affordable Modification Program (HAMP)
Designed to provide incentives for lenders and homeowners to keep homeowners in their homes through loan
modification, including rate reduction and principal reduction. Some second loans may also qualify. In reality,
few homeowners are able to secure loan modifications from their lenders. For those who do, the rate of
subsequent default is fairly high. Lender participation in the program is voluntary.
Home Affordable Foreclosure Alternatives (HAFA)
If loan modification is not a viable option, HAFA allows homeowners to get guarantees from lenders releasing
loan liability, specific processes and time frames for short sales that benefit consumers, and $3,000 of relocation
assistance. Currently the provisions apply to non-GSE lenders, however, the directive is expected to be
amended soon to include Fannie and Freddie owned or backed loans. In the past, short sales took many
months to close escrow, frustrating sellers and buyers. The new HAFA guidelines give lenders 10 days to
respond to short sale contracts.
Impact of Short Sale Vs. Foreclosure On Your Credit Score
In addition to the financial and tax implications of choosing between foreclosure and another alternative such as
a short sale, you should assess the impact to your credit score. The calculation of your credit score, or "FICO",
is based on a private proprietary formula, although certain guidelines have recently been published. Factors to
consider are late and missing payments, and whether a deficiency judgement is recorded, or a short sale,
which may be recorded as "paid as agreed" or "paid as less than agreed".
Options For Distressed Homeowners
Having trouble making your mortgage payments? Is your property valued at less than what you owe? You may
wish to consider a number of options, such as loan modification or a short sale. Contact me to arrange for a
no-obligation, free consultation for an in-depth financial analysis of your options based on your unique circumstances.
Having trouble making your mortgage payments? Is your property valued at less than what you owe? You may
wish to consider a number of options, such as loan modification or a short sale. Contact me to arrange for a
no-obligation, free consultation for an in-depth financial analysis of your options based on your unique circumstances.
Integrity Commitment Results
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David Jordan
Green Real Estate Agent
"Turning A New Leaf"
Green Real Estate Agent
"Turning A New Leaf"