Expiring Mortgage Debt Forgiveness Act To Increase Strategic Defaults?

Last December I blogged about strategic default.  That is, consumers who walk away from their mortgage even though they have the ability to continue making their payments. It results in foreclosure, of course.

If the Mortgage Debt Act is allowed to expire by a deadlocked Congress, will this encourage more struggling homeowners to walk away instead of trying to sell their homes by short sale?  Currently, homeowners don’t have to pay tax on the forgiven debt.  If the Act expires, the forgiven debt will be treated as income (a ‘gift’) and will be taxable.

In September (2012) Housing Wire reported that 1 million Home Affordable Modification Program (HAMP) loan modifications were cancelled by lenders after their 3 month trial. HAMP terms are likely the most appealing to homeowners having financial difficulties – if they qualify. The government predicted this program would help 3 to 4 million homeowners, but as of September 2012, only about 825 thousand made it past the three month trial period. Less than $3 billion of the over $29 billion set aside for this program was actually spent.

Home Affordable Refinance Program (HARP) and lender-based refinances are also options, but they also have requirements that may be tough to meet or the savings may be minimal. That’s why short sales remained attractive to many underwater homeowners.

Like all things financial right now, these are complicated and interwoven subjects, but it seems possible that the expiration of the Mortgage Debt Forgiveness Act will have the effect of causing more strategic defaults and therefore foreclosures.  Write your legislators and tell them to extend the Act today.

Confused about short sales, or need to explore the options for the sale of your home? Give me a call for a no-pressure appointment.

Principal Residence Exemption Passes Michigan House and Senate

This legislation should be signed by Governor Snyder in the next few days.  It's a victory for home buyers wishing to purchase foreclosed homes, often in lower price ranges and on tight budgets.

It allows banks to claim and maintain the Principal Residence Exemption (PRE) during the listing period.  That means that prospective buyers will be able to get the lower Homesteaded property tax rate.  Why is that important?

Since many buyers of foreclosed homes are younger and on tighter budgets, and because their loans usually require property tax and insurance escrows, having the house homesteaded keeps their tax escrow smaller.  Many such buyers have been knocked out of qualification due to the extra property tax burden on a non-homesteaded, foreclosed upon house.

The bank will have to apply for this exemption, and at least in the beginning they probably won't be aware of it, so agents like myself that list foreclosed homes will need to explain the process to them and get them to understand that this will help market the properties to owner occupants.

The bill also changes the old May 1st homestead application deadline to June 1st, and also adds another date of November 1st each year so buyers that do purchase non-homesteaded properties won't have to wait a full year to get the homestead benefit.

Some of you are probably thinking, "Why should banks be let off the hook! They should pay the higher rate even if a new owner gets the lower rate", I'm betting.  Well, guess what? The're not off the hook.  They will still pay the non-homestead rate as a separate line item on the closing statement. 

The very best thing would have been for 'instant' homestead exemptions for owner-occupant buyers at closing, but procedurally that wasn't possible,so this really is the next best thing.  Municipalities will get the taxes owed and new homeowners will not be penalized for long periods of time. 

Thanks to the Michigan Association of Realtors for their efforts in getting this legislation passed.

UPDATE 5/1/2012 - Gov. Snyder signed this bill today.