A year ago I wrote an article similar to this one about the impact of the former Mortgage Forgiveness Debt Relief Act if it was not extended. However, the Act was extended for one more year. So, my article turned into a foreshadowing of the future for today.
Let us remember what the Mortgage Forgiveness Debt Relief Act did for us as a nation. The purpose of the Act was to provide for a forgiveness of the deficiency balance as a result of the sale of a home worth less than the value of the mortgage owed. Traditionally, a short sale or a foreclosure sale that resulted in a deficiency amount that would eventually be collected by the bank either by payment arrangement, collection or a law suit against the home owner.
The Act changed the traditional way of looking at mortgage deficiencies. The reality is the mortgage crisis changed traditional ways completely. The Act was part of several laws put in place to try and help the economy and the people in trouble with these horrible loans out of the trouble they were in. The Act prevented the mortgage companies from taking the traditional actions against the homeowner of collection of deficiency mortgage balances owed. It allowed the homeowner to break away from this terrible time and move on with their lives irrespective of their poor choice in buying the home in the first place.
As I noted in my article a year ago, it was just a matter of time that the Act would not be renewed. The Act really did not help the economy overall. It simply allowed a few people out of a terrible situation and allowed a few smart real estate agents to figure out how to continue to sell homes in a crappy market. It ultimately hurt the banking industry which trickled down to many people trying to refinance but could not because of the high level of credit required because the bank could not afford to take extra risk with facing sucking up all the bad debt from short sales or foreclosures.
The total effect of the Act not being renewed is that Short Sale will be dead. Banks will still be open to Short Sales but the consumer will no longer be able to use the Act to bargain with in completing the sale. Consumers can be faced with paying either tax liability if the bank provides debt forgiveness through a 1098 or will have to pay the deficiency from the sale.
I know it does not sound a great thing but the lack of extension does indicate that we are finally going back to traditional lending practices. Traditional lending practices does open up the door for those who work hard will be able to afford a home. It is not going to be as easy to get a mortgage as it was in the early 2000s but the mortgages will be available and will be a true investment that will not need a Short Sale to resolve.
With the expiration of the act, it may now trigger more bankruptcy filings as well. Instead of short selling a home or allowing the home to be foreclosed and incurring a taxable event, smarter consumers may opt to file a Chapter 7 bankruptcy and simply discharge their debt, which would then eliminate the tax event of debt forgiveness.
As with any matter regarding debt and its legal consequences, it is always a good idea to speak to an experienced debt relief attorney who understands all the options and can properly analyze each unique situation. Many such law firms offer free consultations and homeowners should take advantage of that.