In Florida, about half of all homeowners with mortgages owe more than the value of their home. This is called “having negative equity, ” being “upside down,” or “underwater.” Most of those families owe a LOT more, up to 50% or more than their homes are actually worth! If a family owes tens of thousands or worse, hundreds of thousands, more than the value of their home, there is little hope of ever refinancing into a better interest rate. Selling the home, moving for a job, or relocating for family needs is also very difficult but possible as discussed below. It’s very likely that many families who owe so much more than their homes are worth will never catch up and will never truly own their homes. Many of these families have hundreds of thousands of dollars owed in a balloon payment that is due after ten to twenty years of paying their monthly mortgages. Modifications that only reduce interest rates or extend the number of years to pay off the underwater mortgage may effectively lower the monthly payment but are only delaying the inevitable day of reckoning on the disproportionate mortgage balance compared to the value of the home.
Now that the top five banks (Citi, Wells, Chase, BoA, and GMAC/Ally) get short sale “credit” towards the $25 billion foreclosure fraud settlement , there is an increased approval rate for short sales. A short sale is when a new buyer pays less than the outstanding mortgage owed on the home and the bank allows the sale to go through without demanding the current homeowner come to the closing table with the left-over amount owed. In many short sales though, the bank reserves the right to collect, at some point in the future, the left over (deficiency) amount that was not paid off at the short sale. When banks claim credit towards the settlement penalty, they are required to waive the deficiency. This waiver qualifies as mortgage debt forgiveness, which is normally taxable. Until the end of 2012, the waived mortgage debt is exempt from taxation due to a 2007 Mortgage Debt Forgiveness Act that was passed by Congress. This act will expire next month unless Congress votes to extend it. Our firm helps homeowners review short sale documents to make certain that the deficiency waiver legal language adequately protects our clients.
With each passing year, there is growing awareness that millions of 2003-2007 vintage mortgages were based on a massive Wall Street demand for fraudulent loans. A demand fueled by investment banking firms which bundled up thousands of loans into scam investment bonds and then foisted the scam bonds off on to our pensions and retirement funds but not before insuring the fraudulent bonds and often the mortgage loans themselves. To further enrich themselves, these investment banks bet heavily on the fact that the loans would fail.