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Virtual bank robbers thrive, thanks to an act of Congress

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POSTED August 30, 2010 2:23 a.m.
Washington’s much ballyhooed program aimed at helping struggling homeowners is highly successful in at least one aspect - it has given those not in financial trouble the ability to walk away from homes that are underwater without literally paying the price.

Congress displayed the same attention to detail they did with the stimulus program and the bank bailouts when they put in place programs in a bid to help struggling homeowners facing foreclosure due to rate adjustments, end of an introductory loan period that involved significantly reduced payments, or balloon payments. They pushed through legislation that suspended the losses written off by banks when a home is sold for less than is owed to either get a borrower off the hook in a short sale or when it is disposed of after foreclosure. It seems reasonable enough. Someone who owed $300,000 on a home that went into foreclosure and sold for $100,000 would, under IRS tax, rules be saddled with taxes on the $200,000 - the difference between what the bank was owed and what the home resold for after foreclosure. That $200,000 is considered income and is taxed accordingly.

Every state - including California - followed suit with parallel legislation to temporarily suspend state income taxes on the part of the loan that was essentially forgiven.

Everyone saw what was coming next except, of course, Congress.

People who were still able to make their mortgage payments but didn’t like the fact they had a $400,000 loan on a home underwater by $200,000 or who simply wanted to take advantage of lower prices and lower interest rates walked away from their home.

Lenders finally wised up with those who were playing the system that were still making payments and were in the process of buying another home under the guise of keeping their first home as a rental. More than a few real estate agents in Manteca, Ripon, and Lathrop can cite examples of people doing just that. Once they secured a loan for the new home - often larger, brand new, and at a substantially lower cost than the home they had - they simply stopped making payments on the original mortgage. They ended up with more home at less cost and no consequences for shirking their responsibility to pay a loan that they could more than afford to pay. Sure they suffer a ding on their credit rating but it is an extremely small price compared to getting away with essentially robbing more from a bank than the old-fashioned way employed by run-of-the-mill armed robbers who steal considerably less but gets 20-years plus in prison as opposed to a newer home at a lower cost.

Crime pays if you have Congress on your side. Folks who have made billions off derivatives, pyramid schemes like Enron, and other sweet deals for mega-corporate America have known that for years.

Simply walking away when people can afford to pay is still happening in fairly large numbers. One example this summer was the buyer of a Ripon home who paid over $600,000 for it new and was dismayed to find the same home built a year or so later selling for $250,000 less. What they did was stop making payments and eventually walked away when the bank foreclosed.

The strategy in most cases is to rent for a few years while your credit heals itself and then buy a new home in about two years with lower interest rates and lower prices.

In case you’re wondering in the case above - and in at least a dozen that real estate agents have shared - the people who are taking advantage of the suspension of the tax penalty on forgiven mortgage debt all have annual household income in excess of $100,000.

Meanwhile those who are underwater but are still making payments on mortgages because they can afford them plus those who either rent or who have spent 15-plus years making mortgage payments or own their homes outright are subsidizing the New Age Virtual Bank Robbers.

How tough is it for Congress to pass legislation requiring the IRS to require a litmus test based on true need to get away without being taxed for mortgage obligations that people walk away from?
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