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?

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If you ever wanted to understand how the recent sub-prime mortgage crisis has affected African-American women, then this post is for you. Chances are you’ve heard about the mass foreclosures across the nation and even the phenomenon known as Jingle Mail. We’ve read scores of articles about families foreclosing and losing it all due to bankruptcies and foreclosures, but what about African-American women? Did you know that AA women are disproportionately affected by the sub-prime meltdown? How did we get here? Where are we now? And, more importantly, how can we start over? I’ll show you how.

How Did We Get Here?

I’m not here to blame any one party for their actions as all involved are responsible for the situation we have today. Banks were greedy and turned a blind eye to shady loans being offered to unworthy NINJA candidates, i.e., No Income, No Job and No Assets which caused the mortgage industry to fall flat on its face. Then there’s the uneducated borrower who trusted the word of their real estate agent an mortgage broker without doing their due diligence with regards to the numbers involved. And, there are some who thought they could just beat the system. All involved should have thought about the fact that the banks had no incentive to refinance any loans because once you signed the paperwork, its yours. But, too many fell for it.

However, when the borrower can’t pay the note this leads to foreclosures and short sales which then reduce the value of the homes in that neighborhood, and its like a virus turning into the crisis we have today. No one even if they qualify able to refu because they don’t have enough equity for the refinance.

The Current Situation among African-American Women

Taking a closer look, according to Foreclosure Data Online:

A community of brick row houses, the Belair-Edison neighborhood, has recently been bought, for the most part, by single black women with children. According to an analysis of public records by a nonprofit community development organization called Reinvestment Fund, in the past four years more than half of the houses that have been foreclosed in the neighborhood were owned primarily by women.

Why is that? These are questions we need to ask ourselves because wolves will always be out there in sheep’s clothing pretending to help us get to the American Dream. Consumer Federation of America reports there was a 32 percent more chance of women receiving a subprime loan even though men and women have roughly the same credit scores. We clearly need to be more prepared in this area if we are to pursue that which we know as the American Dream which for others has become the consummate nightmare, losing hard earned life savings in a foreclosure and/or bankruptcy.

As a result many women, especially black women are faced with starting over due to ruined credit ratings, bankruptcy, walking away from a home because of frustrations in dealing with a bank that will not refinance after being promised a refi at the closing table. This continues to happen all throughout the nation today and it will be a while before the market settles down and corrects itself with regards to pricing and the mortgage crisis.

But what can those of you who are already there or thinking about jumping into the frying pan do? Well, you both have something in common, you have a chance to play the real estate game and get out unscathed by doing 2 things. Educating yourselves on the process and insuring that you will weather a financial crisis by being adequately prepared.

5 Tips on Getting Prepared

1. Pay Down Debt
   • Debt is Slavery. Consider that if you pay the minimum on your credit card bill it will take you years to pay off that balance. A good rule of thumb is if you can’t pay off the balance every month then don’t make the purchase.
2. Dispute/Repair all negatives on your credit report
   • Sign up for Suze Orman’s FICO® Kit Platinum and dispute the negative items on your credit report. They have built in form letters which allow you to dispute your accounts from their system. No snail mail necessary.
   • Creditreport.com says that a high percentage of consumer credit reports - up to 70 percent - contain errors. Is that collections account within your state’s statute of limitations? Does that refinance belong to you? Furthermore, can you call up your credit card company to arrange a payment plan so that they will report you as paying on time?
3. Save at least 3 months of expected housing expenses separate from anticipated closing costs
   • This is pretty self explanatory and if you can afford to save more then by all means do it. Looking at the current situation I would expand that target goal to at least 6 months. To many of us this may be daunting but take a look at CNN’s personal finance section and you’ll know why. It’s best to be safe than sorry.
4. Secure a trustworthy, smart and ethical Realtor and Mortgage lender/broker
   • I can’t stress this enough! You need a team to work on your behalf behind the scenes that isn’t only concerned about their bottom line, but about yours as well. Our realtor was sharp as a tact and went to battle for us each and every time. As well, our mortgage broker made sure that we understood the terms of our mortgage and was responsive and honest in answering our questions. Keep in mind, we did a fair amount of due diligence so in answering our questions, he confirmed what we already knew.
5. Buy a home below the cost of what the bank says you can afford.
   • Just because the bank says they will approve you, doesn’t mean you can actually afford it. Many factors play into taking your budget over the top such as increasing gas and oil prices, increase in grocery prices and factors surrounding the impending recession.

Are You Near Foreclosure? Help is on the way:

–Housing rescue: Allow more subprime mortgage holders to refinance into federally insured loans by raising the limit on Federal Housing Administration loans from $362,790 to as high as $729,750 in expensive areas. Increase the availability of mortgages by providing a one-year boost to the cap on loans Fannie Mae and Freddie Mac can buy, from $417,000 up to $729,750 in high-cost markets.

Here are a few things you should consider from the BaltimoreSun:

•Contact your lender. Lenders are more open to working something out than they were even several months ago, whether that’s freezing your interest rate or temporarily forgiving payments you missed. Ask for the loss-mitigation department.

• Call a nonprofit housing counselor. They will act as a go-between and can have more luck getting to the right people. You can find a list of HUD-approved Maryland groups at www.hud.gov/foreclosure. Or call 888-995-HOPE.

• Inquire about a no-interest loan to get you current on your mortgage. The state of Maryland’s new Bridge to HOPE program offers loans of up to $15,000 to qualifying homeowners with subprime or exotic loans. Go to mdhope.org for details, or call 877-462-7555. City residents could also qualify for a $5,000 loan from Neighborhood Housing Services of Baltimore. You’ll need to be referred by a housing counselor.

• Refinance. The state has a Lifeline refinancing program - details at dhcd.state.md.us/Lifeline - and there is also the federal FHASecure, www.hud.gov/news/fhasecure.cfm.

• Sell. If you can’t do so for at least as much as you owe, ask your lender if it would approve a “short sale” and forgive the difference.

• Be wary of unsolicited offers of help. Foreclosure-rescue scammers are targeting homeowners.

Don’t forget about national nonprofits, NACA and ACORN. Let’s begin to make smart decisions about debt moving forward. There’s a lot of work to be done, but it starts with each of us. Making good personal finance decisions ensures that we will be in a good place financially 20..30..40 years from now.

How do you think we got here? Are you there now? Are you considering purchasing a home wthin the next 6 months? If so what are you doing to prepare for the purchase?

Read More:

Baltimore Finds Subprime Crisis Snags Women

Sub-Prime Lending, Women, and the Foreclosure Crisis

Women and the subprime crunch

Like what you’re reading? Check out Ginger at Girls Just Wanna Have Funds and subscribe to Girls Just Wanna Have Funds via email. If you have questions and want to get in contact with me, please see my contact page.

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Picture this scenario, the mortgage company receives an envelope, what they believe will be this month’s mortgage payment, is actually the keys to the house instead. The homeowner has vacated the premises, sending in the keys as a sign of surrender, but this is really the awful sound of foreclosure. Imagine the horror. Well, this is the reality for many homeowners across the nation and a nightmare come true for lenders. This is the new phenomenon known as “Jingle Mail”.

I won’t attempt to summarize the article as everything written on the subject stems from the NY TImes article. However, I will discuss the shift in consumer psychology as of late. I couldn’t help but note the shift in attitudes around consumer psychology. This in turn affects attitudes towards debt, lack of problem solving ability and commitment to a solution. Where did it start? When will it end? These are all questions still looming on the horizon as lender fears are realized and homeowners’ dreams become nightmares. I don’t have the answer but I will take a stab at where it started and where it stands today.

Change in Consumer Psychology

There was once a time when people adhered to conventional personal finance wisdom. This included putting 20% down on a home (which I think is a load), saving for a rainy day and keeping credit card balances to a minimum (ie below 20% utilization). However, what we have today are consumers who believe in excess. Excess they can’t afford which lodges them up a creek with no way down. How did we get here? How and why did we become a buy now pay later society?

My assumption is that we wanted to get away from the old wisdom of our parents and do it our way. Buy bigger homes, afford nicer cars and essentially keep up with Barringtons across the street. I won’t pick your mind with psychological theory, but other than we want to be able to do it bigger and better with no concrete means of paying for “stuff”, while digging deeper into debt. Of course, there’s the “I want my kids to have more than we did“….”David just got a new BMW 7 series, maybe I should go out and get a CLS 550 instead of the Camry Amy and I talked about“….”Hmmm…Allison just bought a new pair of Prada heels, gotta get those Christian Louboutins!”…..and it goes on and on.

Do you see a pattern here? People are making financial decisions based on emotion and not facts. Facts which tell them they can’t afford it once the bill/payment comes due.

Attitudinal Shift Towards Debt Responsibility

When did it become OK to walk away from debt? A home you signed papers to honor the obligation for the next 30, in some cases 50 years. Uprooting your family and putting them through the process of foreclosure and bankruptcy because you signed up for a home you can’t afford at this stage in life. It’s selfish and irresponsible. Just because the bank says you can afford the mcmansion, it doesn’t mean that you can.

A home used to be something that people saved towards and made sure they were ready to purchase, but its become an ATM machine for some and biting them in the arse when its time to pay it all back. Homeownership may be part of the American Dream but it isn’t a must have on the list of things while on the path to building wealth. But we’ve some how made it ok with the proliferation of shady home loans justified by the desire to keep up with everyone else. When you know better, you do better.

Lack of problem solving ability and commitment to a solution

This applies to both the lender and borrower. Lender sticks the borrower with a shady loan and the borrower takes the loan due to a lack of due diligence. Who’s to blame? Both are, both entered into this agreement knowing that the end was never in sight. What do they do now?

Find a happy medium.

Lenders know that in order to stay afloat they need consumers to remain current on their debts. It’s not secret that the banks have been fleecing us for years. What with obnoxious fees to access and hold our money along with reducing our ability to counteract fraud with the new Check 21 act? I am well aware. However, this gives us more reason to bring our “A” game to the underwriters. This is a game, make no mistake. Banks are betting that you will NOT pay that note on time and they will then raise the payment and ding your credit report with a late payment and/or foreclosure. The borrower then panics and attempts to do one of the following: catch up on payments, miss payments, refinance, sell or in this case walk away. But, does the bank really win? They’re now stuck with a property that they are paying taxes on while losing out in their investment.

Does this seem like its going no where? It isn’t. The banks want their money, borrowers don’t have it and both are stuck. This is where I note the lack of a problem solving orientation towards debt. Lets be honest here, no one wins if no one pays. Borrowers’ credit gets jacked up and the bank loses their return on investment and losses trickle down the pipeline. As a nation we have to learn how to work together in tough situations. It works out for everyone when we do, not when we’re deadlocked in a stalemate waiting for the other to surrender.

Are you in this situation? There’s help on the way:

–Housing rescue: Allow more subprime mortgage holders to refinance into federally insured loans by raising the limit on Federal Housing Administration loans from $362,790 to as high as $729,750 in expensive areas. Increase the availability of mortgages by providing a one-year boost to the cap on loans Fannie Mae and Freddie Mac can buy, from $417,000 up to $729,750 in high-cost markets.

Here are a few things you should consider from the BaltimoreSun:

•Contact your lender. Lenders are more open to working something out than they were even several months ago, whether that’s freezing your interest rate or temporarily forgiving payments you missed. Ask for the loss-mitigation department.

• Call a nonprofit housing counselor. They will act as a go-between and can have more luck getting to the right people. You can find a list of HUD-approved Maryland groups at www.hud.gov/foreclosure. Or call 888-995-HOPE.

• Inquire about a no-interest loan to get you current on your mortgage. The state of Maryland’s new Bridge to HOPE program offers loans of up to $15,000 to qualifying homeowners with subprime or exotic loans. Go to mdhope.org for details, or call 877-462-7555. City residents could also qualify for a $5,000 loan from Neighborhood Housing Services of Baltimore. You’ll need to be referred by a housing counselor.

• Refinance. The state has a Lifeline refinancing program - details at dhcd.state.md.us/Lifeline - and there is also the federal FHASecure, www.hud.gov/news/fhasecure.cfm.

• Sell. If you can’t do so for at least as much as you owe, ask your lender if it would approve a “short sale” and forgive the difference.

• Be wary of unsolicited offers of help. Foreclosure-rescue scammers are targeting homeowners.

Don’t forget about national nonprofits, NACA and ACORN. Let’s begin to make smart decisions about debt moving forward. There’s a lot of work to be done, but it starts with each of us. Making good personal finance decisions ensures that we will be in a good place financially 20..30..40 years from now.

(Photo by Aaron Issler)

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