18 Oct The Mortgage Crisis: Upside Down And No Equity – Are Short Sales The Answer? What About Modification Of Mortgages In Bankrupcy?
Short sales are being pushed as a win-win situation since the bank gets something, and the homeowner avoids foreclosure. To me it looks like a lose-lose-lose situation.
Short sales hurt the mortgage company who loses money.
The homeowner loses their home.
Families that live around the property lose value in their homes since short sales and foreclosure drive down the values of the homes around it. This hurts families who did everything right, but are still pulled into a situation where they are also underwater on their home.
Short sales are not going to stop the spiral of foreclosures that have contributed to the mortgage crisis, and although they might make sense for a particular property owner they can create their own problems.
1 in 6 homeowners, or nearly 12 million homeowners, are upside down on their mortgages. Experts believe that this number will climb to over 15 million in a year, and this figure could be higher if house prices continue to fall. This was reported in a story on ABC News Nightline on October 17, 2008 on the mortgage crisis.
The story was on mortgages that were upside down or underwater, meaning that the house was worth more than what is owed.
When owners have no equity, they are not able to sell the home unless the bank agrees to a short sale of the property. In the ABC Nightline story, a woman who bought a house that she couldn’t afford went through a short sale. The short sale appeared to be a good option for her since they said she was “debt free” after the short sale.
If she had other debts that she couldn’t pay or if she couldn’t get the mortgage company to accept the short sale as payment in full, bankruptcy might have been a good option for her.
A benefit to bankruptcy is that you don’t owe tax on debts forgiven in a bankruptcy. Hopefully there won’t be any unexpected tax consequences from the short sale forgiveness for the woman in the story.
In general, I warn people to be careful about short sales, because of potential tax consequences from forgiven debt and also because the homeowner may remain legally obligated to repay any unpaid balance on the loan(s).
It is not logical that mortgage lenders will take a large lump sum loss in a sale to a 3rd party, but won’t allow the original borrower to get the same deal if the lesser amount is one that would be affordable to the homeowner.
If the lender would reduce the amount owed they might get more from the original borrower than they would by selling the house through foreclosure.
Sometimes the total debt owed on the house isn’t the problem. I have seen many people who could afford the home if the mortgage company would just take is a reduction in the interest rate to reduce payments.
These are some of the the changes that are being discussed for the bankruptcy laws. To allow a federal judge to carefully supervise the to modification of mortgages in Chapter 13 bankruptcy, and slow down the spiral of mortgage failure.
by Susanne Robicsek, Charlotte NC bankrupty lawyer
What is a short sale? August 20, 2007 by Doug Jacobs, Chico CA bankruptcy attorney
Does A Short Sale Make Sense? August 31, 2007 by Doug Jacobs, Chico CA bankruptcy attorney
Bankruptcy In Florida: Short Sales Are A Joke October 30, 2007 by Carmen Dellutri Fl bankruptcy lawyer
Short Sales: A Real Estate Disaster Waiting to Happen Sept. 11, 2008 Bankruptcy Law Network by Craig Andresen MN bankruptcy lawyer
Lenders Are Fighting Against Help For Homeowners In Bankruptcy February 22, 2008 by Susanne Robicsek, Charlotte NC bankrupty lawyer
Bankruptcy Reform and Interest Rates: Who Do You Believe? December 21, 2007 by Carmen Dellutri Fl bankruptcy lawyer
Mortgage Modification Bill: Mortgage Bankers Don’t Get It January 29, 2008 by Wendel Sherk MO bankruptcy lawyer
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