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Republicans Seek To Prevent Strategic Defaulters From Getting Taxpayer Bailouts

Tyler Durden's picture





 

The recently ubiquitous phenomenon of homeowners strategically defaulting on their mortgage, and using the proceeds to "buy season tickets to Disneyland…take a Carnival cruise to Mexico…” and go out to dinner more often" and generally boost "consumption" has received wide media attention if not societal condemnation... Yet. Republicans have launched a Motion To Recommit HR 5062 which would amend the bill to "prohibit individuals who strategically default on their mortgage from accessing the FHA program and protect taxpayers from financing a bailout of FHA programs." We doubt this proposal will be accepted lightly by Washington which is now convinced that since the rest of the world is collapsing and it can issue debt with impunity, the much coveted and thermodynamically impossible free lunch is finally here.

As Chris Vieson, floor assistant to republican whip Eric Cantor says, "The Republican motion also protects American taxpayers from possible future bailouts of FHA programs. Washington currently has a bailout culture at the expense of hard-working Americans and this MTR puts into place protections against FHA receiving a taxpayer-backed bailout.  The Republican MTR is a vote to expose and prevent fraud and abuse from FHA and protect the American taxpayer from another Washington bailout."

We are skeptical this will have any preventative or behavioral-modifying impact, however. The only benefit from bankruptcy "recourse" is that Americans lose easy access to credit. However, with banks contracting credit as is, without needing the help of FICO, it has become painfully obvious that the marginal benefit of a 750+ credit score is now negligible compared to the benefit from using up redirected cash flow for immediate needs. And as banks end up holding the defaulted real-estate, which is no longer cash flow positive, the administration will likely very soon need to provide another FASB miracle which converts zero or negative cash flow into record sources of capital. Otherwise, the "cold fusion" consolidation witnessed recently in Spain will seem like child's play when our own domestic bank dominoes start collapsing.

Full note from Chris Vieson.

The Republican Motion to Recommit H.R. 5072, the FHA Reform Act, would amend the bill to prohibit individuals who strategically default on their mortgage from accessing the FHA program and protect taxpayers from financing a bailout of FHA programs.

Strategic Defaults

A strategic default occurs when a borrower decides to stop paying their mortgage even though they can still afford their payments. It is usually undertaken by those who owe more on their mortgage than their home is currently worth.

The Wall Street Journal has reported on families that have chosen to stop paying their mortgage and instead use the extra money they are saving each month to “buy season tickets to Disneyland…take a Carnival cruise to Mexico…” and go out to dinner more often.

Companies have even sprung up to capitalize on the new trend with websites advising people (for a fee) on how to go about a strategic default. These companies actually advertise that after a few years an individual who chooses to default on their mortgage should be able to buy a home again, including through government loan agencies.

60 Minutes reported on individuals who defend their decision to strategically default saying, "…with the money savings that I will have in four to six years, I'm confident I'll have money to buy my way into a house if I want to.”

Strategic defaults raise costs for responsible borrowers, many of whom may currently be struggling to make their mortgage payment themselves, but who take their obligations to pay their debts seriously. The MTR would ensure that no one who chooses to simply stop paying their mortgage, even though they can afford to do so, is able to benefit in the future from the government’s FHA program. 

Future Bail-Outs

The Republican motion also protects American taxpayers from possible future bailouts of FHA programs. Washington currently has a bailout culture at the expense of hard-working Americans and this MTR puts into place protections against FHA receiving a taxpayer-backed bailout.

The Republican MTR is a vote to expose and prevent fraud and abuse from FHA and protect the American taxpayer from another Washington bailout.

 


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Thu, 06/10/2010 - 13:30 | Link to Comment Marla And Me
Marla And Me's picture

Nice work caconhma!  Your words sure are helpful in rebuilding the moral fabric of our country.  How much are you paid per hour to post troll jewels like the one you just posted? 

Thu, 06/10/2010 - 13:45 | Link to Comment caconhma
caconhma's picture

It is impossible to appropriately treat a sick patient without accurately identifying the disease, its origin and history. Telling a lung cancer patient that he has a cold will not do any good. It is vital to know the truth.

 

To change a country, where 50% of its population do not pay any taxes and live on welfare and/or government subsistence, through democratic elections is impossible.

Thu, 06/10/2010 - 14:00 | Link to Comment Tortfeasor
Tortfeasor's picture

As if race has anything to do with the "diagnosis".  Bigot

Thu, 06/10/2010 - 14:07 | Link to Comment Marla And Me
Marla And Me's picture

I'm specifically referring to your racial and religious epithets.  We are all one.  Anybody trying to convince others otherwise should be scrutinized accordingly.  We have met the enemy and the enemy is us...

Thu, 06/10/2010 - 14:36 | Link to Comment Suisse
Suisse's picture

We are all one? What do I have in common with someone who just got off the boat from Hong Kong?

Thu, 06/10/2010 - 14:54 | Link to Comment pan-the-ist
pan-the-ist's picture

Oh- Let me answer.  You were possibly given and took advantage of many opportunities because your culture/genetic makeup/nurture/nature/God made you do it.  Perhaps the person getting off the boat from Hong Kong is trying to do the same thing you are.  That would mean that you both have something very important in common.

Thu, 06/10/2010 - 15:03 | Link to Comment Careless Whisper
Careless Whisper's picture

This isn't about the FHA.

This is a trial balloon to see if the bankstas can get legislation to have recourse against strategic defaulters.

The NY Times article a few days ago was an obvious plant by the banks to create jealousy and portray someone under water who defaults as taking advantage.

Thu, 06/10/2010 - 15:27 | Link to Comment Marla And Me
Marla And Me's picture

We know it's not about the FHA.  "caconhma" or whatever his name is is trying to do the same dirty trick as the NYT; he's hijacking the thread by trying to blame the "jews" and the "incompetent Negro" for our situation.  Divide & Conquer.  The oldest trick in the book.  Can't let him get away with it.

Thu, 06/10/2010 - 15:00 | Link to Comment Marla And Me
Marla And Me's picture

We're all human Suisse.  In case you didn't know, we all have the same mother.  No, really, we do.  Do some research on mitochondrial DNA if you don't believe me.  Expand your circle of circle of friends outside of your comfort level.  Travel the world.  You'll find out we are much more alike than we are unalike. 

Thu, 06/10/2010 - 14:38 | Link to Comment Suisse
Suisse's picture

double post.

Thu, 06/10/2010 - 14:33 | Link to Comment Problem Is
Problem Is's picture

"How much are you paid per hour to post troll jewels like the one you just posted? "

It is one of Rahm-baby's White House intern sock puppets trying to discredit one of the administrations most effective economic critics...

Zero Hedge.

caconhma provides the outrageous post:

MSM: "Look at the ghastly racists on ZH!!"

Oppose Obummer or the Wall Street banks... You're a racist...

Calling critics and dissenters "racist" is a provable pattern in political discourse.

Thu, 06/10/2010 - 15:16 | Link to Comment Marla And Me
Marla And Me's picture

The troll problem has been growing exponentially - pun intended (where's Mako when you need him) - recently.

Oftentimes, the commenters and their perspectives are just as much, if not more valuable than the actual articles.  Unfortunately, the price to pay for free access to all is that threads can be hijacked by imbecilic remarks that add nothing to the discussion.  The fact that "caconhma" posted his rubbish right at the top of the thread tells me that his intent was exactly that - hijack the thread.

Thu, 06/10/2010 - 15:32 | Link to Comment WaterWings
WaterWings's picture

Imagine that these are not simply sick individuals, but paid disinfo agents. They want to affect the flavor in the comment section.

Thu, 06/10/2010 - 16:23 | Link to Comment Marla And Me
Marla And Me's picture

I know they do.  Notice that since I called him out on it, he has been silent.

i.e. Police infiltrating WHO protests in Montebello - http://www.youtube.com/watch?v=7S1nHvvkzvA&feature=PlayList&p=FA7CF36212306397&playnext_from=PL&playnext=1&index=3

The depravity never ceases to amaze me.

Thu, 06/10/2010 - 18:39 | Link to Comment Big Red
Big Red's picture

Thanks for posting that link, it always come up in my memory when I try to enumerate false-flag issues, and it makes the little guy think and look around the next time something smells funny.

Thu, 06/10/2010 - 16:05 | Link to Comment Geoff-UK
Geoff-UK's picture

Strategic defaulters screwing over banks that gave mortgages to illegal aliens with minimal paperwork and "no money down"?  I say, "bwa ha ha ha!"

 

Govt tax breaks to these strategic defaulters, pulling money out of MY pocket to give to them?  Not so funny.

Thu, 06/10/2010 - 11:11 | Link to Comment AnAnonymous
AnAnonymous's picture

Funny how in the land of the braves some are more entitled to a certain course of actions than others.

Strategic default are available to too many people to the taste of the Republicans. Should be a priviledge, not an option open to commoners...

Thu, 06/10/2010 - 11:14 | Link to Comment Gully Foyle
Gully Foyle's picture

 AnAnonymous 

That is a load of shit. You have people not paying their mortgages, not paying their credit cards but buying new cars and tvs. Why the fuck do they deserve a break.

Meanwhile you have a majority who are trying to play by the rules and receiving minimal assistance.

At one point strategic default was about rebellion. Now it's about scamming the broken system.

Thu, 06/10/2010 - 11:24 | Link to Comment partimer1
partimer1's picture

the system is broken.  the capitalism is gone.  what's left is the system to fuck the savers and good majority of people working hard day by day and behaving normally. 

Thu, 06/10/2010 - 12:01 | Link to Comment WaterWings
WaterWings's picture

Obama needs to 'go street' and kick some ass! Here's some perspective:

http://www.youtube.com/watch?v=yghFBt-fXmw

Thu, 06/10/2010 - 11:24 | Link to Comment schoolsout
schoolsout's picture

Da Boyz did it, why can't the lowly peons take advantage, too?

 

I'm not advocating it, but the gov't has taken any and all morality about these type events off the table.

Thu, 06/10/2010 - 11:32 | Link to Comment pan-the-ist
pan-the-ist's picture

Each month when I make my mortgage payment I ask myself why I am doing it.  If the government and the banks have no respect for money and debt, then why should I?

Thu, 06/10/2010 - 11:44 | Link to Comment Jeff Lebowski
Jeff Lebowski's picture

As do I. 

I have two friends who have decided to stop paying their mortgage, for no other reason than it is prohibitive to their lifestyle and they are underwater, as am I, on their mortgage.

Friend A has not paid his mortgage in 14 months.  He has since purchased a Kimber 45, AR rifle, vacationed in Florida, and purchased a boat.

Friend B has not paid his mortgage in 6 months.  He has put his non-payment to work by purchasing hair-plugs for $10,000.

I have no faith that we will discontinue the negative reinforcements of strategic defaults, but perhaps it's time to reward those who do not.

Would a more simple solution than further legislation be to offer a multiplier on lines 6 and 10 of the schedule A of the 1040?  (Real estate taxes and mortgage interest)

Thu, 06/10/2010 - 12:09 | Link to Comment bigdumbnugly
bigdumbnugly's picture

Friend B has not paid his mortgage in 6 months.  He has put his non-payment to work by purchasing hair-plugs for $10,000.

 

Friend B must be a really deep thinker...

Thu, 06/10/2010 - 12:31 | Link to Comment bada boom
bada boom's picture

Or really bald.

Thu, 06/10/2010 - 14:13 | Link to Comment Jeff Lebowski
Jeff Lebowski's picture

Well, he's a little of both, so you're both right.  Between his wife and himself, they make about $125k a year, and defaulting on a $250k loan for a house that is worth $175k.

It's the bank's fault, of course.  They put a gun to his head 3 years ago and forced him to refinance and pull out equity in a house they've lived in for 10 years.

For college, you ask?  Maybe medical bills?

No....  A boat.

Conclusion:  Jeff Lebowski has a balding asshole friend with a boat.

Thu, 06/10/2010 - 18:50 | Link to Comment bada boom
bada boom's picture

Perhaps he got tired of looking at the branch manager's wonderful hair implants each time he went to the bank to pay his mortgage and said to himself,

Shit, I can either give money to the bank to have them spend it or I can spend it myself? 

Either way, money is being spent.

Ah fuck it.

Thu, 06/10/2010 - 13:19 | Link to Comment John Self
John Self's picture

Is Friend B Joe Biden?

Thu, 06/10/2010 - 14:09 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

Friend A plans on taking out a lot of men

Friend B plans on consoling their women

Thu, 06/10/2010 - 12:33 | Link to Comment Almost Solvent
Almost Solvent's picture

Strategic defaults work much better when:

(1) You are way underwater with no hope anytime soon (banks are in no rush to foreclose and saturate the market even more); or

(2) You don't have income sufficient to make the payments in any event.

Too bad I live in a Western NY suburb (high property taxes keep my property values low!!) with equity in my property and the ability to make my mortgage payments.

 

If I try to default, I am really shooting myself in the foot as I could sell my house for a profit and the bank knows that and would not wait 14 months to do nothing.

 

I should have bought an overpriced condo in Arizona or Florida.....

Thu, 06/10/2010 - 11:56 | Link to Comment FEDbuster
FEDbuster's picture

They are to big to fail and change the rules as they see fit.  You and I are tied to some out of date code that punishes the small borrowers upon default.  Now they run your credit report to buy insurance and when you get a job.  They want to apply a scarlet letter to defaulters, and give billion dollar bonuses to those who get bailouts.

Thu, 06/10/2010 - 12:07 | Link to Comment Dr. Richard Head
Dr. Richard Head's picture

in all fairness, the credit report for employment is not as common as you think.  FCRA rules require credit reports only be run for positions were credit is relevant to the position.  Not many of those positions out there.  99% of background checks are completed for verifying past employment, education, credentials, and looking for past criminal history.

Thu, 06/10/2010 - 11:40 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

I was thinking the same thing.  Didn't MS walk away from some commercial real estate?  Why isn't there a bill denying them access to the Fed discount window?

Thu, 06/10/2010 - 12:53 | Link to Comment Assetman
Assetman's picture

Yeah.  It's a huge double standard.

What I find surprising is that the Republican stance on the strategic default issue makes them look callous to the masses, in the context of supporting the largest bailout of the banking system ever.

That's not likely to win over the hearts of the majority of the electorate.

Perhaps the Republicans sponsoring this should have imposed market to market accounting on all the too-big-to-fails and take away the safety net-- in combo with the strategic default issue.

That would be a little more evenhanded, now wouldn't it?

Thu, 06/10/2010 - 13:13 | Link to Comment Hellholeratrace
Hellholeratrace's picture

Exactly.  Borrowers "strategically default" on CRE loans whenever it makes economic sense for them to do so, and then for example, can go get a fannie loan to finance their next apartment project.

Thu, 06/10/2010 - 14:07 | Link to Comment Augustus
Augustus's picture

CRE loans are underwritten on an entirely different basis.  That does not mean that the underwriters or appraisers don't make screw ups and have losses.  The general idea for the CRE was to make a 70% LTV first mortgage with current net income (not projected income) giving a 1.3X debt service coverage.  Rates were also higher than for home loans.

However, if it does become the norm for society to decide that there is nothing wrong with robbing the bank by walking away from repayment obligations, high loan to value home loans will just not be available to anyone.  It has never made sense to me to give high LTV mortgages for the larger home prices.  Originally the loan limits were fairly modest and would only cover the starter home price or the first move up home.  After that the downstroke % went way up and the term for repayment was shorter.

What the scam artists are doing now is completely wrecking the most successful home ownership system in the world.  There was a NY Times article a few days ago dealing with the default issue.  A couple in Florida had decided to quit making payments.  They had refinanced the home a few years ago and had taken money out to use in their business.  One of the uses was to buy a new truck and raffle it off for the sales people.  Now the business is not doing so well and the house price is down.  They decided that they could live a little better if they quit making the mortgage payment, so they stopped that expense.  The real money quote in the whole article was from the wife, something like "why should we pay those bankers as they are just crooks anyway?"  So the real question now is how the heck does a borrower come to the conclusion that the banker who fulfilled their request for a loan just as they asked now become a crook and it does not matter if the borrower simply steals from them?  The more that concept becomes accepted, the more difficult loans will be to come by.  Then we will hear that bankers are being too difficult in underwriting.  And that is exactly what we are seeing play out, just let it build for another year.

Thu, 06/10/2010 - 14:53 | Link to Comment Assetman
Assetman's picture

No doubt there are scam artists.

Problem is, they are everywhere... from origination to default.  From borrowing party to lending party.

I agree that banks have every right to tighten loan standards if borrowers go into mass strtegic default mode.  Problem is, they get handed a mountain of collateral they have to maintain, and will likely to continue to erode.  Who's gonna buy that mounting inventory if loan standards are tight?

I can't explain the logic of some borrowers in your example.  I also can't explain why a bank or a mortgage originator would approve loans with no documentation-- or a LTVs that absolutlely make no sense from a business standpoint.

In the end, borrowers and lenders will be best served in this environment by objectively negotiating loans based on their current market values and sharing in the losses.  I haven't seen financial institutions moving in that direction very quickly-- and the government hasn't really helped out the process at all.  If banks tighten loan standards, they pretty much ensure that the housing price/default destructive loop continues.

 

Thu, 06/10/2010 - 11:32 | Link to Comment almost_have_a_name
almost_have_a_name's picture

I'm getting tired of playing by the rules too. Everyone around me has enjoyed

the credit bubble and they constantly complain about their credit card rates, home

taxes and school fees.

If you don't play the credit card game your punished in this country. Good thing

I racked up and paid off 100K on American Express in the 90's as a computer

consultant, they are offering me a Gold card. Time to buy a sail boat courtesy

of the American "Fiat" Express.

 

See you later Land Lubbers !

 

 

 

Thu, 06/10/2010 - 11:38 | Link to Comment schoolsout
schoolsout's picture

A blowboat?  lol

 

Just kidding...

Thu, 06/10/2010 - 11:46 | Link to Comment The Merchant of...
The Merchant of Venice's picture

I was crushed to learn that Chamillionairre chose strategic default on one of his Houston properties while also maintaining a custom chop shop also in Houston.

At least he's still "Ridin'"

Thu, 06/10/2010 - 12:26 | Link to Comment WaterWings
WaterWings's picture

Rulez are meant to be broken, punk ass bitch!

---

White face? No problem!

http://www.youtube.com/watch?v=CGOt8dZRsHk

Thu, 06/10/2010 - 12:35 | Link to Comment AnAnonymous
AnAnonymous's picture

People walking from their obligations dont belong to the house owners population only.

Where is the project of law to pin all the others?

Thu, 06/10/2010 - 14:11 | Link to Comment MarketTruth
MarketTruth's picture

At one point strategic default was about rebellion. Now it's about scamming the broken system.

Not necessarily that simple. As an example, Donald Trump had defaulted as the RE he was holding a debt note on was not producing so he defaulted and folded that company. As i recall, he has actually done this a few times. So defaulting is a BUSINESS decision based on sound common sense of personal/business financial benefit.

PS: A few banksters in the past year or two have defaulted (jingle mail) properties back to their owners. But of course this gets virtually no press.

 

PPS: If you REALLY want to get into it, the bank probably had VIRTUALLY NO MONEY to lend you for the loan per se. It is only AFTER you sign the contract that the bank can then CREATE the fractional reserve money in their ledger to lend you. In other words, you have a physical item and the bank had virtually nothing.

Thu, 06/10/2010 - 16:34 | Link to Comment Mesquite
Mesquite's picture

And another point, seldom mentioned...In the banksters haste to bundle up those mortages, and peddle em to make their bonuses, now it may be hard to actually come up with the original mortgage..This gets 'out', it can get really messy..

Thu, 06/10/2010 - 13:03 | Link to Comment tmosley
tmosley's picture

At one point strategic default was about rebellion. Now it's about scamming the broken system.

Who says you can't do both?  Lots of people got rich during the American Revolution, I'm sure plenty of them loaded up on loans and defaulted, just like these people are doing.

The system is broken.  There is no fixing it, so you might as well make some money during its demolition.

Thu, 06/10/2010 - 13:38 | Link to Comment hbjork1
hbjork1's picture

+5

Gully, if it was "strategic", it was always about scamming the broken system.

Use of "strategic" default is just an aspect the feeling or "need" for entitlement that began to replace the need for honor and community starting during the 60's or early 70's.

As a child, I heard stories of people during the 1930s of people who refused public assistance because they were ashamed to be considered dependant.  That, of course, ment that what their neighbors thought of them was more precious than a little bit of money.  

"Sow the wind, reap the whirlwind.  If it has no stalk, the bud shall yield no meal."

So we can conclude that the type of problem we are having is not a new one for mankind. 

IMO this evolution of attitude started decades ago and has been enhanced through the years by the increasing available of communication means (like TV) providing instant gratification.  The Vietnam War and behavior of some of the people in responsible positions, hasn't helped.

What other real people think of us has gotten less and less important.  What we can acquire to impress our now more remote next door neighbors has become more inportant.  

 

 

Thu, 06/10/2010 - 14:23 | Link to Comment lawrence1
lawrence1's picture

Since the bansters and other elite continue their theft with impunity, why shouldnt everybody else not take whatever advantages they can?  There is no sign that those in charge have any intention or will to solve the basic fiat debt mess, so let the whole fucking system collapes, the sooner the better and dont let the fucking republicans limit anyone else's ability to make the best out of a collapsing fundamentallty unjust corruption infested system.

Thu, 06/10/2010 - 16:01 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

Are you ready? Are you sure?

Thu, 06/10/2010 - 12:47 | Link to Comment GeorgeHayduke
GeorgeHayduke's picture

Yep. it was okay when their buddies were doing, but now that the peons have caught on, it's time to get all morally righteous about it.

Thu, 06/10/2010 - 11:11 | Link to Comment Gully Foyle
Gully Foyle's picture

Good. Why should they receive any benefits for scamming the broken system.

Thu, 06/10/2010 - 12:09 | Link to Comment Dr. Richard Head
Dr. Richard Head's picture

Why should the cronies at the top only be privy to bailout/stimulus projects?

Thu, 06/10/2010 - 11:14 | Link to Comment jimijon
jimijon's picture

Speaking of which, once the literal strings are cut from the power grid and power goes distributed, the final stake will be put through the existing structure. The universe doesn't seem to need strings to power itself....

tesla was right.

 

Thu, 06/10/2010 - 11:24 | Link to Comment Blues Traveler
Blues Traveler's picture

Protect the taxpayer, yes, we must protect the taxpayer, brillant....Rubin the anti-christ needs more souls. 

"I get a shit ton of fan mail"

 

Thu, 06/10/2010 - 11:30 | Link to Comment pan-the-ist
pan-the-ist's picture

By taxpayer, they mean banksters.

Thu, 06/10/2010 - 11:25 | Link to Comment Marla And Me
Marla And Me's picture

Well, since our $ keeps getting more and more valuable, you can add North Korea to your memory bank of what happens when governments manage  the currency so well:

http://www.nytimes.com/2010/06/10/world/asia/10koreans.html?partner=rss&emc=rss

Thu, 06/10/2010 - 11:26 | Link to Comment homersimpson
homersimpson's picture

If the GOP wants to prevent bailouts of homeowners or the FHA, that sounds good to me.

For those that oppose, explain why the financially prudent should bail out the financially inept.

Thu, 06/10/2010 - 11:29 | Link to Comment pan-the-ist
pan-the-ist's picture

Hi Homer-

If I am underwater in my mortgage, the prudent thing to do is default.  It is amazing that more people haven't.  I am sorry if my (lack of) hardship takes proffits from your bank.

Thu, 06/10/2010 - 11:33 | Link to Comment schoolsout
schoolsout's picture

I'm not a businessman, I'm a buisness, man.

Thu, 06/10/2010 - 12:05 | Link to Comment TBT or not TBT
TBT or not TBT's picture

I'm not in the business Mr. Deckert, I am the business.

Thu, 06/10/2010 - 13:13 | Link to Comment Assetman
Assetman's picture

Who in the world says that a strateic defaulter isn't fiscally prudent?

If Morgan Stanley buys a commercial property, does a mortgage agreement with a bank... and five years later concludes it's a money losing proposition... they approach that bank and say, "hey, this isn't working...but here are the keys, and we left things in good shape".

Perhaps those of us that are more conservative and are making our mortgage payments are morally prudent, but I don't feel like a fiscal genius when I make a payment on a mortgage than I know is underwater.

In most cases, banks are willing to make loans if they believe that the value of the collateral goes higher, and the due diligence on the borrower tells them the mortgage will be paid in full.   In essence, a bank has made a bad decision when a strategic defaulter comes in and decides that continuing to make payments doesn't make fiscal sense.  And the government has made a bad business decision on guaranteeing loans that have deteriorating collateral value and poor due diligence of the borrower.

It's the latter that should burn the prudently fiscal up the most.  Ultimately, we have to subsidize both the banker AND the strategic defaulter in these cases.  But it's the bank that has made the bad business decision-- and the government for "guaranteeing" the note.

Thu, 06/10/2010 - 14:38 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

It is ridiculous to write legislation prohibiting an FHA bailout while Geithner is still verbally guaranteeing GSE debt (yet maintaining it off book). I do not however, have a problem with telling strategic defaulters that they have to arrange private financing going forward. That isn't some draconian punishment. For the Feds to prove that you're a strategic walkaway means it must be pretty obvious, and FHA cannot handle that kind of action on top of the legitimate capitulations.

Thu, 06/10/2010 - 11:40 | Link to Comment rawsienna
rawsienna's picture

You have that right - no doubt. But since you are screwing your tax payer neighbors (most mtgs are guaranteed by teh GSA or FHA) , the govt has a right to prevent you from getting a subsidized mortgage in the future. Seems fair no?  I have no issues with strategic defaults. Just realize that the idiots at the GSE' s and FHA never priced that risk in . 

Thu, 06/10/2010 - 11:43 | Link to Comment schoolsout
schoolsout's picture

Subsidized mortgages shouldn't even exist...

 

When they take away the money train going to Da Boyz, I will agree with your sentiment.  Until then, let's party like it's 2009.

Thu, 06/10/2010 - 11:58 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Exactly.  I see no problem with subsidizing rent to give people shelter, but subsidizing debt just creates debt slaves.

Which is probably the whole point, of course.

Thu, 06/10/2010 - 12:32 | Link to Comment Reductio ad Absurdum
Reductio ad Absurdum's picture

Here's the problem: If you make it easier for people to survive (by subsidizing their shelter or food costs) then you make it easier for people to have children. Children inherit the genetic and cultural characteristics of their parents. In short, such subsidies lead to ever greater numbers of genetically unintelligent and culturally lazy people, thus exacerbating the problem.

Thu, 06/10/2010 - 12:58 | Link to Comment Lucky Guesst
Lucky Guesst's picture

+10

Definitely not junk...... Cold Hard Truth!

Hunger is real and unicorns do not exist. How compassionate are we when we enable people to become incapable of taking care of themselves?

Thu, 06/10/2010 - 13:06 | Link to Comment WaterWings
WaterWings's picture

I'll piggyback. We are in for a mighty correction a la Mako.

Thu, 06/10/2010 - 11:46 | Link to Comment pan-the-ist
pan-the-ist's picture

What is a fair interest rate on a mortgage?  Will that change over time?

Thu, 06/10/2010 - 12:00 | Link to Comment schoolsout
schoolsout's picture

Depends on the risk involved?

Thu, 06/10/2010 - 11:57 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Who is screwing whom?  Isn't it the FHA's responsibility to properly price for the risk they take on?

i.e., issuing 96.5LTV mortgages is fraught with risk, should they not charge more to take on that risk?  Is it the borrower's fault if they rationally exercise their default option, and that option was underpriced?

Thu, 06/10/2010 - 12:29 | Link to Comment rawsienna
rawsienna's picture

agree- people are smart. Govt is dumb. Govt misprices the risk, sees the strategic defaults and continues digging a deeper hole by expanding FHA becasue they are afraid of what would happen if prices actually fell to the correct level. Have no problem with borrowers - my problem is with FHA- At least FN/FH have corrected the problem .

Thu, 06/10/2010 - 13:40 | Link to Comment Assetman
Assetman's picture

FN/FH... well, yeah, after developing a massive black hole.

Thu, 06/10/2010 - 14:10 | Link to Comment hbjork1
hbjork1's picture

Raws...:

Government may be dumb but it is smart enough to buy votes by the policies enacted.

The people, by their vote, usually get the government they really want.

It is just that minorities like me, don't get what we want.

 

Thu, 06/10/2010 - 12:06 | Link to Comment MachoMan
MachoMan's picture

Exactly, this is the result of government initiative.  Once you begin regulating the market, you have to keep regulating and regulating and we get a slippery slope.  For example, when the government pays for everyone's medical expenses, the fda inevitably regulates salt intake...  same thing here.  This is why you keep it out in the first place...  unintended consequences and, ultimately, lack of choice/freedom.

Thu, 06/10/2010 - 12:11 | Link to Comment Dr. Richard Head
Dr. Richard Head's picture

I agree with you.  Plus, this is not unsecured debt.  There is collateral - the home.  So they get the home you get out of the mortgage. You agreed to pay the mortgage for the home.  If you decide to give up the home, you give them the asset.

Thu, 06/10/2010 - 14:28 | Link to Comment lawrence1
lawrence1's picture

Exactly, and encourage everyone you know to do so, and to buy gold. 

Thu, 06/10/2010 - 13:54 | Link to Comment OldTrooper
OldTrooper's picture

Homer,

There, but for the grace of God go I.  Plenty of people underwater today aren't 'financially inept'.  If you have an income today, count yourself lucky.

Am I the only one that can appreciate the irony of Congressmen lecturing us on financial prudence?  That takes real balls!

Thu, 06/10/2010 - 14:50 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

Since you are an Oldtroop, I will just say RTFM. It is a mild rebuke to those who are NOT hurting financially but want to option out. They don't get another bite at the already stressed FHA apple. Big whoop. Sounds like something I would expect from a sentient congress.

Thu, 06/10/2010 - 14:09 | Link to Comment fiddler_on_the_roof
fiddler_on_the_roof's picture

wrong Question. If a person defaults, Banks/FHA/lender have to take the loss.

Why should you or other taxpayers.

Republican will always protect taxpayers from defaulting tax payers, but will never protect taxpayers from wall street. when the Bank bailouts were happening, faux news was silent - in fact actually goading to help banks.

Thu, 06/10/2010 - 14:26 | Link to Comment hbjork1
hbjork1's picture

fiddler:

"Republican will always protect taxpayers from defaulting tax payers, but will never protect taxpayers from wall street."

While I am an "independant" switch voter, who agrees that the news is often "faux news", I have to observe that Democratic president Barrack O. saw to it that the rules were bent so Chicago's South Shore Bank could get a bailout when they began to have trouble, even though they were not on the list of banks that were considered ualified for bailout. 

"Power corrupts"  Why not help our friends?

 

 

Thu, 06/10/2010 - 14:54 | Link to Comment homersimpson
homersimpson's picture

Interesting viewpoints. From what I can tell, people are saying:

1) Banks should've accounted for the risk of strategic defaults (but that set up currently still screws over anyone who is up to date on their mortgage).

2) People who own underwater houses say they aren't financially inept - but I really do wonder how financially saavy people can a) Buy a house during inflated pricing periods or b) Buy to the point where you are so strapped for cash that if ANYTHING goes wrong you'll lose your house. Very un-ZH like. 

Don't tell me 5 years ago strategic default would be a way of life as it is now. SD was unheard of simply because house prices were rising and many folks that shouldn't have entered the housing market eventually fell off the cliff.

Don't get me wrong - banks are guilty for the crap they pulled- but if you bought a house during the real-estate "boom" while blindly disregarding the dangers of owning a home (or not accounting for any problems that might arise in your life), you get what you deserved. The aftermath: Those strategic defaulters are really no different than the banks that got bailed out. And that's why the US is going to go down the toilet: No responsibility accounted for by the banks or the homeowner.

Thu, 06/10/2010 - 16:04 | Link to Comment Assetman
Assetman's picture

Wrong again, Homer.  You're misinterpreting people's comments.

Let's get to your "aftermath", though:

Those strategic defaulters are really no different than the banks that got bailed out. And that's why the US is going to go down the toilet: No responsibility accounted for by the banks or the homeowner.

The problem with that statement is that the banks have every opportunity to re-negotiate these non-recourse loans that reflect the underlying collateral values.  They could make an effort to share in the losses-- as BOTH parties going into it have assumed prices would go higher.

For the most part, banks have simply not budged in their efforts to restructure these loans, and at leasat share in some of the losses.  Why?   Because a negotiatied loan based on revaluation will result in realized losses on their books.  Banks are exposed to collateral risks-- but they don't want to share in those losses once the risk is real.  In many cases, they would rather have their borrowers serve as squatters than take the immediate loss.

No doubt, there are some strategic defaulters out there that are trying to take advantage of a broken system.  But there are many others (especially many of the recently unemployed) who are only left with stategic default as an option after meeting resistance on loan restructuring.  At the end of the day, the lender is stuck with the collateral and its underlying value.  A "finanically inept" borrower (perhaps due to an unexpected loss of income or an unexpected loss in collateral value) may be faced with making a "finanically prudent" decision.

 

Thu, 06/10/2010 - 11:28 | Link to Comment pan-the-ist
pan-the-ist's picture

Don't they have other things to worry about?  How about preventing banks that strategically sold shitty MBS's to the fed from getting governement bailouts?

Thu, 06/10/2010 - 11:41 | Link to Comment rawsienna
rawsienna's picture

The shitty MBS already guaranteed by govt so it does not matter.

Thu, 06/10/2010 - 11:44 | Link to Comment RockyRacoon
RockyRacoon's picture

It's a populist move, plain and simple.   i.e.: Politics as usual.

There will be hand-wringing and bold speeches all around.  Everybody will feel great.  But the giant ponzi will go on.   As is said here so often:  Nothing to see folks, move along now.

Thu, 06/10/2010 - 12:27 | Link to Comment WaterWings
WaterWings's picture

If one homeowner defaults it's fiscally unsound. If 1,000 homeowners default it's political action.

Thu, 06/10/2010 - 11:28 | Link to Comment bada boom
bada boom's picture

As opposed to the strategic black mailers. (Martial law I tell ya)

Well, at least I guess its a start.

 

Thu, 06/10/2010 - 11:29 | Link to Comment bugs_
bugs_'s picture

Those waskally wepublicans!

Thu, 06/10/2010 - 11:29 | Link to Comment PeterSchump
PeterSchump's picture

Yes, it is important that bankers get bailouts, but no one else.

Thu, 06/10/2010 - 11:31 | Link to Comment primefool
primefool's picture

The mark of a third world nation and the primary cause of poverty, income inequality and brain-drain/capital flight:

1. laws are labrynthine, undecipherable and nobody follows them anyway.

2. The laws keep changing - but no body cares - other than how to get a passport to some other country.

3. property rights are questionable, contract law - depends on who you are and who you know.

4. The people who vigorously protested and threw out the "rich" and the "succesful" - gradually decend into a environment of powercuts, water cuts, gas lines , food rations and ultimately live closely packed together in shacks.

 

Its the same everywhere - I have seen these "laws: work like magic.

Thu, 06/10/2010 - 11:36 | Link to Comment rawsienna
rawsienna's picture

So true.  But we have a Latin American style dictator in the White House who thinks otherwise. 

Thu, 06/10/2010 - 11:37 | Link to Comment pan-the-ist
pan-the-ist's picture

This is it exactly.  This is what I am beginning to grasp.

Thu, 06/10/2010 - 14:08 | Link to Comment technovelist
technovelist's picture

Why do you hate Amerika?

Thu, 06/10/2010 - 11:35 | Link to Comment rawsienna
rawsienna's picture

MESSAGE TO CONGRESS  - VOTE YES TO THIS OR GET VOTED OUT IN THE FALL. 

Thu, 06/10/2010 - 11:46 | Link to Comment RockyRacoon
RockyRacoon's picture

Why put a restriction on it?  Vote 'em out anyhow.

Have you seen the most recent elections?  There is NO incumbent rout by voters.

Same old crap, same old system, same old results.

If nothing changes, nothing changes.

Thu, 06/10/2010 - 12:04 | Link to Comment WaterWings
WaterWings's picture

To vote is to consent to be governed by criminally-psychopathic children. Don't do it. Follow the example of the Founding Fathers in this given situation.

Thu, 06/10/2010 - 11:37 | Link to Comment JW n FL
JW n FL's picture

The free lunch is just now getting here? really? seriously? are you sure? Tyler? cause those same fucking greasy republicans that started the domino effect? thru austerity measures?

those republicans are now up in arms for what they created? wait, thats right Barney Frank did it all... the dem's fucking hate the lil fat fag, but Barney had the horse power to pull it all off by himself...

Bullshit!

December 16, 2003. The American Dream Downpayment Assistance Act authorizes up to $200 million annually for fiscal years 2004 - 2007.

http://www.hud.gov/offices/cpd/affordablehousing/programs/home/addi/

 

HOME is the largest Federal block grant to State and local governments designed exclusively to create affordable housing for low-income households. Each year it allocates approximately $2 billion among the States and hundreds of localities nationwide. The program was designed to reinforce several important values and principles of community development:

http://www.hud.gov/offices/cpd/affordablehousing/programs/home/

 

Which was part of: HOME is authorized under Title II of the Cranston-Gonzalez National Affordable Housing Act, as amended. Program regulations are at 24 CFR Part 92.

Which Daddy Bush pushed thru...

 

Now, after pumping all of these dollars in... Bush cut funding, never mind the shit head idiot dems v. reps...

When Bush pumped the housing market, with the magic, un-written Federal backstop clause and then cut the funding... all of that 50 to 1 leverage took on a new sheen... 50 to 1 leverage for an ongoing Federal Program, or as I would call it... The big boys feeding from the public trough of tax dollars... was safe, safe enough that how many absolute return funds bought into the rated, magic Federal funded and back stopped debt machine / vehicles? LOTS!

But, when the Federal monies where cut... and the magic backstop was found to be a lie... the domino's fell, one after another... Goldman, being smarter than the rest bought shorts and insurance? how many different ways did Goldman profit from the failure, per deal... in the plainest of terms... for every one dollar in failed debt Goldman earned $2 dollars? Short + Swaps? I am guessing there just for the fun of it... sorry.

 

But the failure was brought on by Bush pumping and then de-stabilizing the Federal dollars (really tax payer dollars) that where assumed to be safe by Bear, Lehman and so on... Don't get me wrong, Barney is an idiot Lobby whore just like Bush... but there is no difference between Barney, Bush, Obama, Clinton and so on... they are all moved by Lobby dollars... the song and dance is strictly for the public's entertainment.

 

Obama is Bush part duex.. he is not a commie, he has taken every Bush program and ran with it... not run from it. Dont get caught up in the public spin machine.

 

I offer... http://www.opensecrets.org/ see who owns your favorite representatives and then for fun look at the dem's side who should be against the reps push... and see how the dollars move the votes, not the party affiliations.

 

John Mcsame spent all of a whole 10 minutes yesterday grilling Goldman, and said he was very disappointed in Goldmans behavior... he spoke less that the girl in Levin's ear...

Top Industries

John McCain

http://www.opensecrets.org/politicians/industries.php?cycle=Career&cid=N00006424&type=I

Finance, Insurance & Real Estate

       $33,457,679

  $745,772

    $32,711,907

 

           

Lawyers & Lobbyists

      $13,170,368

   $307,508

     $12,862,860

 

                   

Other

      $42,122,454

     $8,400

       $42,114,054

 

John McSame spent 100 times less times talking about how we all have been screwed by Goldman for around 10 times more money than the other committee members where Bribed... Oops, I mean Lobbied with.

 

There is no difference between the two parties, the lobby has bought and paid for all the whores inside the beltway, don’t think because of the cute sound bite you like hearing that the two parties are any different.

 

Thu, 06/10/2010 - 11:39 | Link to Comment schoolsout
schoolsout's picture

Cliffnotes?

Thu, 06/10/2010 - 11:48 | Link to Comment RockyRacoon
RockyRacoon's picture

What does your comment mean?  Could you expand on that a bit?  Thanks.

Thu, 06/10/2010 - 12:02 | Link to Comment schoolsout
schoolsout's picture

It was said in jest, but he simply could have stated that "both parties are the same and they act in similar ways, no matter what they say/do"

 

 

Thu, 06/10/2010 - 12:16 | Link to Comment TBT or not TBT
TBT or not TBT's picture

Well, notsofast.  The committee votes on measures to stop abuses by the GSEs were split mostly down party lines, and pretty clearly so.   The Banking Queen and his dem cronies got a vote or two from the other side, putting down efforts to reign in the GSEs over and over during the Bush administration.   Naturally following the Pelosi-Reid takeover that was the end of that, and tons of damage had already been done.   Note that the GSEs are now explicity infinitely backstopped by the taxpayer, under a democrat dominated political backdrop.   That's a big difference from before the Pelosi-Reid era when the Bush administration was going to bat with Congress to do something fast to restrain the risks the GSE's were piling on.   Keep in mind that the GSE's initiated a huge chunk of the bad lending, to insolvent people and that this is something that the Democrats openly supported continuing ad infinitum, and which the Republicans resisted about as well as they could.

Thu, 06/10/2010 - 14:59 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

Didja see that CSPAN clip where Meeks practically threatened violence on Falcone (who coulda wiped the floor with him, my guess)? All because Falcone was badmouthing the GSE cash cows. I believe that was the infamous hearing where Bawney declared that the safety and soundness of Fannie Mae was but a "shibboleth".

Thu, 06/10/2010 - 19:01 | Link to Comment JW n FL
JW n FL's picture

TBT or not TBT,

"the Republicans resisted about as well as they could"

Shut the fuck up stupid.. go shoot yourself and spawns and do the world a favor... The little fag no one likes didnt do it... he never had the horse power. just cause your Drill Baby! Drill!! shit is puking on you right now?!

Home Ownership and President Bush

http://www.youtube.com/watch?v=kNqQx7sjoS8&feature=PlayList&p=C1B06538A32767DF&playnext_from=PL&index=165

 

Thu, 06/10/2010 - 13:44 | Link to Comment Assetman
Assetman's picture

Rocky... did you say "expand on that"?  Oh please, don't do that again! :)

Thu, 06/10/2010 - 15:29 | Link to Comment RockyRacoon
RockyRacoon's picture

Sorry.  I just hate to unload on somebody without knowing their position, and a one word comment is not enough to warrant a full-dump.  I'll restrain myself in the future.  I just thought that he was too lazy to read the comment and wanted a sound-bite. 

Thu, 06/10/2010 - 13:26 | Link to Comment Lucky Guesst
Lucky Guesst's picture

YOU ARE FULL OF CRAP. It was CLINTON and everybody knows it. Here is a link from HUD's archives boasting about CLINTON'S huge increase in home ownership by people who could otherwise not qualify.

http://archives.hud.gov/news/1996/pr96-011.cfm

It is dated February 8, 1996. Bush was just too chickensh*t to stand up and say NO to all the politically correct social programs that needed to be scrapped.

Thu, 06/10/2010 - 14:06 | Link to Comment pan-the-ist
pan-the-ist's picture

Why not blame Ben Franklin for helping to authorize the printing of money after the revolution?

He claims not allowing the colonies to print their own money was the cause of the revolution, but when he gets older he changes his view and thinks that too much money printing is a bad thing.

Conclusion: If there was no revolution we'd all be British subjects and then Bill Clinton never would have been president.  Call Glenn Beck when you get it all sorted out.

PS.  Love me some soccer Moms.

Thu, 06/10/2010 - 18:57 | Link to Comment JW n FL
JW n FL's picture

Lucky Guesst,

Drill Baby! Drill!! or... No money down program expanded by 200% no wait 400%... then cut short to undermine the entire "Feed from tax trough system" developed for Bush's push... Clinton? really? seriously? are the HUD.gov links to, too much for you to click and follow? You are a perfect example of why dealing with women is a waste of fucking time?

Home Ownership and President Bush

http://www.youtube.com/watch?v=kNqQx7sjoS8&feature=PlayList&p=C1B06538A32767DF&playnext_from=PL&index=165


December 16, 2003. The American Dream Downpayment Assistance Act authorizes up to $200 million annually for fiscal years 2004 - 2007.

http://www.hud.gov/offices/cpd/affordablehousing/programs/home/addi/

 

HOME is the largest Federal block grant to State and local governments designed exclusively to create affordable housing for low-income households. Each year it allocates approximately $2 billion among the States and hundreds of localities nationwide. The program was designed to reinforce several important values and principles of community development:

http://www.hud.gov/offices/cpd/affordablehousing/programs/home/

 

Which was part of: HOME is authorized under Title II of the Cranston-Gonzalez National Affordable Housing Act, as amended. Program regulations are at 24 CFR Part 92.

Which Daddy Bush pushed thru...

 

 

Thu, 06/10/2010 - 11:38 | Link to Comment rogersails
rogersails's picture

Will the ban bailouts of defaulted banks, too ?

Thu, 06/10/2010 - 11:39 | Link to Comment b_thunder
b_thunder's picture

i want amendment to the bill that would prevent corporations that strategically default (Morgan Stanley, Tishman) from benefitting for TARP, discount window, etc.

 

Thu, 06/10/2010 - 11:42 | Link to Comment rawsienna
rawsienna's picture

agreed -

Thu, 06/10/2010 - 11:59 | Link to Comment Rogerwilco
Rogerwilco's picture

@b_thunder

Let's see, they borrow money at 1%, and then lend it to fucktards at 29%. Gee, you think they might be able to "pay back" what they owe to Uncle Sugar? Of course they will pay it back, every penny, with interest. They took the money from US.

Thu, 06/10/2010 - 12:25 | Link to Comment TBT or not TBT
TBT or not TBT's picture

The banksters employees should make up a "union" that spans all major companies in that industry, and start giving massively to Barry and company.   That way, in default, they could get awarded large ownership stakes in their companies while senior debt holders get ripped off outright by Barry.   Naturally, any banks that didn't participate in the fascist rip off would get no concessions from the union or the government going forward.   The union controlled, union owned banks with the government staking them would have that backstop as long as they needed, plus agressive government propaganda and regulatory attacks on their foreign competitors.

(Yeah, I'm talking about the auto industry model)

Thu, 06/10/2010 - 11:45 | Link to Comment Rogerwilco
Rogerwilco's picture

At some point, all these "strategic defaults" are going to turn into 1099-Rs. So go ahead and screw da Man, da Man will just add it up and send that form to the IRS. The IRS doesn't like to be screwed, and they never go away until you are dead (natural causes, their bullet or yours) or in prison.

Thu, 06/10/2010 - 11:50 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Actually, through 2012 debt foregiveness is tax free in most situations.

 

http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

 

 

Thu, 06/10/2010 - 11:58 | Link to Comment Rogerwilco
Rogerwilco's picture

@ghostface

Nope -- that only applies for mortgages formally restructured under the rules. Deadbeats don't get the tax benefit, just a 1099 in their mailbox.

Thu, 06/10/2010 - 12:02 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Did you actually read the link?

 

1. What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
  • Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
  • Non-recourse loans:A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.

 

3. I lost my home through foreclosure.  Are there tax consequences?  

There are two possible consequences you must consider: 

  • Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
  • A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)

Use the following steps to compute the income to be reported from a foreclosure:

Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section.  You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.___________
2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C.  This amount is taxable unless you meet one of the exceptions in question 2.  Enter it on line 21, Other Income, of your Form 1040.

Step 2 – Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________
5.    Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.)                                    ____________
6. Subtract line 5 from line 4.  If less than zero, enter zero.   

The amount on line 6 is your gain from the foreclosure of your home.  If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.  If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.


4. I lost money on the foreclosure of my home.  Can I claim a loss on my tax return? 
 

No.  Losses from the sale or foreclosure of personal property are not deductible.  


5.  Can you provide examples?

A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000.

The borrower figures income from the foreclosure as follows:

Use the following steps to compute the income to be reported from a foreclosure:

Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section.  You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.___$220,000__
2. Enter the fair market value of the property from Form 1099-C, box 7. ___$200,000__
3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C.  This amount is taxable unless you meet one of the exceptions in question 2.  Enter it on line 21, Other Income, of your Form 1040.

Step 2 – Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __$200,000__
5.  Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.)                                        ___$170,000__
6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__

The amount on line 6 is your gain from the foreclosure of your home.  If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.  If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.

Other examples can be found in IRS Publication 544, Sales and Other Dispositions of Assets, under the section “Foreclosures and Repossessions”.

Thu, 06/10/2010 - 12:25 | Link to Comment Rogerwilco
Rogerwilco's picture

@ghostface

Thanks for posting the IRS code book. My comment stands -- the mortgage debts forgiven outside the formal government restructuring programs don't qualify for exemption under that law. All those Braveheart "strategic" defaulters who just stop paying their note are going to get 1099s, and the IRS is going to expect their vig.

Thu, 06/10/2010 - 12:39 | Link to Comment Almost Solvent
Almost Solvent's picture

But you can exclude any forgiven debt to the extent of your insolvency immediatly prior to the cancellation of debt.

 

There is an IRS form (not sure of the #) you file to exclude cancelled debt from gross income. Plus, most lenders will sue you in any event and take a judgment unless you live in a non-recourse state.

 

Chances are if you are way underwater on your home and walk and get a 1099, you can exclude most if not all unless you have other siazable assets with some FMV exceeding the amount of your insolvency.

Thu, 06/10/2010 - 12:44 | Link to Comment Jeff Lebowski
Jeff Lebowski's picture

Well stated, ghostface - but I do believe that Rogerwilco is correct.

I believe that you will also be hit with the mortgage payments missed on the 1099, if I interpreted correctly.

Thu, 06/10/2010 - 11:53 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

double post, sorry

Thu, 06/10/2010 - 11:46 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

What the Repubs don't understand is that encouraging strategic default is a goal of the Administration, especially Treasury, in order to support consumer spending.

Many people strategically default not only because they are underwater, but because they can live rent free for 2-3 years now at current foreclosure timelines.

They can only do that because the Treasury, via HAMP, has discouraged banks from foreclosing.

If foreclosure timelines were 6-12 months like they were historically, strategic defaults would be lower.

Thu, 06/10/2010 - 12:06 | Link to Comment WaterWings
WaterWings's picture

+1

Something big is on the way. And it's not an oil-soaked hurricane.

Thu, 06/10/2010 - 13:03 | Link to Comment MachoMan
MachoMan's picture

HAMP didn't have anything to do with it...  changes in accounting rules and regulators with kids' gloves did...  THE BANKS CANT ALLOW PRICE DISCOVERY BECAUSE THEY CANNOT KEEP THE DOORS OPEN AFTER RECOGNIZING THE LOSSES.  After all of this stimulus and time, they're still insolvent...

Thu, 06/10/2010 - 16:21 | Link to Comment Geoff-UK
Geoff-UK's picture

+5

 

So like Mako and John Derbyshire keep saying--we're all screwed and there's nothing anyone can do to stop what's coming.

Thu, 06/10/2010 - 11:52 | Link to Comment Kina
Kina's picture

I can understand the question of if I should make my mortgage payment when if my house is worth $300k and my loan is $450k and will be worth not much more than that for some time. And I didn't know how long I could keep my job, and I had a kid or two to feed.

Yet I could rent real cheap now else where....

 

But honesty and responsibility make you pay it, because thats what you do. Then you see the  banksters and their kind having just raped every man woman and child in the USA, arrogantly line their pockets with mega bonuses, get bailed out billion after billion, make record profits...and threaten the Administration anytime it looks like doing something that would be good for the country...

 

You would have to say to yourself...that the country is owned and run by criminals who dont have to pay, who can take what they want, who face no consequences, ie the financial system is utterly and totaly corrupt and is for only increasing the wealth of a few at the expense of all.

Now you would wonder, why the fuck would I pay any cent I owed to these people?

 

Indeed if everyone decided to not pay it might bring everything to a head much quicker, before BB prints another bunch of trillions burrying the country deeper.

 

 

 

Thu, 06/10/2010 - 12:22 | Link to Comment FEDbuster
FEDbuster's picture

I would like to add part of the reason your home is worth $300K is due to the banksters selling foreclosed properties in your neighborhood for half of what would have been the market value.  Yes the banksters have been bailed out, because the loss is taken by Fannie, Freddie or the FHA (now 98% of the mortgage market).  Banksters have nothing to lose when they dump a house, but it effects  the entire market of comparable sales by screwing up the "market value" for everyone.  Dumping properties, rising defaults and bailing out GSEs will continue until the whole thing collapses. 

Commercial real estate is collapsing, but the banks are having trouble pawning these losses off on anyone (except the FED).  If the losses in CRE are ever exposed (hidden now by phony accounting), we will see a financial meltdown much greater than the Great Depression.

Thu, 06/10/2010 - 11:52 | Link to Comment Crummy
Crummy's picture

I think it has been pointed out here and elsewhere that the grand total of all mortgage debt pales in comparison to the black hole that is TARP.

This seems to me to be a very convenient line to try and draw and an excellent way of turning the "Useless Eaters" against one another in a time when the owned are finding common ground with one another in which to stand against the owners.

Thu, 06/10/2010 - 11:57 | Link to Comment bulbar
bulbar's picture

I would not hesitate 1 minute in defaulting on my note, even if i could pay it.  screw the banks.

Thu, 06/10/2010 - 12:19 | Link to Comment Mark McGoldrick
Mark McGoldrick's picture

The way to "game" the strategic default system:

Agree to a short sale, and move out.  

Vandalize the interior of the house by spray painting the walls with profanities, and tearing the carpet.  Leave the front door unlocked so it appears to be random vandalism that you're not responsible for. 

While the vandalism looks horrible, it only costs $5k to fix (new paint and carpet in two rooms).   

Have a friend or relative buy the house from the bank.  The bank is so eager to get rid of the house (because the vandalism looks atrocious) that they agree to a ridiculously low price.  Plus, "Shaniqua" who makes $10/hour at "Chase Bank" is easily convinced to accept the low-ball bid so that she can get this "ridiculous" house off her desk.  

The same house that you owed $800k is sold to your relative or friend for $275k.  

Spend $5k fixing your own vandalism, so now your friend/relative owns the house for $280k. 

Your friend/relative sells the house 60 days later for $475k.

You split the profits.

So now you've gotten rid of your $800k lien which is "legally paid in full for less than the full balance" (not a foreclosure), and you and your friend have pocketed nearly $100k cash.

Game over.  Based on a true story. 

Thu, 06/10/2010 - 12:29 | Link to Comment Commander Cody
Commander Cody's picture

Sure, let's all drop any attempt at honesty and decency and become Fraud Nation.  Call me up in Singapore and let me know how that works out.

Thu, 06/10/2010 - 12:32 | Link to Comment Rogerwilco
Rogerwilco's picture

LOL - more flipper fantasies. I see properties around me that have lost over 50% of their original "value" since 2007. One right next door was purchased by a flipper last November for $281K, and he has it listed at $445K. The poor bastard will be lucky to get $300K, if it ever sells. Big profits - LOL.

Thu, 06/10/2010 - 13:28 | Link to Comment Mark McGoldrick
Mark McGoldrick's picture

Sorry to hear that your neighborhood has lost 50% of its value. I can understand your reluctance to believe that anyone is making money in real estate.  

The scenario that I spoke of is finalized. Done.  

I'm not saying that it's normal, nor ethical.  In fact, I'm half tempted to report it to the bank that got victimized.  

Don't delude yourself into thinking that people aren't gaming the system, and producing quite incredible profits.  Do you actually think that the price at which a bank is offloading its inventory is the true, market value of the property? In many cases, they are selling far below market value, especially on properties that are perceived to be vandalized or need major renovations.  Banks are dumping those properties at ridiculous prices, and "Shenequa" at $10/hour and who makes these decisions for "Chase Bank" doesn't know the difference.  She has no fucking clue if a particular house is worth $300k or $400k or $500k. No clue whatsoever.  All she knows is that she has paperwork on her desk that she needs to get rid of, and she has a willing buyer for a vandalized property.  

It doesn't work on every property, but it certainly works on some. 

 

 

 

Thu, 06/10/2010 - 13:51 | Link to Comment Marla And Me
Marla And Me's picture

Packages of homes in the Detroit metro area are being sold through government backed programs for 17 cents on the dollar compared to what the properties sold for in 2007.   $100k homes going for $17k...  The developers/buyers take on very little risk to play the roles of the liquidators.

Thu, 06/10/2010 - 12:14 | Link to Comment Caviar Emptor
Caviar Emptor's picture

As I've warned: Although they want you to believe that deflation hurts borrowers, the real problem is that deflation-induced defaults hurt creditors, aka those with wealth. And TPTB won't give up any power without a fight. This is why the Fed, Treasury and most in government are fighting deflation so hard, at the expense of the middle class, and creating a toxic double whammy environment by inflating the paper assets backing the real assets (while the real assets like housing continue to deflate). 

Deflation is a declaration of class warfare. Those with wealth who are creditors will never willingly relinquish that privilege. The first step in the war was the Fed and Treasury's policy of bailouts for banks and creditors who pushed the credit bubble. The follow up was the policy of "reflation" using ZIRP and QE (and other tricks) in order to prevent deflation. SInce only paper assets are being reflated, we have The Double Whammy Economy I've been describing where real assets, employment and incomes deflate while the cost of living and doing business inflates. 

The next stages of the fight against deflation (and the crisis in general) will use political weapons. The Republican Motion to Recommit is an attempt to punish defaulters. Translated: "if you have ANY money left, you will send it to us, and not use it to put food on your table."

If pushed further, the political struggle will go to the next phase of class warfare: underwater mortgages will be converted to a lifelong mandatory rent whereby the debtor becomes indentured, obligated to pay the landlord or face prison. Yes friends, a step back 3 centuries. 

Thu, 06/10/2010 - 13:57 | Link to Comment Marla And Me
Marla And Me's picture

Now all of a sudden, that crazy Russian Igor Panarin who predicted that the U.S. would fall apart literally, and physically, in 2010 doesn't look so crazy anymore:

http://online.wsj.com/article/SB123051100709638419.html

I don't think his spheres of influences are quite right (heck, the midwestern states might take over Canada before they take orders from them), but the coming fight is going to create plenty of opportunistic "leaders" ready to pander to this or that group...

Thu, 06/10/2010 - 14:23 | Link to Comment fiddler_on_the_roof
fiddler_on_the_roof's picture

+1000000. Very correct that was why I think Bankruptcy laws was changed by republicans in 2005 to help creditors.

Thu, 06/10/2010 - 15:26 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

The Republican Motion to Recommit is an attempt to punish defaulters.

You intentionally leave off the modifier "strategic", meaning those that can pay, although I haven't seen the cutoff for determination of that state. And the punishment? You get away with it, but only once, at least with FHA. That's supposed to be some bully class warfare there? The no bailout portion is a futile effort to reign in the garbage paper that FHA is currently churning. That threat won't work in the present environment. 

Thu, 06/10/2010 - 12:19 | Link to Comment firstdivision
firstdivision's picture

I would pay to watch this bill pass, with a provision to also speed up the foreclosure process.  That would hurt the banks, FHA, and GHA so hard that it will make this great ponzi scheme collapse.  We have a mass wave of defaults about to hit this summer (all these great unemployed whose benifits now are expended) and more homes on the market will pressure prices further causing banks balance sheets to look like they puked $'s to fill the Grand Canyon. 

 The simplest and quickest solution has always been for the banks to just refinance and take a haircut to get the homeowner to the waterline.  That was all.  The haircuts would hurt, and some banks would need saving, but it would help stabilize the home market which has been the biggest thron in our side.  Instead they let greed take over and they want all or nothing.  Now the banks are all gang banging themselves in the butt by dumping empty homes on the market and putting more pressure on home prices.   

I am so happy I ignored the mass hysteria to buy a house during the bubble, and still continue to rent until this next wave hits.  There will be so many empty homes to choose from that they will be included in the Big Mac value meal.  Cue lawn chair, beer, and sunglasses as it all explodes.

Thu, 06/10/2010 - 13:30 | Link to Comment OldTrooper
OldTrooper's picture

The feds can't really do anything to speed up the foreclosure process.  Those are established by state laws and vary from state to state.  The best the feds can do is fiddle with the bankruptcy law.  A lot of states have already 'streamlined' foreclosure laws to eliminate alot of those pesky notices and proceedings.  Who needs due process?  This is a crises!

Thu, 06/10/2010 - 12:16 | Link to Comment baldski
baldski's picture
JP Morgan strategically defaulted on $100 million in office buildings in San Francisco.

Where was the Republican outrage? JP Morgan said it was a business decision.

Why can't I make the same "business decision" with my mortgage? Am I not a "person" just like a corporation? Or are corporations more equal than living persons? 

This just goes to show you the load of shit the supreme court has loaded on the public with their corporations are persons mantra.

Thu, 06/10/2010 - 12:23 | Link to Comment firstdivision
firstdivision's picture

and yet JPM still has access to federal subsidies...the world is standing on its head shitting on its self.

Thu, 06/10/2010 - 12:23 | Link to Comment Caviar Emptor
Caviar Emptor's picture

See my comment above: deflation is a declaration of class warfare. All Fed/Treasury actions since the crisis may be understood as an effort to combat deflation and support TPTB. The next phase is a political response whereby default becomes illegal. This motion in Congress is a first small step in that direction since it declares that defaulters will be punished, cut out of future social benefits available to others. Stay tuned for more political responses.

Thu, 06/10/2010 - 12:24 | Link to Comment Commander Cody
Commander Cody's picture

What the fuck are you all talking about?  By foreclosure and repossession the banks are taking property away from the populace - it is a transfer of wealth.  The banks don't have to account for any loss thanks to the criminals in Congress (abetted by the FASB).  Plus, they are backstopped by the corrupt and faceless Fed - and ultimately by you, dear taxpayer.

So, continue with your mindless spending and debt overloads and debt defaults until the day comes when you realize - I'm a serf and I can't get up.

Thu, 06/10/2010 - 12:26 | Link to Comment docj
docj's picture

Brilliant move, Republicans - if you'd done it in 2008, starting with the banks.

But you didn't.  You not only went along with bailing them out, you were among the people pushing for it.

So now you just look like a bunch of apologists for GS and the rest of the Fraud Street Democrat Party fundraising machine - all while self-same Democrats get to beat you about the head and neck for supporting the bailout of the banks while the little guys are getting screwed.

The Stupid Party rides again.

All that said, I sincerely hope there is a special place in purgatory reserved for "strategic" defaulters.

Signed,

Fool who has never missed, or even been a day late, on a mortgage payment

Thu, 06/10/2010 - 12:29 | Link to Comment Caviar Emptor
Caviar Emptor's picture

Next step: Defaults are declared illegal. All creditors become landlords for life to those who owe money. Pay them monthly rent or face prison. Simplest solution down through the ages. The system we call Feudalism was essentially this.

Thu, 06/10/2010 - 12:44 | Link to Comment ozziindaus
ozziindaus's picture

Probably more likely the IRS steps in to garnish mortgage payments.

Thu, 06/10/2010 - 12:51 | Link to Comment Caviar Emptor
Caviar Emptor's picture

That's an intermediate step on the way to banksters becoming the landlords. Depends how bad the deflation gets and how much political power the banksters have (lots imo)

Thu, 06/10/2010 - 13:19 | Link to Comment Jeff Lebowski
Jeff Lebowski's picture

Life imitates art.  We are a bank run away from being Pottersville.

That's an intermediate step on the way to banksters becoming the landlords.

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