I’m a little late getting to this WSJ story about the Corelogic report on negative home equity and what often follows it – a short sale. But, it seemed worthwhile to bring it up here for two reasons, the first being the neat little graphic shown below.
How could any central banker with half a brain have looked at that right-most graphic in 2003, 2004, and 2005 and not thought that there was some pretty big trouble ahead?
The other part of the story that caught my attention was the interview subject who “tapped” his home equity for a couple hundred grand and is now trying to do a short sale.
It’s at the end of the story:
Homeowners seeking a “short sale,” in which they sell their property for less than the value of the outstanding mortgage, have a much harder time doing so when they have a second loan, because all the lenders involved must agree to take losses on the sale, and second-lien holders take the first losses in such a situation.
In 2005, Matt Facchini, took out a $200,000 home-equity loan on his home in Toms River, N.J., and used it to pay his divorce settlement, pay down some credit card debt and make home renovations, including installing new fences and restoring the swimming pool.
Two years ago, after price declines put him approximately $190,000 underwater, he walked away from the home, and is currently trying to negotiate a short sale. But Mr. Facchini, who works installing insulation for pipes, worries that the lender on his second mortgage will demand that he pay the approximately $70,000 deficiency on the second loan.
“I’m sweating. I have a broken car sitting in my driveway that I can’t afford to fix. I can’t get a loan to buy a new car because my credit is ruined,” Mr. Facchini said. “I’m hoping they don’t come after me for the money I owe them. That would be, for me, the end of it all.”
What Mr. Facchini should be worried about is the IRS, not his home equity loan!
But, before we get to that, it’s worth noting that we bought a short sale property here in Montana about six months ago and were shocked when we heard how easy it was to work with the second lien holder (i.e., the bank behind the home equity loan).
They agreed to accept 10 percent of what they were owed the day after we made our offer!
Apparently, if the house goes into foreclosure, the second lien holder gets wiped out, so, understandably, they figure that something is better than nothing.
As for the IRS, if memory serves, they’ve waived the tax on debt forgiveness for first mortgages, but not for seconds, so, all those people like Mr. Facchini who borrowed huge amounts of money against their house but never paid it back will have to pay taxes on the amount of debt that is “forgiven” by the bank.
In his case, that’s a tax bill on $70,000 or more that will only be mitigated to the extent that it makes him insolvent at the time that the transaction is completed, so, if I were him, I’d plan accordingly.