One in 10 home loans is under water: Economy.com

[UpInArms]

Source: Reuters

NEW YORK (Reuters) - One-tenth of U.S. homeowners hold mortgages that are larger than the worth of their homes, Moody's Economy.com said on Friday.

Nearly 8.8 million homeowners, or 10.3 percent, are in over their heads, its chief economist, Mark Zandi, estimates.

As a result, millions of U.S. homeowners have the incentive to abandon their properties.

With an already unwieldy supply of homes for sale, more inventory could prolong a recovery of the hard-hit U.S. housing sector, suffering one of the worst downturns in history.

<snip>

The surge in foreclosures is putting further downward pressure on the housing market because it adds to the inventory of homes for sale, already at a lofty level.

Read more: http://www.reuters.com/article/bondsNews/idUSN2259847620080222

[ayeshahaqqiqa]

1. People around here are mostly buying foreclosed homes

Folks who still have their homes and are trying to sell them are having a tough time, because generally the foreclosed homes are a better deal. I got a notice in the mail that one of our regular customers is going bankrupt. Two income household, both jobs high paying for the area and very steady (one in education, one in health care). Wondering how many more bankruptcy notices we'll be getting soon.

[napi21]

2. I suspect most of them are those who got 100% loans.

I still blame this mess on the greedy lenders for offering loans that never should have been offered!

[LakeSamish706]

3. What are the ramifications of just walking away from the home? n/t

[Demobrat]

Well it looks bad on your credit report.

But if you had bad credit to start with it and were able to get a home loan anyway it really doesn't matter.

[rumpel]

38. and you may be hit with taxes

on forgiven debt

[jtrockville]

39. The debt may not be forgiven.

Depending on the terms of your loan, the bank will sell the property and deduct the proceeds from what you owe, and you'll be on the hook for the remainder of the debt. I don't think bankruptcy will free you from this debt.

[AP]

43. I think there are only a handful of states that allow banks to collect only on the house.

Most states allow banks to go after the borrower for the balance of the principal they don't get from selling the house after a foreclosure sale.

You'd think banks would be a lot more diligent about (1)) lending only to people who could afford the loan, and (2) only lending an amount that was a realistic estimate of what the house would be worth in the future if they could only collect the collateral (the house) if anything went wrong.

[Wcross]

4. Damn, that is a bad sign,

I just paid off my home this week so I can't relate to these homeowners plight. The problem is that if these people "walk away" the lender will auction the property & sue them for any deficiency. Thanks to the new bankruptcy laws most will not be able to "walk away".

[LakeSamish706]

5. You just answered my question, thanks... n/t

[coalition_unwilling]

6. Lender can sue for deficiency. But collecting on any judgment will

prove difficult, if not impossible. Add to that the fact that often there is no "the lender" to sue, as loans were sliced-n-diced so many times that there may not be a single holder of the note.

[Wcross]

11. It depends on how far they go to collect.

They could garnish wages if they get a judgment. I wouldn't want to count on walking away as a solution to being upside down on my mortgage.

[izquierdista]

20. Garnish

Something that makes the plate look pretty, but is not meant to be eaten and has little nutritional value. That's what lenders are going to get if they garnish the wages of a person who is out of work.

[enid602]

26. 1099C's

But now the lenders are sending 1099C's to the government, which reports uncollected (foregiven) debt) as income to the person that's doing the walking.

[coalition_unwilling]

28. I had heard apocryphal reports that forgiven debt was being

reported to the IRS as 'income'. Does anyone know for a fact that this is happening? If it is income, seems to me the person "doing the walking" could exactly balance against it a capital loss in equity value of the underlying asset, resulting in a wash for tax purposes.

For example, bank holds note for $1 million on house in foreclosure. Bank sells house for $500K at loss. Bank reports $500K as income to IRS. However, taxpayer's asset has declined in value from $1 million to $500,000, thus a capital loss of $500K. See what I mean? The income on the forgiven debt matches exactly the taxpayer's capital loss.

But maybe I'm missing something here?

[enid602]

30. 1099C's

I work part-time fro H&R Block during tax season, and so far have seen 2 1099C's from mortgage companies, and one from JC Penney's, for a $200 debt that was foregiven. I don't believe the taxpayer would be able to offset these gains with loss of equity in assets. You can only claim a gain or loss from the sale of an asset after you actually seel it. I wouldn't think a foreclosue would qualify as a sale in this case.

[AP]

44. There are new rules -- here's a summary and Q&A re old law from IRS web site.

Questions and Answers on Home Foreclosure and Debt Cancellation

Update Feb. 4, 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 2007, 2008 or 2009. 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.

The amount excluded reduces the taxpayer’s cost basis in the home. More information on claiming this exclusion will be available soon.

The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007.

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”.



6. I don’t agree with the information on the Form 1099-C. What should I do?

Contact the lender. The lender should issue a corrected form if the information is determined to be incorrect. Retain all records related to the purchase of your home and all related debt.



7. I received a notice from the IRS on this. What should I do?

The IRS urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.

8. Where else can I go to get tax help?

If you are having difficulty resolving a tax problem (such as one involving an IRS bill, letter or notice) through normal IRS channels, the Taxpayer Advocate Service may be able to help. For more information, you can also call the TAS toll-free case intake line at 1-877-777-4778, TTY/TDD 1-800-829-4059.

In some cases, you may qualify for free or low-cost assistance from a Low Income Taxpayer Clinic (LITC). LITCs are independent organizations that represent low income taxpayers in tax disputes with the IRS. Find information on an LITCs in your area.

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

[cap]

41. yes, forgiven debt is being reported to the IRS as income.

so you pay taxes to the government of your marginal tax rate (30-40%) of the value of the debt.

So in the case of the $1 million house, the $500K lost by the bank is reported to the IRS. The tax payer pays taxes on his salary etc. plus 150K to 200K. It's now up to the IRS to collect on this.
There aint no such thing as a free lunch. It's just debt collection is now up to the government. Oh, I forgot. We are outsourcing IRS debt collection to private corporations. So the debt collectors will now have the government behind them to garnish wages and assets.

Are we having fun yet?

[gmpierce]

31. Only bad for some...

Some will NOT be able to walk away, but the new provisions do not apply uniformly. I've forgotten the exact details, but if your income is less than the median and you take the credit counseling you are still eligible.

The other fun situation is that there are now a half dozen or so cases where the judge threw the eviction out of court, because the plaintiff could not produce a piece of paper showing that he had right to evict. In many cases, the mortgage is in a bankers box along with other mortgages that act as collateral for a bond. No one knows who owns what, and the paperwork may be in the back room of a company that has itself gone bankrupt.

The real fun comes when you don't pay, actually do get evicted, and the IRS jumps in and wants their piece of the action -- if they can find a piece of paper that shows how you benefited financially by becoming homeless.

[Xenotime]

46. Did * sign this bankruptcy law? What bullshit

[sinkingfeeling]

7. And many of them took out equity to buy other stuff, compounding the problem.

[slackmaster]

8. This kind of statistic has a fundamental weakness that makes it subject to overstatement

It is not possible to gather the actual current balance of equity credit lines.

For example, if you have a first mortgage with a balance of $100,000 and a HELOC with a limit of $50,000, your total amount mortgaged will be reported as $150,000 even if you have no outstanding balance on the HELOC.

[Gormy Cuss]

24. slack, did you find a link to the original defining the mtge that way for this report?

I understand what you're saying about assuming the full amount of HELOC in the calculation but I would expect Moody's to be clear about that in its reporting (not the link to the story, but in Moody's actual report.) If they are including HELOCs the stat is being used in a very deceptive manner here given how generous the HELOC limits have become in recent years.

[slackmaster]

27. No, but my job involves working with that kind of information

I have a very good idea of what's available and what's not.

[RantinRavin]

9. Sounds like a lot of people

dramatically overpaid for thier homes. Perhaps a little research was in order first.

[conflictgirl]

13. Or they didn't put much down and their housing market declined in value.

That's basically what happened to us. What we paid for our house would get you an abandoned trailer on contaminated land in many parts of the country, but we still can't compensate for the fact that home values have declined by 10-15% and we didn't put that much down. Maybe the solution going forward should be to get rid of gov't programs like FHA that let people get into homes for less than the traditional 20 percent down, but that doesn't help the people who bought normally-priced homes and didn't expect the value to *go down* within 5 years.

[RantinRavin]

15. Actually, I have a question about that

How has it really affected you now that your home value is less than the morttgage value ?

Are you having to make larger payments because of it ?

[Mountainman]

22. If you have a fixed rate mortgage the payment stays the same but taxes may decrease.

So if you pay property taxes with you mortgage payment it may go down a bit.

[conflictgirl]

32. That depends

Our payment has actually gone up by almost $100 a month in the past 2 years because of tax increases, mostly due to local millages. We have our property taxes rolled into our mortgage payments.

The primary way it affects us is that we can't sell without taking a loss. Due to a significant decrease in income since we bought the house, we would be much better off selling it, but the decreased values make it likely that we would lose money on the sale.

[dysfunctional press]

40. for people that plan to stay in their house for awhile anyway, it's not that big a deal...

except that they won't be able to use the house as a piggy bank, because they won't have equity to draw on.
the people who bought to flip for a profit are the ones taking it in the shorts.

we'll be refinancing our place soon, to put up a new garage this spring- but we paid off 3/4 of our mortgage when we sold our previous place- so we still have plenty of equity.

[cap]

42. most people in many urban areas don't have 40-50K downpayment

on a 200K-250K house. That size mortgage is lower middle class in many major metropolis.

[conflictgirl]

10. I'd guess many of them are people with FHA loans

We got an FHA loan so we only had to put 3% down. Otherwise everything about the loan was standard - no subprime interest rate, no second mortgage, etc. We would like to sell our house because our income has decreased and the payments are now too high of a percentage of our income, but the local housing market has decreased by about 15% since we bought the house. Even if we could manage to sell it, we would lose a huge amount of money. After factoring in the decrease in value, after 3 years we don't have enough equity in the house to break even (let alone factoring in realtor fees).

[Roland99]

12. The trouble with drowning sorrows is that...

sorrows learn to swim.

[PDJane]

14. My grandmother used to say.....

That trying to drown one's problems tends to irrigate them.

[safeinOhio]

16. I just bought a home this week from a bank

Paid 128 for a house that was sold in 2001 for 130. The poor guy put another 60 or 70 into the remodel before he lost it. I feel bad as I found out he had 5 kids. In the local paper they list property transfers. This month half were sold by banks.

[DaveJ]

18. You bought the home to live in?

Or to make an easy buck?

[Xenotime]

47. Sounds like an easy buck to me

Vultures all over out neighborhood are doing this.

[DaveJ]

17. Only one good thing may come of this

People should stop thinking of homes as financial investments, something to make a quick and easy buck.

I wish I'd never lived through that disgusting housing bubble and hope never to again.

[PassingFair]

19. This MUST include "home equity" loans.

Most people I know borrowed against their homes.
They can't sell without paying off the equity loans, too.

THAT is how they got "upside-down" on their home loans.

[redqueen]

21. It couldn't be that the value is decreasing as the market is flooded with homes? (nt)

[PassingFair]

23. I'm sure that's happening too.

But the 1 in 10 number....

that's just GOT to include Home Equity Loans....

[Xithras]

37. My sisters home is worth substantially less than she paid for it.

She paid $380,000 for it in 2005 using 80/20 100% financing. The house next door to hers, identical in almost every way, just sold for $205,000. She'd be seriously upside down with it even WITHOUT the funky home loan.

Of course, I'm in Northern California where the drop has been particularly bad. I'm looking at buying a few homes as rentals right now...one house I'm looking at is on the market for $260,000, and according to the tax records last sold in 2004 for $515,000. We're talking about a 50% drop in equity. That house sold NEW in 1998 for $220,000. The downturn has wiped out nearly a decade of appreciation.

My own house, a couple of pretty acres hugging a riverbank, was appraised at $1.1 million at the peak of the market. Today it's appraised at a hair over $500k (my bank cut my HELOC because the property value no longer covered it). I'm still up from what I paid for it eight years ago, but only by about 100k...and the market is still dropping around here.

[UpInArms]

25. Related: More homeowners say their homes depreciated: survey (highest since 1992)

http://www.reuters.com/article/bondsNews/idUSN2217772920080222?sp=true

NEW YORK (Reuters) - A record number of homeowners thought their homes decreased in value in February, according to a Reuters/University of Michigan survey published on Friday.

Thirty-three percent of homeowners reported that their home had lost value in February, compared with 16 percent in February 2007 and well above the 24 percent peak recorded in 1992.

The recent survey showed the proportion of homeowners who reported falling home prices was greater than the proportion that reported gains for the first time.

Just 25 percent reported gains in their home's value, down from 48 percent in February 2007 and the peak of 76 percent in mid-2005.

When asked about prospects for the year ahead, 27 percent of all home owners in February anticipated additional declines in home prices, up from 21 percent in January and 12 percent in March 2007. Those anticipating gains in home values, in contrast, fell to just 21 percent in February, compared with 41 percent in March 2007.

The declines in home values were most frequently reported by residents of the West, with 45 percent reporting that their home had lost value in the past year. That was more than twice the 21 percent who reported recent gains in their home's value.

...more...

[4dsc]

29. Quit buying new homes

Lets face it I bet most of these homes are new one that are not worth their inflated prices.. I have no idea why anyone would buy a new home under these conditions..

[conflictgirl]

33. Not always...our house was built in 1968.

And it cost well under $150K.

We bought it 3 years ago, not able to foresee what would happen with my husband's employment or that housing values would decline even here. Sure, there are a lot of people who bought giant new McMansions that weren't really even worth what they paid at the time of purchase, but a lot of us working class people with very moderate older homes got snared in the fallout of the declining housing market too.

[mihalevich]

34. I bought my first house 3 years ago

for $75K. Do you think smaller older homes, in good neighborhoods, will weather the storm better than other homes?

[conflictgirl]

51. I think only in the sense that the dollar loss will be proportionately smaller

People will always need cheaper houses, so I think smaller older homes will always have their buyers (especially if the trend toward bigger houses starts to go the other way). And if houses lose 10% in value, on a $75K house that's only going to be a loss of $7500, compared to a loss of $50K on a $500K house. However in my own experience with the house I grew up in, the real risk with the older cheaper homes is that the neighborhood could decline. It's really anyone's guess, though I would personally guess that the people who had the houses near the higher end of the price spectrum have more to lose than those at the lower end.

[gorfle]

35. We just built...

Why buy a used house when you can buy a brand-new one built-to-order for the same amount of money?

That's what we did. Zero-money down, too.

Is the value of my house depreciating? Probably. Am I worried? No. I'm not planning on selling for at least 10 years and either things will have settled down by then or I will have paid in enough equity to hopefully be able to break even at that time.

[Xenotime]

49. How do you get a house with zero money down?

[ExtraGriz]

36. sadly this is only the beginning....

the US economy will be severely impacted a few more months to years down the road....this is only a ripple, the tsunami is coming.

[davsand]

45. A lot depends on the market you live in.

Yep, there are a large number of foreclosures right now. I don't think that can even be debated. I think there were a lot of people that went into these houses with some "creative" financing and that is now biting them on the ass, and I also think a lot of people were using their house like an ATM. I will also tell you that there are some market areas that have NOT seen the same level of decline.

If you live in an area where the market was "hot" or if you live someplace where the values were driven by a lot of speculation, you are gonna get hammered with all these foreclosure sales going on around you. Banks will unload these properties for whatever they can get out of them and then they will begin the litigation to try and recover any losses. Potentially, it makes for a good bargain for somebody looking to buy on the cheap.

When you have a large number of properties for sale it makes sense that people will pay the least amount of money they can get by with--it is called competition. When private sales are competing against "fire sale" prices (foreclosures) the private offering suffers in comparison and you see sale prices going down and markets stagnating.

In my local area, I will tell you that it is only specific types of houses that have seen an actual decline in value. The basic starter houses--the 3 bedroom 2 bath ranches for example--are holding value. There was a huge bloom of what I call "McMansions" and THOSE are the market segment that got hammered here in my area. (I'm talking about the 3000+ sq ft stuff that is about 3-5 years old.)

Part of the loss of confidence I'm seeing is that people read these articles and they do not KNOW their local market enough to gage if they are in any trouble. People are scared right now, and that makes for some bad decisions. Say what you want, but if you have clean credit and have saved up a 20% down payment you can buy a house right now and get a good bargain. (Please note, FANNIE and FREDDIE are now talking about points on anything less than perfect credit--so lending IS a lot tougher than it used to be...)

Regards!


Laura

[Trajan]

48. I thought CNN's 'In The Money' said ....

over 30% were upside down ....

The fellow was apoplectic about the situation .... I dont know his name ...

EDIT: That CNN show will repeat @ 3PM EST today ... and the fellow I referred to comes on near the end, I believe .... Of course, the fellow could be wrong ..... (I dont know his name, obviously)

[Seabiscuit]

50. Since this housing crisis blew up I no longer get crap in the mail from

companies offering me seemingly impossibly low monthly mortgage rates. Companies who don't bother to check the Recorder's Office and notice that I paid off my original mortgage years ago.

They were all obviously offering scam "subprime" mortgages, and doing mass mailings all over town. I used to get at least one in my mailbox every week.

I'm at least thankful they're gone.

I think there should be criminal penalties leveled against any bank/realtor who ever deceived any buyer into a "suprime" loan.

Thanks to those scammers the entire ecomony is suffering and my stock portfolio has lost 16% of its value since last July.

And that's absolutely nothing compared to what the direct victims of their predatory practices have suffered.