Profile picture for lynrosect

The bank gave your neighbor $50K...

I have a bit of a dilemma regarding short sales.  All circumstances aside, the individuals that are approved for a short sale are basically given money, i.e. debt is forgiven.  It is my understanding that most short sales are the result of a home equity refinance of some sort. 

This is the scenario that is annoying me: 

A home is purchased in 2004 for $250K.  The homeowner refinances the home in 2006 receiving $50K to buy a Harley/Boat/New Car/Plastic Surgery etc.  The total mortgage due to the bank is now $300K.  The market crashes.  The house is now worth the original $250K.  The house is now underwater mainly due to the 2006 refinance.  The bank allows a short sale of the home for $260K.  The homeowner's debt of $40K is forgiven.  So the former homeowner is basically given $40K and their credit score gets a bit of a spanking. 

I know the numbers fluctuate due to the monthly payments made and that it is not a clear cut grant of $40K; however, I don't think I have the scenario all wrong?  As a responsible knowledgeable buyer of anything over $50, I must ask … Where is my forgiven debt, i.e. Harley/Boat/New Car???  

I must also ask….Are hard working credit worthy responsible buyers getting the short end of the stick in this short sale environment?

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August 24 2010 - US
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Replies (15)

Profile picture for sunnyview
Yes responsible people are getting the short end of the stick. Although they may have some benefit through temporary government stabilization of housing prices if they own, they will pay every bit of that in taxes while the irresponsible skate away.

When I read what I typed, I feel like a heartless goon, but I so want this country to value responsibility and hard work again. I am no political animal just a responsible person who wants better than ongoing handouts to individuals or to big business. 
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August 24 2010
You are already got your reward, you can proud to tell to your children in the future ,as same as you, how they make the living as the honor man.
It is also same in the wartime, there are the heroes and the deserters (the chickens), well, it is not easy to explain. the rewards are unseen, but it is there, you will know about that if you go to the church.
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August 24 2010
You might take solice in knowing that the homeowner will be surprised with a 1099 at the end of the year on which they will owe taxes on that $40,000 that they were forgiven.
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August 24 2010
Profile picture for lynrosect
Yes Sunnyview, I feel heartless and just plain mean when I think of how much it annoys me, but I just can't help it.  I do hope this country will again start to reward hard work and innovation. Soo, I guess its not just me.  The hard working credit worthy responsible people in this counrty are getting scr*wed.
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August 24 2010
Doug, be careful about giving tax advice.

http://www.irs.gov/individuals/article/0,,id=179414,00.html


Lynrosect,
many banks are no longer forgiving the debt.
A short sale is when the bank agrees to release the lien (so it can transfer to the new owner) even though there will be an outstanding balance.

I too wish the government had not stepped in to "help"
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August 24 2010
Profile picture for lynrosect
Ahh that makes me feel alittle better.  If the banks are not forgiving the debt, then the homeowners who short sale walk away with a healthy bank note that represents their Harley/Boat/New Car/Plastic Surgery etc.  If this is true, I feel much better about the short sale situation. 
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August 24 2010
Profile picture for sunnyview
Can I be responsible and somehow still get a free Harley? I would look really good on this one. I promise I'll still teach my kids to be good responsible citizens. Pretty please? 
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August 24 2010
Profile picture for wetdawgs
lynrosect:  A difference in "forgiveness" is related to primary purchase dollars or dollars put into your house, vs equity used as a piggy bank for Harley's, boats college education etc.   

I feel like an old fuddy duddy when people are begging for principle reductions because they bought in 2007 or  2006 with a mortgage.  How about those who paid cash?  Where's our handout?
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August 24 2010
Profile picture for the_country_hick
I was stupid. I acted foolishly. I can not believe what I did. I guess it is to late now to change things. (sighs)

I lived within my means.
I did NOT take out a mortgage I could not afford.
I WAITED to buy.
I saved up as much money as I could living very frugally.
I lived within my means (repeated for effect)

Since I behaved well can I avoid the whole short sale thing and just get the same $50k to apply to the purchase price of what I finally do decide to buy?

That would be equal treatment under the law right?
BOTH of us bought a house.

Just because I was responsible (groans) and waited to buy why should I not get the same $50k that the person who bought more than they could afford earlier gets?

We both would cost (the banks, government, whatever) the same amount of money. At least the money given to me would be well used and not wasted. (cries a bit)
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August 24 2010
Profile picture for SoCal_Engr
The "reward" I get is that, if I leave my home, it will be my decision, on my terms.

What everyone loses sight of is the simple fact that when you abdicate responsibility to the government (or other entity), you usually also lose some of your rights.

Personally, I wish everyone who walked-out-on-the-limb (both individuals and corporations) during the RE runup was allowed to experience the downside of taking an overly leveraged position. The hand that has been burned is less likely to keep touching hot objects.
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August 24 2010
Profile picture for Gannet
The hard-working people always get the smelly end of the stick, always have, and always will.

They get two things in partial recompense: they have more security (because they take fewer risks), and they get to look at themselves in the mirror.
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August 25 2010
Profile picture for sunnyview
True, but if I had been less responsible and paid for plastic surgery with bubble refi money like other people, I could look at almost any face I wanted in the mirror and still ride a new custom Harley.

Even knowing that, I remain responsible. That either means I'm a decent person or a chump who let the gravy train pass me by due to pesky principals of honesty, hard work and responsibility.
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August 25 2010
I think you summed it up very well.  The govenment handout system is flawed, but then anytime the governent get involved there seems to be flaws.  The sad thing today is there is almost no public shame in doing a short sale or a foreclsoure.  A generation ago people would have been mortified.

Simon Mills
Mills Realty
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August 25 2010
Profile picture for lynrosect
Well at least I am not alone in the way I feel. 

I am a firm believer of karma.  I suppose my karma is not tainted by being upset by the short sale situation.  I also suppose that karma will eventually catch up to the swindlers and irresponsible indiviuals among us.  Until then, I will continue to live well within my means. 

I wonder what's going to happen to all of those McMansions?  Even if they are priced hundreds of thousands cheaper than peak prices, who wants to pay for the upkeep on a 4000 sqft house on a horribly tight zero privacy lot?  I'll take the 2500 sqft house on 2 acres anyday!
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August 25 2010
Profile picture for SteadyState
The government should make it a law that home modifications resulting in reduction of principal and/or lowering of interest rates should be funded only from the salaries of the employees of the bank/mortgage company.
Better yet - commissions provided to agents for transactions resulting in short sales and/or foreclosures should be paid back to the buyer who must immediately use the proceeds towards the short-sale and/or foreclosure. 
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August 26 2010
 
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