Mortgage Forgiveness Debt Relief Law Extended

Good news.

According  to reliable sources, the late night deal to avert the fiscal cliff included an extension of the 2007 Mortgage Forgiveness Debt Relief Act which was to expire at midnight last night. According to the National Association of Realtors, and confirmed by the text in the screen shot of the bill:

Of most interest to real estate, the bill would extend mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, typically in a short sale or foreclosure sale for sellers and in a modification for owners. Without the extension, any debt forgiven would be taxable, which, for underwater households, represents a financial burden.

Here is the clause referred to in the quote above:

Mortgage Forgiveness Debt Relief Act Extension

The full text of the American Taxpayer Relief Act of 2012 can be found here and here. I know a number of home owners and colleagues in the industry who were concerned that the law would not be extended or languish in ambiguity until a retroactive extension, neither of which would have been particularly good.

There are details which are best discussed with your CPA and other professional financial adviser, and no broker like myself gives tax advice, so do consult with your accountant or lawyer. If you need a referral to a CPA or attorney familiar with the law, send me and email and I’ll be happy to put you in touch.

Bottom line: The business and tax ramifications of doing short sales did not change from the past 5 years, and if you are in the process of a short sale or considering one, a significant obstacle has been cleared. We can all exhale.

Update: Deal has been approved by both Congress and the Senate, and the President has signed it into Law.

 

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Strategic Defaults in Westchester County

Wikipedia defines the term Strategic Default as

“the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments.” (my emphasis added)

Given the huge amount of attention given to the practice, I thought that I would offer my own observations on what I am seeing in Westchester County. Given our proximity, I think the commentary holds true for other parts of the New York Metropolitan area, including Rockland, Fairfield and Long Island.

Simply put, I don’t see many people consciously deciding to walk from mortgages that they could otherwiseWoof pay in this area. While it may be said that a short sale Realtor like myself would not be approached by someone considering a strategic default, I would argue to the contrary- the very definition of “strategic” would indicate that some thought and research would go into the mix before deciding to default. I have spoken with people who are considering it; there are just aren’t as many here as in other areas. I think the reason lies primarily in the characteristics of our marketplace, and the fact that you have to live somewhere, and this isn’t the easiest place to change where you live.

Here are a few reasons I think strategic defaults are not as prevelant in Westchester as they might be elsewhere:

• We don’t have the options other markets have. In places like the Sunbelt, which have been hit very hard, I can see why it would be tempting to move into a similar house right in your own subdivision and cut your payment in half. We just don’t have those subdivisions with dozens of available options. Westchester has been a mature county for decades, and there are no vast new subdivisions with lots of available inventory to be had. The options might not allow their children to remain in the same school, or that one identical house might be a mothball smelling geriatric special with a 1975 kitchen and baths. And if there is a tempting option at an attractive price, there might be competition, shrinking the financial advantage in moving.
• The economy of scale is bigger than other places. Take a homeowner in an area like Eastchester or Yorktown who paid $600,000 for their home in 2006 and is now only worth $485,000 with a balance of $525,000. They are indeed underwater, but there isn’t much of a step forward in renting or buying a similar house for $485,000. In the case of buying, they’d still to come up with a downpayment and closing costs, which, even for an FHA loan, could be $40,000-$50,000. Remember, just the tax escrow on a home here would be $10,000 before you paid a dime in closing costs. There may be some who rent, but maintaining status quo in quality of life in that case, especially in light of losing the tax advantages, is dubious. I would argue that anyone who takes this option isn’t being strategic, but has their hand forced due to financial hardship.
• The downturn hasn’t been as big here. Oh, it’s been big alright, and in dollar value perhaps even larger than most, but in terms of percentages, we’ve only lost 20-25% of value, half of the percent of the harder hit regions. The climb back, therefore, isn’t as steep. So if the choice on the table were to lower your mortgage payment from $4300 to $3800, come up with $50,000 and wreck your credit, I think most people would decide to stay put. Elsewhere, where the option is a far smaller payment and much less cash of an upfront cash outlay, the credit consequence might not seem as high a price to pay.

So who is strategically defaulting in Westchester? I think that most of the strategic defaults in Westchester are on non-owner occupant properties where the rent no longer covers the payments and the monthly shortfall is not worth it to the owner. Rather than subsidizing a property awash in red ink, they let it go and keep the money in their pockets.

However, from my non-scientific, real estate broker vantage, by far, the bulk of defaults in Westchester are not strategic, but due to real hardship. In a county where the median price peaked at over $700,000, an interruption in employment or loss of income can get you pretty behind in hurry, and the numbers might be too enormous to catch up for most. That discussion will be forthcoming.

Originally posted at: J. Philip’s Westchester Real Estate Blog: Are Strategic Defaults a Problem in Westchester County?

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