Last year saw a remarkable fall in foreclosures, but it seems that this trend may turn around again. In 2007, Congress conceded a tax exemption for exculpation of mortgage debt. The exemption terminated at the end of 2013 and has not been extended. Needless to say, this is a harsh blow to short sales. Short sale implies the sale of real estate, which generates proceeds that are less than the mortgage amount on the property. Most sellers turn to short sales as a way to avoid foreclosure.
The effects of the recent foreclosure calamity had been abated to an extent due to banks pardoning mortgage debt, worth billions of dollars. Most of these arrangements were governed by legal settlements with the federal government and general state attorneys. Banks have permitted around 2.8 million short sales since 2007. The extension of the tax exemption until 2015 or 2016 is advocated by many congressmen. However, in the wake of attempts to overhaul the tax code, attempts to bring about the much-needed exemption for the next couple of years have been ignored.
Several mortgages have been subject to “principal reduction mortgage modifications,” which has resulted in foreclosures dropping by 28% in the last year. However, 3 million borrowers persist in lagging behind on their repayments, out of which 1.24 million are being subjected to foreclosure. It is tragic how several of these aberrant borrowers could have avoided foreclosure through a short sale or principal reduction mortgage modification, but have been unable to do so, due to ignorance.
One such borrower, Tony Janega, has been attempting a short sale for three years. It was eventually accepted last week, but, unfortunately, he was five weeks late to be eligible for the tax exemption. His house was sold for $125,000 less than the amount that was payable on the loan.
Although short sales have reasonably been able to bail out the crumbling real estate market, they may be challenging in states that prescribe long liquidation timelines. Long liquidations call for greater costs in liquidating the property, which subsequently leads to lower returns for financiers. Such a set-up is detrimental to both the investor and the seller because, in some cases, the seller or the distressed borrower is not able to afford the short sale after the liquidation costs, which may ultimately lead to repossession by the bank. Before considering a short sale or bankruptcy, please speak to a qualified Gaithersburg Maryland bankruptcy lawyer.
Source: CNBC, “Foreclosures could rise if Congress doesn’t help,” Diana Olick, Feb. 10, 2014