investors make up majority of mortage defaults
- Thread starter loza
- Start date
That's how it works. If the forgiven debt is large, the borrower probably doesn't have assets to pay the taxes either. Then it becomes a negotiation with the IRS or bankruptcy court.
Historically, this hasn't been much of a problem. By the time a borrower has to default even on a "zero down" loan, the house has appreciated enough for the lender to recover 100%. (Not necessarily a good thing, however.... caused by maniacal Fed money-pump inflation.)
However, when the borrower took out a 125% LTV amount or when, like currently, people are in trouble shortly after buying and the housing market is weak... + borrowers are facing ARM reset calculations.... it's likely to be a problem in the near term.
We have to be careful making generalizations. Here is some info quotes:
"Mortgagor is required to pay for mortgage insurance, or PMI, for as long as the principal of his primary mortgage is above 80% of the value of his property. In most situations, insurance requirements are sufficient to guarantee that the lender will get all his money back, either from foreclosure auction proceeds or from PMI.
Nevertheless, in an illiquid real estate market or following a significant drop in real estate prices, it may happen that the property being foreclosed is sold for less than the remaining balance on the primary mortgage loan, and there's no insurance to cover the loss. In this case, the court overseeing the foreclosure process may enter a deficiency judgment against the mortgagor. Deficiency judgment is a lien that obligates the mortgagor to repay the difference. It gives lender a legal right to collect the remainder of debt out of mortgagor's other assets (if any).
There are exceptions to this rule, however. If the mortgage is a non-recourse debt (which is often the case with residential mortgages), lender may not go after borrower's assets to recoup his losses. Lender's ability to pursue deficiency judgment may be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't.
If lender chooses not to pursue deficiency judgment and write off losses, or is not allowed to do so because of the mortgage being non-recourse, borrower may be liable to pay taxes on the amount being written off as if it was his income.
Any other loans taken out against the property being foreclosed (second mortgages, HELOCs) are "wiped out" by foreclosure (in the sense that they are no longer attached to the property), but borrower is still obligated to pay them off if they are not paid out of foreclosure auction's proceeds."
So the answer really is, it depends on your jurisdiction and the mortgage agreement you signed. If you have a non-recourse mortgage with no provision for deficiency judgement you are off the hook if the bank forecloses except for tax consequences.
We all have been saying correct things but we are also generalizing so I wanted to make sure that I at least, got my facts straight.
Summary:
Non-recourse with no deficiency judgement provisions means bank cannot come after you.
Deficiency judgement provisions means bank can come after you.
If bank writes off loan amount not covered by foreclosure sale, then you can get a 1099 form for that amount as income and have to pay taxes and then it is between you and IRS
.
Hope that summarizes what we have been talking about. Sorry for the confusion.
"Mortgagor is required to pay for mortgage insurance, or PMI, for as long as the principal of his primary mortgage is above 80% of the value of his property. In most situations, insurance requirements are sufficient to guarantee that the lender will get all his money back, either from foreclosure auction proceeds or from PMI.
Nevertheless, in an illiquid real estate market or following a significant drop in real estate prices, it may happen that the property being foreclosed is sold for less than the remaining balance on the primary mortgage loan, and there's no insurance to cover the loss. In this case, the court overseeing the foreclosure process may enter a deficiency judgment against the mortgagor. Deficiency judgment is a lien that obligates the mortgagor to repay the difference. It gives lender a legal right to collect the remainder of debt out of mortgagor's other assets (if any).
There are exceptions to this rule, however. If the mortgage is a non-recourse debt (which is often the case with residential mortgages), lender may not go after borrower's assets to recoup his losses. Lender's ability to pursue deficiency judgment may be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't.
If lender chooses not to pursue deficiency judgment and write off losses, or is not allowed to do so because of the mortgage being non-recourse, borrower may be liable to pay taxes on the amount being written off as if it was his income.
Any other loans taken out against the property being foreclosed (second mortgages, HELOCs) are "wiped out" by foreclosure (in the sense that they are no longer attached to the property), but borrower is still obligated to pay them off if they are not paid out of foreclosure auction's proceeds."
So the answer really is, it depends on your jurisdiction and the mortgage agreement you signed. If you have a non-recourse mortgage with no provision for deficiency judgement you are off the hook if the bank forecloses except for tax consequences.
We all have been saying correct things but we are also generalizing so I wanted to make sure that I at least, got my facts straight.
Summary:
Non-recourse with no deficiency judgement provisions means bank cannot come after you.
Deficiency judgement provisions means bank can come after you.
If bank writes off loan amount not covered by foreclosure sale, then you can get a 1099 form for that amount as income and have to pay taxes and then it is between you and IRS
.Hope that summarizes what we have been talking about. Sorry for the confusion.
to be clear, the industry-standard definition of a commercial loan is a loan on either a residential property with more than 4 units, or on a commercial property such as an office.
what you are referring to are loans on non-owner-occupied residential properties. they are not commerical loans.
When they are done through an entity as an investment like I do the banks put us in touch with the commercial loan department since these are not treated as residential mortgages nor do they qualify for Freddie/Fannie, that is why I call them commercial loans.
If you do it as an individual then you can qualify for a second residential loan. When you own through an LLC or Partnership, even a condo a single family home, they tend to classify you as a commercial loan and treat it that way (commercial rate and terms).
The loans regarding the purchasing of commercial properties or Candos are said to be the investment on the second property. The loans will be provided for these type of things only if we have no debts and if we are individual. The insurance policies are also provide along with these loans. Could you please produce some more attachment links for the more detailed view?
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