Is 2012 Your Last Chance For Short Sale Or Loan Modification That Involves Principal Reduction?
Posted by: Kenny Tan
January 28, 2012
Topic: Loan Modification
This seems obvious. Yet lenders had approved less than 5% of the applications for loan modification to included a principal reduction. Is it the disdain for borrowers who just refuse to make their mortgage payments despite having the ability to do so because they don't want to throw good money after bad and having entered into a contract to make these payments? Or is there somehting going on between the servicers and the investors that we don't know about? I'm not sure why.
Lenders Are Doing A Much Better Job With Short Sales And Loan Modifications
But change is here - at least we're some signs of it being here. This is in part due to the robo-signing debacle in October 2010 which prompted a settlement between the 50 attorneys general and the 5 major banks which puts pressure on them to work with borrowers to avoid foreclosure and in part the servicers and lenders own realization that at the end of the day, it makes business sense to allow more short sales to folks who just can't seem to qualify for any kind of loan modification programs and approve more loan modifications to folks who can - even if it means reducing a portion of the principal.
Tax Relief Measure Will Expire In 2012
2012 has arrived. Is 2012 the last chance for folks who desperately need to have their loans modified in order to avoid foreclosure? I can't say it is. But it seems banks are picking up their pace foreclosing people's homes in the last quarter.
The Obama's HAMP program is due to expire on December 31 2012. It's unclear if it will be extended. Though the program has been a big disappointment in meeting its goal of helping the number of people it was intended to, to some extent it did its job and it is my view that it is better to have it than not. However, the Republicans have threatened to pull the plug on it early. So for now it seems unlikely that it will be extended.
So will the temporary tax relief programs for short sales and principal reduction on loan modification. The federal and state governments passed law to temporarily allow borrowers to have their mortgage debt reduced and not have it treated as a discharge of debt which is taxable under the tax code before these tax relief measures were passed to encourage short sales and loan modifications that include forgiven debt .
After 2012, borrowers that want to do short sales or loan modifications that involve forgiven debt would be wary of tax consequences of these transactions and should consult their accountants before they proceed.
So while we're seeing an increase in lenders approving short sales to borrowers, we may be seeing less borrowers wanting to do short sales due to tax considerations- unless the governments decide to extend the benefits under the current tax relief measures.
So for many borrowers who desperately need to avoid foreclosures, 2012 may be their last chance.
