HAMP, Home Affordable Modification Program and the 2007 Mortgage Debt Forgiveness Act are set to expire next year, December 31, 2012. So, why am I mentioning this fact now?
Foreclosures, short sales, and modifications take time. Anyone who has beat his head against the wall trying for a mortgage modification can attest that for most people, it can take many months and sometimes over a year. Foreclosures in most states take about 9 months and in the areas hardest hit by the real estate bust (Nevada, Florida, Arizona, etc) foreclosures are taking one to two years.
The Mortgage Debt Forgiveness act relates to the tax implications of forgiven mortgage debt. If your home forecloses (or you short sell), and the home is worth less than the balance due on the mortgage obligations, and the bank decides to forgive the debt, the IRS treats that amount as taxable income. So if you owe $200,000 on your home, and the bank forecloses and sells the house for $150,000, that $50,000 difference is taxable income (I know, you’re surprised). The Mortgage Debt Forgiveness Act exempts the deficiency from being taxable income if the deficiency results from a foreclosure or short sale of a primary residence between calendar years 2007 to 2012. But, banks are not required to forgive mortgage debt; in most states, banks can try to collect the balance from you.
As you can see, if you live in a state with a prolonged foreclosure cycle, you could be hit with a nasty tax bill if the foreclosure finalizes in 2013. So, if you have any inkling that you will be walking away from your home, get that process started.
Given the banks’ inherent reluctance to modify mortgages in the first place, I can certainly imagine that as the expiration date looms closer, the banks will delay modifications and start laying off the employees in those departments. So unless HAMP gets extended, there is probably only a 9 to 10 month window from today to attempt a modification. Long term, the jury is out on whether the homeowners that received modifications will ultimately avoid foreclosure or short selling their home.
However, there are still options. Bankruptcy eliminates mortgage deficiency balances; so long as you file bankruptcy in the same tax year as the foreclosure/short sale, you not only eliminate the deficiency, you eliminate its status as taxable income; you kill two birds with one stone. Also, bankruptcy can completely eliminate 2nd mortgages and HELOC’s. Although bankruptcy cannot modify the terms of your first mortgage, bankruptcy can eliminate your other debt, possibly eliminate your 2nd mortgage to give you the best opportunity to keep your home and financially recover.
By Matt Berkus
