AND.....if you lied on your mortgage application that is known as BANK FRAUD..... Some of these speculators could go to prison..... SteveD
Residential Mortgages are non-recourse loans with the house as the sole collateral. I did not personally guarantee my mortgage as most people do not and the bank has no recourse to look to me personally to pay off the loan if I default. They get the house which they have a lien on (which is what a mortgage is). If the loan was a commercial mortgage on an investment property then banks usually look for a personal guarantee of the debt, especially if the purchaser is using an LLC or LP to purchase the property as known investors. Then the individual or entity will be on the hook for the full debt based on the personal guarantee.
Yes, The banks always can get judgements against the defaulter, Collecting the money is more difficult. The IRS considers any debt forgiveness as taxable income. So if you own a bank 100k for a mortgage or credit card and you settle for 50k....The IRS will tax you for the 50k written off.....Its a killer. I think congress and Bush may change this law if too many homeowners have to deal with this.
YOu have to be clear though as I do not think the banks can get a judgement in a non-recourse loan mortgage scenrio. If you default and the bank forecloses your credit goes to shit but your are only on the hook for the house (that is why banks normally want you to put a lot down so you have a stake in the house and are less likely to walk away). Bank will not go after you for a nonrecourse loan as they have no right to. The lien was on the house only. But the difference is, as I said, in commercial mortgages where the bank may ask for a personal guarantee. In that case they can go after you and easily get a judgement. Also, if the bank forecloses on you and you still owe $50k that is not loan forgiveness really, that is outright default. The loan forgiveness comes in as you described where the bank specifically forgives part of the loan. But I bet you anything the bank will not want to forgive anything but simply take the property and sell it for what it can get and move on.
Commercial mortgages are NEVER personal liability except for short term construction loan.....once property completed and leased, new non-recourse loan is placed based on income analysis....cap rate or pe basis... residential loan are all personal liability....the bank can and will send a 1099 to you for the "gap" after the house is sold, if there is a "loss". Most of these loans are not with banks or traditional lenders, Freddie or Fannie, but with non-traditional lenders from Wall Street. The lenders will work with anyone who wants to keep the house...maybe re-structure the loan in some way.... But, if you are a speculator, who just walks away making no attempt to abide by the contract, then they can make it very tough on you....they may choose to make an "example" out of some big player....just to send a message..probably only if some borrower is really bad... I have seen this rodeo before...... SteveD
When I refer to commercial mortgages I am talking about when individual investors buy a condo or house as an investment (2nd property) to rent out or speculate. In many cases the bank will ask for a personal guarantee. I was not referring to a mortgage on a new construction site or loans to homebuilders. The housing market collapse is mainly in residential homes/condos which is what I am limiting my comments to and I am referring to individuals who buy that second home or condo to rent as an investment. Most of those scenerios have mortgages with personal guarantees. In those cases I would not expect the homeowner to walk away so easily since they are on the hook so I correct what I said earlier. But a poor overextended family with an ARM or I/O loan who cannot afford the mortgage will have to let the bank or lien holder foreclose and walk away and the lien holder will not go after them, but take the house and sell it and eat the loss. You cannot squeeze blood from a stone. Anyone who has the means I assume would try and sell the house to get out from under the debt somehow quickly and that presents a ncie buying oppty for those of us looking to take advantage of the situation .
I've heard (astonished, actually) this is the case in California. For most states, however, residential mortgages are "full recourse". Non-recourse loans typically require a LTV of only 50% or so. That way if the lender has to foreclose, there's probably enough equity for him to recover what's owed.
You are correct about the tax treatment. As far as changing the law, I disagree. Borrower got the money, didn't pay pay it back. Lender has to write if off as "bad debt", so borrower SHOULD have to declare it as income. Changing the law would mean that taxpayers should absorb the bad debts... bad idea.
When a residential home is foreclosed the home will go to auction, any deficiency including legal cost will be the responsibility of the individual. Unless there was some type of Mortgage Protection Insurance with the loan that will kick in for the balance, the Mortgage holder has the legal right to collect the unpaid balance as spelled out on the loan. And they will! The home may be the collateral but itâs to you and your credit the bank is loaning the money. You are responsible, bottom line. Better read the fine print, why do you think they changed all the bankruptcy laws?
And of course, this makes perfect sense. If a residential buyer is required to put down 5% or less, the loan virtually HAS to be full recourse... otherwise the loss potential from default makes no sense for the lender. (Well, that always WAS the case back in the days before they "securitized" mortgage loans and sold them to sucker, bag-holder investors.) I don't know if the recent changes in the bankruptcy law modified relative provisions regarding residential mortgages, but they have been full recourse for at least as long as I've been old enough to pay attention to such things.