You might ask your friend if she's ready to pay taxes on the bank sending them a $200K 1099.Could someone explain to me the particulars of what's going on?
Well, she announces her friend just got he mortgage re-sized(?) by the mortgage company to what his house is currently appraised at, cutting 200k off of his loan, and she is now going to do the same.
The legal maneuvers mentioned in another post are designed to get mortgage values down to FHA loan limits (85% LTV) so that the mortgage can be insured by the FHA. The bank writes off the loss of the mortgage money (which is probably a smaller loss than the bank would take if they foreclosed the home) and the homeowner pays taxes on the 1099 (unless Congress allows that to be written off too). The idea is that FHA insurance will give real credibility to the assets behind all the subprime CDO tranches and pull this housing market out of the worst hit since the Depression... which is when the FHA was created.
I guess it's considered a better way to use taxpayer money than to just crank up the Treasury presses. Any hypothetically the FBI and the other TLAs are chasing down the fraudsters & other criminals to bring to justice so that this can't possibly happen again... until next time.
Actually your neighbor might be aiming too low. My BIL the CPA just helped a friend move out of her house near Annapolis. She bought it with a $140K mortgage 10 years ago and just kept refinancing with equity cashouts every few years. (Her $50K/year salary was too small for her living standards.) By the time the party ground to a halt when the bank refused the latest refinance, she was staring down $350K of mortgage debt and another $40K of credit-card debt (same bank). Under the latest friendly foreclosure laws, she turned over the keys and the bank forgave everything except a charge for a Caribbean cruise, for which she'll continue to pay $50/month payment for 16 months. I'm not sure that she even gets a 1099 if the bank calls the house the value of the mortgage & cc debt.
My BIL says she spent the money on entertainment and crap that didn’t mean anything. If you ever said anythig to her, you would just get the evil eye. She's a compulsive spender and will be right back in credit-card debt in a few more months.
I'm not sure what impact all these financial finagles have on one's credit rating. I'm not sure that anyone cares about that, either.