Question about foreclosure

Jeff616 · #1 Apr 9, '11, 3:28 pm

A friend of mine asked me a question that I couldn't answer. Is it a mortal sin to foreclose and walk away on a house that is very underwater?

**puzzleannie** · #2 Apr 9, '11, 4:53 pm

don't understand the question
if the house is underwater why doesn't the homeowner's insurance cover the damage, and if the house is a total loss, pay off the mortgage?

the bank forecloses, are you asking if their action is morally licit?

Lainey63 · #3 Apr 9, '11, 6:30 pm

Most mtgs in my county and the neighboring county here in FL are underwater including mine. The value of my home has change in value over 152%. I bought my house in 1989 and I didn't ever refinance and it is so frustrating to see those who refinance not once but twice, got all new toys and then turn around and walk away from their responsibilities.

One thing that perhaps these people who walk away from their mtgs and have short sales don't fully grasp is that they will get a 1099-C which is a forgiveness of debt and that has to be reported on their tax return as ordinary income the taxpayer then can fill out a form if they were insolvent at the time of the short sale-but if they have IRA accounts or other investment property they don't qualify for insolvency test and according to the IRS.

Here they had some type of mtg assistance in another city and people went and stood in line all night-many were rejected because they still had all their "toys" from their refi's and they were told to sell them.

Excuse me for ranting but by the same token there are those who just lost their jobs and couldn't find work, most of those were in the construction field-others went for the low interest 1% interest rate which stayed at 1% for a year with the intent to refi when the interest rate shot up but they couldn't refi because there houses had dropped in value so much. Sorry for the rant..sore spot i guess

**JimG** · #4 Apr 9, '11, 8:25 pm

"Underwater" in this context means that the home's current market value is less, and maybe a lot less--than the mortgage balance. The homeowner owes more on the home than it is worth.

Lainey63 is correct that if a part of the debt is written off--i.e., forgiven, the IRS treats it as income and income tax must be paid on it.

It is also a good point that during the boom years when values were rising, many people refinanced their homes more than once for more than the first mortgage balance, taking cash out to buy other things. They treated their homes as a savings account which required no input of savings. The market did that for them.

Now, the market has gone the other way, leaving homeowners with negative equity.

In some states, mortgage holders may bid in current market value at a foreclosure sale, resulting in a large deficiency judgment--which, if written off, means a 1099-C and income tax due on the amount written off.

Normally, foreclosure is no sin, in my opinion. But the question is this: is it wrong to walk away from a debt if you can actually afford to repay it?

Jeff616 · #5 Apr 10, '11, 11:59 am

Sorry JimG is right about the "underwater" term, I guess I should have said upside-down on the house, (owing more than it's worth). Thanks everybody for the help!

The Old Medic · #6 Apr 10, '11, 2:57 pm

If you are capable of paying the house payment, then walking away is cheating the mortgage holder. Cheating is ALWAYS a sin, and cheating a person or company out of many thousands of dollars would be a mortal sin.

It is not the banks fault that a person was dumb enough to grossly overpay for a house. If it has lost value, you still are required to make every effort to meet YOUR obligation.