A lender who reserves the right to the deficiency, obviously has not ‘forgiven’ the debt. There should be no 1099C being issued.

Conversely, if the lender issues the 1099C, they are reporting to the government that they have paid the borrower income, thereby cancelling the deficient balance, and making any further collection efforts improper.

If I have all this correct, is it rooted in something more than common sense that I could refer to?

Regards,
Steve

I like to there’s many intelligent readers and commentators here. You’ve certainly added to that with distinguishing the three key way people are looking at this issue.

To a degree, the “societal” one you mention has an economics element or is the economic one (or a fourth one). From an economic perspective, the eventual outcome to a lender of short sale, loan mod with principal reduction, or a foreclosure to REO all have essentially the same general outcome: a significant loss on the loan which will result in property values working their way to realistically lower levels. There may be tax, regulatory or tactical reasons why a lender chooses one over the other. There are many different incentives or penalties that were designed for other circumstances which now encourage otherwise less than rational outcomes. It’s way to much to get into here. I just don’t have enough time — or complete enough knowledge.

As to your other topic, feel free to mention it or to email me about it and I might create a post for it.

Ron

As I read the comments, it’s clear you have a few fairly inteligent readers. There is certainly a lot to comment on and I don’t want this to turn into a rant. But a few thoughts..

Judging strategic defaults and the people who may choose them is difficult. I see at least three different basis to judge: the social context (as Bisenius did), the legal context (as you address), and the moral/ethical context (as many people see as the main issue).

I think it’s important to realize we no longer live in the world of June and Beaver Cleaver. The world has changed. It’s hard to speak of ethics when corporations lay off thousands of workers – and the CEO takes a record bonus for his work. America’s moral compass is largely broken. Tied directly to that, as you said is accountability. I’m hardpressed to think of any problem where at the core there wasn’t a lack of accountability.

One huge piont Bisenius misses, if you have a strategic default, how about holding the LENDER accoutable? I have to believe most people would not consider a strategic default if they had gotten an acceptable loan mod. Maybe that means a loan mod with principle reduction, but at the end of the day, the LENDER made the decision they would rather have another REO than make a loan mod. Hard to blame the borrower for that decision.

And as if all this wasn’t enough, Bisenius dares mention the 125% refi? What’s wrong with this program? If you are only underwater by 20% of your loan balance, the government will step in to refi your and minimize the banks exposure by taking the loan of the banks’ hands and passing the loss on to the taxpayer??? I guess at this point, government charity to big business is hardly worth getting upset over.

But I did take one lesson (a practitioner’s tip?) away from what Bisenius wrote. If the homeowner can find ANY reason, be it work, family hardhsip, health or the dog dying, if they can find a reason they NEED to move, then we can avoid that ugly term of ‘strategic default’ altogether and just call this an ordinary short sale.

And maybe after the short sale closes, circumstances change and the dying dog gets better?

Respectfully,
Steve (dare I sign my name for this is surely heracy) Pawera

PS – is there a better place than tagging it on here to start a new topic or throw up an off-topic question?

This blog is not about political and moral issues, (I have a domain reserved to use for that some day) but about legal issues in connection with short sales, particularly in California.

From the perspective of real estate investors buying short sale properties (especially for rapid resale) and for real estate agents/brokers involved in these transactions, the key point with strategic defaults remains: don’t get involved in any transaction in which the lack of true hardship is misrepresented (lied about). Then you are risking involvement with a fraudulent transaction.

If the homeowner is simply telling the bank up front that they are walking away, I think it is unlikely that a short sale will be approved (regardless of any economic sense for the bank/note holder in doing so) and that the property will go to foreclosure and REO.

This issue needs to be watched in connection with its effects on real estate prices in each particular market so investors don’t find themselves buying legitimate hardship short sales in re-declining markets where it will be difficult to resell, rent or gain any mid-term (2-4 year) appreciation.

just read your reply to my comment now I guess we were typing at the same time…

“I just don’t see justifying a new “wrong” based on the prior “wrongs” of others. That’s a sure formula for societal chaos and further economic meltdown.”

Couldn’t agree more with that. It boils down to deciding if it’s ‘ethical’ or ‘ok’
to steal from a thief kinda question which every one will have to answer for
themselves.

Bottom line though seems to be that our ‘elected’ reps are not acting in
the ‘represented”s best interests (except Ron Paul as far as I can tell).
Can’t really blame them as I’m sure most of us ‘regular’ people would
do just that were we in their shoes and seats ( see Stanford Prison Experiment
from 1971)
http://en.wikipedia.org/wiki/Stanford_prison_experiment
http://www.prisonexp.org/
http://www.youtube.com/watch?v=rmwSC5fS40w

It’s humbling to become aware that we are molded by our environment
and the ‘role’ we’re supposed to play.

Great content Ron, don’t want to keep you on the blog
too long, go help us help homeowners.

Yves Baggi
http://www.ShortSaleFactory.com

http://www.youtube.com/watch?v=ESp98DmbQqY

Great reply to Becky’s post, appreciate the clarification.
It seems now as it was in the past that it is up to the
‘little guys’ to keep the big ones accountable.

All the best

Yves Baggi
http://www.ShortSaleFactory.com

You said:

“So there is nothing ethical about what the government and banks
are pulling on the people with mortgages, car loans, student loans
or credit cards.”

And, “Anytime I speak to an individual they know there is something
wrong with this system. They may not know what it is or how
it works exactly but there’s something wrong..”

I agree. The entire financial (and electoral) system needs a radical overhaul that establishes a direct risk-reward system throughout the entire chain of transactions.

I just don’t see justifying a new “wrong” based on the prior “wrongs” of others. That’s a sure formula for societal chaos and further economic meltdown.

Ron

The attorney-like answer: it depends.

Fraud requires a material misrepresentation (a “lie”) or a material omission that one has a duty to disclose.

If the borrower is simply telling the note holder, “I don’t like this deal and I want out,” then the borrower is telling the truth and there is no fraud.

If the borrower is falsifying a hardship by providing falsified records and/or otherwise lying, then there likely is fraud. Legitimate short sale flip investors should not be involved in these cases.

However, the strictly economic impacts of strategic defaults are the same regardless of the underlying method used to accomplish the result.