With the Mortgage Forgiveness Debt Relief Act expiring, the likelihood of banks foreclosing on properties has increased meaning foreclosures may be on the rise in 2014. Throughout 2012 and into 2013, short sales steadily declined –which was in part due to rising home prices.
So far, short sales –a type of home real estate transaction that the bank allows itself to be “shorted” the difference between a sale at current market values and the remainder on the current loan, have been on a steady decline.
The Mortgage Forgiveness Debt Relief Act was renewed and extended twice. It allowed borrowers to exempt the amount of forgiven mortgage debt from their income, making short sales a better option for those trying to avoid a foreclosure.
With the expiration of the act, a heavy taxable income would be created for the borrower if they go forward with a short sale –which may cause them to rethink doing a short sale.
There are other consequences as well to the act’s expiration. Forgiven debt is now taxable income, and a loan modification with a principle reduction –this presents more complicated decisions for the borrower and servicer. An increase on the taxable income could place more stress on a distressed homeowner. Servicers will need to become more creative and look for avenues to help the homeowners, possibly a rate reduction or principal forbearance.
The uncertainty of the extension of the act has put increased negative pressure on the volume of short sales and principal reductions. If you have questions about short selling your home and want to know what the potential consequences could be feel free to contact us, we’d be happy to answer all your questions.