Short pay-offs and Short Sales are alternative techniques to allow an owner to close on the sale of property worth less than the debts secured by it. Depending on the circumstances surrounding a particular property and seller, either alternative may be possible with each option having its own pros and cons.
A "short pay-off" or "short sale" is a transaction in which a lender agrees to accept less than it is owed to permit a sale of the property which secures its note. (Throughout these materials, the term "lender" or "lenders" refers to the collection of institutions aligned on the "lender's" side, which might include the holder of the note, a loan servicer, and a private mortgage insurance company.) HUD seems to call these sales "Pre-Foreclosure Sales."
In a typical short pay-off, the lender agrees to accept the net proceeds from the closing (the sales price, minus the cost of closing the transaction, including commissions, escrow, pre-payment penalty, etc.), perhaps with some additional consideration from the seller (such as a promissory note) in exchange for releasing its lien. Lenders do not agree to short pay-offs to be generous. In negotiating the short pay-off, the lender needs to be convinced that it will come out better than it would by foreclosing on the property and reselling it in the near future. Though short pay-off procedures vary somewhat from lender to lender, most lenders need to be convinced of the following:
The sales price under the proposed contract is equal to or higher than the amount for which the lender would be able to sell the property after a foreclosure. The lender will require a market analysis from the REALTOR® listing the property. The lender will often confirm the market analysis by contacting its own sources, such as an appraiser or the real estate agents which handle its REO sales.
The commission under the proposed transaction is equal to or less than the commission it would pay its agent for selling the property after foreclosure. The lender will want to know as precisely as possible the amount of proceeds it can expect to receive from the sale. The more precise the estimate, the better. This is typically obtained from information on the seller's HUD-1 net sheet, prepared by the escrow company handling the sale transaction.
The lender will want an explanation of the circumstances which created the need for the short pay-off transaction. Common explanations include divorce, medical problems, death, birth of a child taking one wage earner out of the work force, birth of children making the existing home too small, loss of a job, or a job transfer creating the need for a move. Also, in the majority of situations I deal with today, the seller has had a low 1-4% "teaser" start rate on their mortgage with a negative amortization clause adding unpaid interest onto the original principal balance. Once the principal balance grows to over $125% of the initial balance, the loan may "recast" with a new, substantially higher, payment. Additionally, the seller may not be able the refinance, due to a pre-payment penalty and insufficient equity due to a depreciating market.
That the seller doesn't have the money to make up the shortfall on their own. To verify the financial condition of the seller/borrower, the lender will require: financial statements showing the seller's assets, liabilities, income, and expenses; the seller's tax returns for the previous two years; and the seller's paycheck stubs for the most recent pay periods. The most common disputes which arise in short payoff sales concern the seller's financial condition. On the one hand, the lender will be reluctant to approve a compromise without having the ability to analyze the financial strength of the seller.
A borrower with minimal assets, little income, and a willingness to file bankruptcy has little to lose by providing financial information. However, most candidates for short pay-offs have some assets, a good job with garnishable wages, or a desire to avoid bankruptcy. Candidates for short pay-offs need legal advice regarding the advisability of submitting financial information to the lender. Though a refusal to submit financial information to a lender greatly decreases the chances of closing, a refusal to submit financial information does not necessarily preclude closing on a compromise sale.
Short Pay-Off Traps
When working on short pay-offs, certain issues and problems frequently arise. It is important to keep them in mind.
A seller's ability to close on a compromise sale is not within his control. It is important that in any contract which the seller accepts, his/her obligation to close is contingent upon successful negotiations with the lender.
Most sellers would like to protect their credit rating as much as possible. A substantial motivation for a short pay-off as an alternative to simply allowing the property to go into foreclosure is avoiding the detrimental credit consequences of a foreclosure. The seller is advised to seek legal and tax counsel regarding steps which can be taken to ameliorate the credit consequences of the work-out.
It is unlikely that a seller will receive any proceeds from the closing on a compromise sale. (Note, however, that in the HUD short pay-off program, borrowers may receive money out of the sale as an incentive to close.) Yet the closing is likely to force the seller to move. If the seller hasn't already moved, or doesn't have some other reason to move, closing on a short-pay might actually hurt the seller. The dawning realization of being homeless might make a short pay seller back out of a closing. Because the foreclosure process generally takes five or so months to run, it might be in the best interest for some owners to live in their home until the end of their redemption period in the foreclosure. >
These transactions often require a patient buyer. Working through the bureaucracy of the loan servicer, the investor, and the private or public mortgage insurance company takes time. Closing dates may need to be extended. It is important to work with buyers who have flexible closing needs and flexible dispositions.
As many as three entities may be involved on the lender's side of a short pay-off transaction. It is not unusual for the mortgage insurance company, the investor, and the loan servicer to have several different departments working on the transaction. Errors may arise simply due to bureaucratic miscommunication. It is important to get the terms of the short pay-off transaction (release of liability, no adverse credit consequences ... etc.) in writing.
You may occasionally run into a seller who initially does not care about the financial or the credit consequences of a short pay-off transaction because he has filed, or is about to file, bankruptcy. While this may seem to be a blessing, it should raise concern. Bankruptcy affects the seller's ability to convey title and may disrupt a transaction which you have worked long and hard to put together. A seller filing bankruptcy will usually already have legal counsel. In these circumstances, the REALTOR®; needs legal advice.
A seller who has little concern for the financial and credit consequences of a short pay-off has little incentive to avoid these consequences. Often these sellers seem to be very agreeable until they realize that they will need to move out of the property sooner than if the property went into foreclosure These sellers may decide to let the foreclosure run its course, rather than close on a compromise sale.
Short pay-off transaction may involve the forgiveness of debt which may create detrimental tax consequences to the seller. While residential short pays rarely create capital gains problems for their sellers, a commercial short-pay is likely to cause a recapture problem for a seller. Sellers should consult their tax advisors.
Keeping the above factors in mind should increase your chances of successfully closing on a short pay sale.
In some states, other than California, a lender can sue the borrower for the difference between the pay-off on the note and the highest bid at the foreclosure sale. This difference is called a "deficiency." In the vast majority of foreclosure sales, the lender is the successful bidder at its own sale. As a consequence, a lender has much control over a borrower's post-foreclosure liability.
The foreclosure statutes are written to encourage lenders to bid a property's fair market value at a foreclosure sale. One of the ways in which the statutes encourage fair bids is by giving the foreclosed upon owner redemption rights. The successful bidder at a foreclosure sale does not obtain title to the property. Instead, it obtains a receipt (the "certificate of purchase") which entitles it to receive a public trustee's deed after the expiration of all applicable redemption periods.
A failed attempt at a short pay-off can actually put a seller in a worse position than he would have been had a short pay-off not been pursued at all. The efforts to document the property's fair market value (the market analysis and the proposed offer) help the lender justify biddi
Short Payoff Advantages:
Depending on the interplay of a variety of circumstances, it is sometimes best not to aggressively pursue the short pay-off, and to instead allow the property to go into foreclosure as quickly as possible. Of course, this strategy has its dangers. Once the property goes to foreclosure sale, the seller has lost the short pay-off alternative. It has put all of its "eggs" in the "redemption basket." Decisions regarding how aggressively to pursue a short pay-off, when to give up pursuing a short pay-off, and the likelihood of a redemption are decisions which should be made after careful consideration between the REALTOR®, the seller, tax advisor and the seller's lawyer.
Watch or check back here for the latest news releases from President Bush on Loan Modifications (9/01/07).
PLEASE CALL or email
ME FOR A FREE CONFIDENTIAL CONSULTATION IF YOU FEEL YOU COULD BENEFIT FROM MY SERVICES.
Barry Shapiro 805.405.0930
Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an realtor-client relationship. For legal advice on a specific matter, consult an attorney and/or tax professional. Information deemed reliable but not guaranteed.
Bush promises help for homeowners, but not lenders
FHA will help delinquent subprime borrowers refinance
The Bush administration today rolled out a plan officials said was geared at helping up to 700,000 homeowners avoid foreclosure in the next two years, but which is not intended as a bailout of mortgage lenders who are facing mounting losses on bad loans.
The plan gives the Federal Housing Administration the authority to insure loans for delinquent borrowers facing foreclosure. Administration officials said the new "FHASecure" program will allow FHA to guarantee an additional 60,000 refinance loans a year.
Because borrowers pay premiums on FHA mortgage insurance, the program is expected to pay for itself and can be implemented immediately as an administrative action.
"We will enact it today, but it will probably be Tuesday (before the program goes into effect) given the long weekend," a senior Housing and Urban Development official speaking on background told reporters in a conference call today.
A plan to introduce risk-based pricing in January is also expected to allow FHA to help an additional 20,000 troubled borrowers refinance into conventional loans. All told, HUD expects to boost FHA-backed refinancings to 240,000 in the current fiscal year, compared with a projected 160,000 under previous existing programs.
HUD estimates that the introduction of risk-based pricing -- which will allow borrowers who previously would not have qualified for FHA programs to participate by paying slightly higher premiums -- will help an additional 120,000 home buyers a year obtain FHA-backed purchase loans.
While the Center for Responsible Lending has projected
that more than 2 million homeowners have lost or will lose their homes to foreclosure in the next two years, the HUD official said such estimates include vacation homes and investment properties purchased by speculators using subprime loans.
"We think ultimately there may be 600,000 to 700,000 people we can assist through this program over a two-year period," the HUD official said. "Unfortunately, there will be some families we will be unable to help."
The FHASecure program
will be geared toward borrowers who have become delinquent on their adjustable-rate mortgages because of interest-rate resets. It will be available only to those who meet FHA's underwriting guidelines, which currently includes a requirement that borrowers have at least a 3 percent equity stake in their homes.
The program will insure loans only for borrowers who had a good payment history for six months prior to the interest-rate reset that caused their delinquency.
Borrowers seeking to refinance under FHASecure must obtain a new appraisal and be able to demonstrate they can repay the loan. But there is no minimum FICO score, and outstanding late payments can be refinanced into the new loan as long as the 3 percent equity requirement is maintained.
The plan rolled out by the Bush administration also calls for the Treasury and Housing and Urban Development departments to identify borrowers who are in danger of defaulting, and work with private lenders and mortgage repurchasers Fannie Mae and Freddie Mac to provide new loans that could help them keep their homes.
"The government has got a role to play -- but it is limited," Bush said at a White House press conference. "A federal bailout of lenders would only encourage a recurrence of the problem. It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford. Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders, or a little help from their government. So I strongly urge lenders to work with homeowners to adjust their mortgages."
Bush also asked Congress to change a provision of the tax code that can penalize borrowers who are able to negotiate forgiveness of part of their mortgage debt. The Internal Revenue Service currently considers cancelled mortgage debt as taxable income, which can complicate the process of working out loan modifications or holding a short sale in exchange for forgiveness of debt.
"If the bank modifies your mortgage and forgives $20,000 of your loan, the tax code treats that $20,000 as taxable income," Bush said. "When your home is losing value and your family is under financial stress, the last thing you need to do is to be hit with higher taxes."
The National Association of Realtors issued a statement
welcoming the administration's actions, saying "FHA can now help many more families in jeopardy" of losing their homes.
Bush also called on Congress to pass an FHA modernization bill
that would allow the administration to expand risk-based pricing, reduce down-payment requirements on loans it guarantees, and raise loan limits in high-cost states like California
and New York
from $363,000 to $417,000.
In a statement, Mortgage Bankers Association Chairman John Robbins said many of the proposals rolled out today "are ones for which we have long advocated, even before the recent troubles in the subprime mortgage market." Robbins said he hoped the "president's attention to turmoil in the mortgage markets … would encourage Congress to take the needed steps to reform FHA."
As he concluded his press conference, Bush disregarded the final question directed his way.
"Sir, what about the hedge funds and banks that are overexposed on the subprime market?" the president was asked. "That's a bigger problem. Have you got a plan?"
Although Bush did not delve into the subject, Federal Reserve Chairman Ben Bernanke delivered a speech
on the topic today at an economic symposium in Jackson Hole, Wyo
Bernanke gave no indication in the speech that the Fed will move to cut a key short-term interest rate at a Sept. 18 meeting.
Some economists say slashing the federal funds rate -- the rate banks charge each other for overnight loans -- would encourage borrowing. But Bernanke said that because the majority of mortgage loans are now securitized and sold to private investors in the secondary market -- rather than held in the portfolios of banks and other institutions -- short-term interest rates aren't as important to housing markets as they once were.
About 56 percent of the home mortgage market is now securitized, compared with only 10 percent in 1980 and less than 1 percent in 1970, Bernanke said.
As a result, "the availability of mortgage credit today is generally less dependent on conditions in short-term money markets, where the central bank operates most directly," Bernanke said.
While acknowledging the potential threat disruptions in the mortgage lending industry pose to the economy at large, Bernanke said that some increase in the premiums investors require to take risk is "probably a healthy development."
Changes in Tax Code May Benefit Some Homeowners
"In recent months we have seen a reassessment of the problems of maintaining adequate monitoring and incentives in the lending process, with investors insisting on tighter underwriting standards and some large lenders pulling back from the use of brokers and other agents," Bernanke said. "We will not return to the days in which all mortgage lending was portfolio lending, but clearly the originate-to-distribute model will be modified -- is already being modified -- to provide stronger protection for investors and better incentives for originators to underwrite prudently."
Real Estate Foreclosures
California has its own unique foreclosure process that all lenders must follow. Much of this process is unique because California uses Deeds of Trust to secure a mortgage to a piece of real property. Here are some quick California foreclosure or (mispelled) forclosure facts:
Foreclosure Quick Facts
The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present in the mortgage or deed of trust. This is uncommon with most commercially available real estate loans and most likely would be found when there is a private party lending the money to purchase or finance real property. Generally, once the court declares a foreclosure, the property will be auctioned off to the highest bidder.
Using this type of foreclosure process, lenders may seek a deficiency judgement in an attempt to recoup some of their losses. Under certain circumstances, the borrower may have up to one (1) year to redeem the property.
The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee. This is uncommon in most other states where there is no "third party" that can execute the sale upon default by the borrower.
Power of Sale Foreclosure Guidelines
If the deed of trust or mortgage contains a power of sale clause and specifies the time, place and terms of sale, then the specified procedure must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:
A notice of sale must be:
Recorded in the county where the property is located at least fourteen (14) days prior to the sale
Mailed by certified, return receipt requested, to the borrower at least twenty (20) days before the sale
Posted on the property itself at least twenty (20) days before the sale
Posted in one (1) public place in the county where the property is to be sold
The notice of sale must contain the time and location of the foreclosure sale, as well as the property address, the trustee's name, address and phone number and a statement that the property will be sold at auction.
The borrower has up until five days before the foreclosure sale to cure the default and stop the process.
The sale may be held on any business day between the hours of 9:00 am and 5:00 pm and must take place at the location specified in the notice of sale. The trustee may require proof of the bidders ability to pay their full bid amount. Anyone may bid at the sale, which must be made at public auction to the highest bidder. If necessary, the sale may be postponed by announcement at the time and location of the original foreclosure sale.
Lenders may not seek a deficiency judgment after a non-judicial foreclosure sale and the borrower has no rights of redemption.
1. Notice of Default
Foreclosure proceedings start with a Notice of Default (NOD). The lender (or trustee for the lender) files a Notice of Default with the county, after the property owner (trustor) fails to make his/her loan payment(s). This is done to give, constructive notice to the public which is required by law. The owner may be delinquent anywhere from 15 days to 12 months, or more. This time period is also referred to as the Reinstatement Period.
After the recording of the Notice of Default, in the state of California, the borrower and junior lien holders are given proper notification and the borrower has 90 days to bring their account current with the lender.
2. Notice of Trustee Sale
If the borrower does not reinstate their account within the 90 day period, the lender will authorize and instruct the Trustee to record the Notice of Trustee Sale (NOS).
After 21 days of the recording of the NOS, a foreclosure sale can take place at public auction. The property may be sold to a third party bidder or revert back to the lender for a specified amount. Bidders are required to bring cashier's checks or money orders to the sale in an amount equal to or higher than the lenders opening bid. The auctioneer will qualify each bidder and the successful bidder will have to tender full payment at the time of the sale.
The Notice of Trustee's Sale is recorded at the County Recorder's office in the County where the property is located. It contains the date, time. and place where the auction will take place. This notice has to be published in a adjudicated newspaper in the city where the property is located. The NOS is also posted on the property as a requirement of law.
Buying property at a Trustee's Sale is not like purchasing property in a conventional manner. You will not have the opportunity to inspect the property after you have purchased it at sale. Any and all due dilligence must be conducted prior to the Trustee's sale. This means potential purchasers will benefit from tracking the properties as the Notice(s) of Default are filed up until the time they are sold at the Trustee's Sale. There is a great service we have used over the years to track distressed properties called RealtyTrac. You can receive a free one week trial to their real estate foreclosures tracking service.
3. Disbursement of Funds
After the sale auction is completed and if the property sells to a third party bidder, all funds owed to the lender/beneficiary will be prepared for immediate payout . If the property reverts to the lender/beneficiary at the sale, a Trustee's Deed Upon Sale will be issued and the lender will have ownership to the property securing the debt.
The forced sale of property offered as security for a debt that is in default.
Forclosure is foreclosure mispelled. Please see above.
A deficiency judgement refers to any difference in the sale amount and the amount owed to a lender in a foreclosure proceeding. A court may issue a deficiency judgement in favor of a lender if there is a deficiency in the proceeds from the sale of real property to cover the costs and amount owed to the lender. The court can issue a 1099 (to the borrower) for the difference or they may send the borrower to a collections agency, or even garhish the borrower's wages.
In regards to foreclosures, Trust Deeds are a written instrument legally conveying real property to a trustee (or a third party) used to secure a mortgage or promissory note.
A sale conducted by a Trustee, in the case of foreclosures, this refers to the sale of the property in question.
Notice of Default
Written notice sent by a lender notifying the borrower that he/she has not met his/her obligations under the loan contract, and the lender may take legal action to enforce said agreement. In other words, the lender is notifying the borrower that they may start a foreclosure action against them and their property.
In real estate, a short sale refers to the sale of a property in which the sale price is insufficient to pay off all encumbrances and pay the expenses of sale. If the lender is convinced that the owner, for various reasons, is unable to continue making the payments the lender will often agree to take less than the full amount owed to allow the sale to close escrow. The incentive for the bank to approve a short sale is to have the property sell before the loan becomes a problem account on their books.
This Process may be difficult to believe but it is a definite possibility. As stated below there are hoops to jump through. Banks are willing to allow individuals to assume the loan if they meet the required criteria. This is a system that works because the banks do not want to hold property for one but they also do not want to pay a fee (at times up to $25,000) in order to send the property through the foreclosure process.
Before a lender approves a short sale they will make two key decisions.
First, can the owner afford to continue making the payments on the property? If they can there is no reason for the bank to eat the loss. Banks will not look favorably upon a borrower that they determine lied to get the loan.
Second, will approving the short sale leave the bank in relatively the same position as they are likely to be in by going though the foreclosure process and then selling the property? If the bank can do significantly better by foreclosing they are likely to do so.
The seller must not receive any sale proceeds for themselves.
If there is a junior lienholder, the discounts can be substantial, sometimes as high as 90% or more. Question two is the primary determinant here. If the senior lender forecloses the junior may get nothing so they may take a deep discount to get something out of the property.
Short sale sellers need to be careful because there is no free lunch. The seller may end up with taxable income in the amount of the debt that is forgiven. The seller may also end up with adverse entries in their credit history. Any property owner considering a short sale needs to seek the advice of competent legal and tax advisers before entering into the transaction.
I would advise anyone facing foreclosure to discuss their situation with an experienced Realtor. Short Sales are not a part of real estate basic training but there are a number of educational seminars a Realtor can take to get up to speed. Lenders will pay a reasonable selling commission so Realtors have an incentive to get involved in Short Sale situations. The basic requirements for a Short Sale are a Listing Agreement with a Realtor and a Sales Contract from a Buyer which are submitted to the Lender along with a Hardship Letter from the Seller explaining why they cannot continue to pay the mortgage and supporting documents such as tax returns, bank statements, information and photos of the home and the Comps, or comparative home prices supporting the offer. The way mortgages are sold, the mortgage holder can be anywhere and certainly not aware of local real estate conditions. If the package is complete, the Lender will order a BPO, or Broker's Price Opinion, from an independent Realtor. Ths BPO is the key to the whole process. If it is too high, the Lender will not accept a low offer. Your Realtor can meet with the Agent doing the BPO and offer information supporting the offer, such as the average time on market of comparable homes, recent selling prices and point out any defects in the home. Most Lenders will accept an offer lower than the BPO, but usually not much more than 10% lower, though that will vary depending on the company. The sales contract should specifically state that the offer is contingent on the Lender accepting the purchase price in full and forgiving the Seller the deficiency on the mortgage. Yes, there can be tax consequences. The Seller does receive a 1099 on the forgiven part of the mortgage, but there are provisions in the tax code for the offset of the phantom income due to insolvency. Most Short Sellers will satisfy the insolvency requirements or the Lender would not be allowing the Short Sale in the first place. Be aware too that if the home goes to foreclosure, a 1099 is received for the FULL amount of the mortgage, plus late fees, legal fees etc. Obviously every individual situation is different so a CPA or tax attorney should be consulted.
The process does all take time and Lenders are swamped, expect at least 2-3 months before a sale can be finalized, even if the Lender accepts the first offer. If they do not, the price can be negotiated.
The Short Sale is a detailed but fairly straightforward process that can work to benefit Buyer, Seller and even the Lender. The Buyer gets a good price on a home, the Seller gets to avoid the disruption and credit hit of a foreclosure and the Lender avoids the delay and expense of foreclosing on a property they don't want to own and that would negatively impact their ability to make more loans.
From: Realegal <email@example.com>
Subject: Realegal -- TAX BREAK FOR MORTGAGE DEBT FORGIVENESS
Date: Thu, 20 Dec 2007 17:25:41 -0800
Thursday, December 20, 2007
Brought to you by the CALIFORNIA ASSOCIATION OF REALTORS®
TAX BREAK FOR MORTGAGE DEBT FORGIVENESS
President Bush signed into law today a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.
This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).
For purposes of calculating capital gains, any debts discharged excluded from income under the new law must be subtracted from the basis of the taxpayer's principal residence (but not below zero). However, taxpayers may generally exclude from capital gains income up to $250,000 (or $500,000 for married couples filing jointly) for properties owned and used as their principal residence for at least two of the last five years.
For a copy of the Mortgage Forgiveness Debt Relief Act of 2007
, go to http://www.govtrack.us/congress/bill.xpd?bill=h110-3648
C.A.R.'s Legal Department provides REALTORS® with many legal articles covering a wide range of topics of interest. Some of new or newly revised legal articles available through C.A.R. Online
are as follows:
- Statute of Limitations: Deadline on Time to Sue
- Errors and Omissions (E&O) Insurance for REALTORS®
- Residential Listing Agreements Between Seller and Real Estate Broker
Realegal® is published by the CALIFORNIA ASSOCIATION OF REALTORS®, a trade association representing nearly 200,000 REALTORS® statewide.
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phone (213) 739-8200; fax (213) 480-7724
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Homeowners whose homes were foreclosed in the last year or who gave a deed in lieu of foreclosure or had a short sale approved by their lender have been granted a new benefit by Congress.
In the past, when taxpayers ended up paying less than the total amount due on their mortgage, the lender was required to issue a form, similar to a 1099, for a cancellation of indebtedness income. Thus, a debtor who had lost his home might find himself facing taxes on thousands of dollars in forgiven debt if the house failed to fully repay the mortgage at auction.
Under The Mortgage Forgiveness Debt Relief Act of 2007, up to $2 million of the cancelled debt on a principal mortgage is now tax free. The new law does not apply to investment property.