WSJ - Cities Consider Seizing Mortgages ?

[Semiretired2008]

Quote:

Originally Posted by traineeinvestor 2. if the mortgagor gets relieved of the balance of their mortgage obligation, is that taxable income? My knowledge of US tax law is pretty limited, so I would be interested to know how this would work out.

This gives a short summary for your question. In summary the answer is - it depends...

Tax Consequences When a Creditor Writes Off or Settles a Debt | Nolo.com

[Independent]

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For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. ... But unlike the beneficiaries of most recent mortgage-modification efforts, who must show hardship, these borrowers would have to be current on their payments to participate.

If I'm the judge, I'll let the city argue that the mortgage is only worth $120k, but I'll rule against them.

The value of the mortgage is the present value of the expected future payments (and that PV will be a little more or less than the outstanding principal, depending on interest rate changes).
If the homeowner is current, why would I assume that those future payments aren't going to be made?

[M Paquette]

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Originally Posted by Independent If I'm the judge, I'll let the city argue that the mortgage is only worth $120k, but I'll rule against them. The value of the mortgage is the present value of the expected future payments (and that PV will be a little more or less than the outstanding principal, depending on interest rate changes). If the homeowner is current, why would I assume that those future payments aren't going to be made?

At which point the homeowner drops the deed and keys on the table in front of the lender on the way out of court.

The homeowner has been making payments in good faith that the lender providing the first mortgage and sharing in the joint investment and risk of the home purchase (for that is how first mortgages are constructed in California and a number of other states) would in turn in good faith recognize the drop in value of the home. Since the judge has now determined that the homeowner is a reliable sucker who can be counted on to pay off a mortgage worth considerably more that the property securing it, rather than continuing to pay this sunk cost, the homeowner logically cuts his losses, and releases the security for the mortgage back to the lender. Complaints about the morality or ethics of this are irrelevant. This is a matter of contract law.

Things get much messier with a second mortgage, because of the differing nature of the laws covering such secondaries, and the contractual obligations of these mortgages. A judge can come in handy in setting the priorities between the multiple lenders.

[frank]

If you owned property worth say 300,000 and sold it on contract to someone else, who then say 3 years later came to you and said " that property you sold me is now only worth 200,00, so we'll have to revise our agreement" what would you say? be it a piece of land, a house, or any physical property. the agreed price is what you would expect to recieve or you get the property back. when government uses eminent domain in this context it is bad for everyone.

[MooreBonds]

Quote:

Originally Posted by Independent The value of the mortgage is the present value of the expected future payments (and that PV will be a little more or less than the outstanding principal, depending on interest rate changes). If the homeowner is current, why would I assume that those future payments aren't going to be made?

...

Quote:

Originally Posted by M Paquette At which point the homeowner drops the deed and keys on the table in front of the lender on the way out of court.

So then let the homeowner drop their keys and walk out - and then start the multi-month foreclosure proceeding, which is what established foreclosure law is about.

You're asking a large industry to summarily willfully reneg on their contracts solely in order for the local government to share in the profits.

The local community isn't taking an interest in other foreclosed homes to reduce their supply and improve the community, nor is it interested in helping displaced homeowners who lost their homes to line up financing to buy a different home at the current (lower) market price - which would truly help eliminate the supply of vacant homes and stabilize the community.

Is it similar to ED practices to level some homes to build a shopping mall? Well, all I can say is, hopefully those homeowners forced to sell in order to build a SuperWalMart at least received a market price for their homes - they didn't buy their home for $100,000, and had the gov't force them to sell at $50,000, which is what they appear to want to do with a select minority of the mortgages.

And before I say the next part, for the record, I'm not a strong proponent of using ED mainly to satisfy the whims of a local developer and increase tax revenue....but, with this selective mortgage ED seizure, the community is only doing this to increase their revenue, and they're doing it on a selective, 'random' basis. It's not like they can point to the corner of Washington and Carver St, and say "this is a major intersection, and it would somewhat benefit the community to have more competition with more retail choices" (as with Retail Development ED), or point to an entire neighborhood and say "30% of the homes in this subdivision are already vacant and foreclosed on, we need to help stop even more foreclosures and revitalize the neighborhood to avoid suburban blight" - it's purely on a random basis (for those mortgages not involved in gov't guarantees), and solely to increase revenue.

[traineeinvestor]

Quote:

Originally Posted by Semiretired2008 This gives a short summary for your question. In summary the answer is - it depends... Tax Consequences When a Creditor Writes Off or Settles a Debt | Nolo.com

Thanks.....when it comes to taxes, I guess nothing is ever as simple as it should be