Jingle Mail Revisted: Possible Bank Recourse And Borrower Consequences

• Stumble This
• Digg This
• Share on Delicious
• Share on Facebook
• Tweet This

There’s been heavy talk recently around “walking away from foreclosures” and the devastating effect it’s having on banks and homeowners.  Jingle mail occurs when the borrower drops the keys in the mail and sends them back to the bank as final step in walking away from their home due to a rising mortgage and hard economic times all around.   But one thing we bet you hadn’t considered is that depending on the state, the lender may or may not have recourse or legal ability to seek the balance from you upon foreclosure in the form of a deficiency judgment.

Some states are non-recourse, which means they aren’t able to pursue a deficiency judgment against the borrower, most notable, the homes in California are non-recourse for purchase money mortgages.

Before walking away from your home consider ALL of your options:

• Short sale: Call your lender to find out whether or not this is an option for you.
• Loan modification: A loan modification can reduce your interest rate thereby changing your monthly payments to reflect one inline with your budget
• Loan extension This option allows the bank to place your payments on hold for a period of time and the balance that is unpaid is put towards the end of your loan to be paid in a balloon payment at the end of the term.  But this may not be available through all lenders.
• Principal write down The bank will refinance your loan down to the current market value, giving homeowners some equity back in their homes and more reason to stay put as most homeowners are disenchanted by the negative equity and perception of their largest investment being worth nothing or very little to them.

The above mentioned options can be pursued through your lender or better yet through housing non profit organizations like NACA and ACORN.

If the above options aren’t available to you for one reason or another you may be thinking about walking away from your home altogether.  Before you mail the keys, consider the following consequences:

Payment

You may be on the hook for the balance of what is owed after your home goes into foreclosure depending on your state and it’s laws around lender recourse.   The lender may seek a deficiency judgment where you either pay it off or let it charge off on your credit report which leads to severe damage to your credit standing.

Taxes

You may also be taxed on the amount forgiven or the balance owed in either situation.  The tax rate can range from 10-35% depending on your income.  The IRS treats the discharge of the debt as income or it is listed as “discharge of indebtedness income” on your tax bill.  So while losing your home is bad enough, just wait until you get the tax bill.

Now that you have more information, let’s take a look at how the situations are treated depending on whether or not you live in a recourse or non-recourse state.  Take note of your state’s laws, the bank’s ability to see a deficiency judgment and, if so, then consider your tax liabilities.  The IRS is far more tenacious in its collection of taxes owed so please consider the penalties and consequences of walking away from your home.

The following is a list linking to all the states and their respective laws and information around bank recourse:

If you live in a state that permits recourse then you are liable for the balance owed.  If the sale did not yield enough proceeds to cover the balance then you, the borrower must pay the difference which includes the interest that accrues during the process of foreclosure.

For example, if you have a home that is worth $600,000 and you have a $675,000 loan, in a recourse state, the bank has legal standing to go after the borrower for the balance and the IRS will send you a tax bill for the taxes owed on the $75,000 as this is treated as income.  The lender is required to send you a 1099 detailing the forgiveness of the debt of which a copy is also forwarded to the IRS.

If your loan is non-recourse then it is secured by the loan collateral.  If the sale of your home in foreclosure does not cover the balance on the loan then your lender has no legal standing on which to pursue the remaining or outstanding balance.  Therefore if you have a home that is worth $600,000 and you have a $675,000 loan, in a non-recourse state, the bank may not pursue the remaining $75,000.

Keep in mind that you could end up owing capital gains taxes if your loan is non-recourse.  You are reading correctly: the bank is selling the house, you are not, still the IRS treats this transaction as if you are selling the home.

Straight talk from the IRS:

Publication 544:

“If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. … You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized.”

There you have it.  Straight from the IRS.  Please consider all your options before walking away from a home you worked hard to obtain.  Foreclosure can have devastating consequences not only financially but psychologically as well.  Please be sure to talk to your lender, CPA and Realtor to gain an understanding of the options available to you.

*Whispers* But if you decide to walk away because it’s just a devalued money pit, that’s alright with me, but you didnt read that here.

Question:  Would you consider Jingle Mail if you lived in a non-recourse state?