Sept. sales: 67% below bubble peak

A couple of additional ways to look at the September home sales numbers released by DataQuick today:
--September sales in L.A. County, at 4,316 homes, were down 67% from the peak September during the housing bubble, which was Sept. 2003, when 13,070 homes were sold
--September sales in L.A. County were 35% below August 2007 sales.
--The overall level of sales in Southern California was the lowest DataQuick has measured in any month during its 20-year history.

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Comments

[JustAsking]

Under the heading "I should know this" are most home loans recourse or non-recourse to the borrower? For example if a lender makes a loan for $550,000 to someone purchasing a home for $600k, and the home later sells for $500k, does the lender then sue the borrower for the loss of $50k?
Or does the Borrower and Lender make a bargain in the beginning where the most you (Borrower) can lose is $50k and even if you have other assets I won't seek a deficiency judgment against you. I'm just trying to figure out the motivations and downside to each party.

[Minnesota Nice]

The law in CA, as far as I remember, is that all purchase money mortgages are required to be non-recourse. That does not extend to refis, HELOCs, etc. Of course, it also does not extend to loans based on clear fraud by the borrower.

Some refi loans, as long as more money isn't being pulled out, may also be non-recourse, but that would have to be a term in the contract, it's not required. From what I've been able to pick up, most of these loans include the non-recourse clause.

It's also not limited to a certain amount, at least when non-recourse is legally required. It could be 50k or 500k deficient. As long as the contract includes the clause, whether explicitly or implicitly by operation of law, non-recourse means non-recourse.

[Tex]

What you are describing is a "short sale." The homeowner gets the bank's permission in advance to accept $500K for the home. The bank, seeing the writing on the wall, agrees to take the loss and the house sells for $500K. Then the lender reports to the IRS that the seller got $50K of mortgage forgiveness sends the seller a 1099 form; the $50K of forgiven debt is considered "income" so the seller is now stuck with a tax bill. Recently Congress voted to change the rule so that forgiven debt on short sales would no longer be taxed; however, I don't know if that change has gone into effect yet. Does anyone know?

[Jeremy (jemarqu)]

Peter,

I guess the bottom line on this is there are a lot of Real Estate agents out there looking for other work.

Jeremy

[Hula Girl]

Okay. While we're on the foreclosure/short sale subject: A few of my friends were discussing the merits of a cash-out refi vs. taking out a 2nd. They can cash-out 90% of the LTV, ride out the current market. and IF they do have to walk away, they haven't left the"equity" on the table. They believe the lender can only come after them for the second mortgage but not a first.

Our discussion reminded me of sex-ed - Speculation among the "experts" at our table who've learned everything from the streets. Mystery abounds - but I guess mortgages and sex have something in common: We're all getting screwed. Please advise on the merits of cash/out refi V. 2nd. Thanks!

[Minnesota Nice]

Tex,

I haven't seen anything about that bill passing. It's probably still in committee.

The non-recourse deal doesn't just apply for short sales where the borrower sells before they lose title to the property. It applies for foreclosures/trustee sales too, where the bank takes possession, and sells it at auction or as an REO. If their recovery from that process still does not cover loan amounts due, the borrower is still personally liable for the debt, except when the loan is non-recourse.

Short sales can occur on recourse loans too. If the note-holder wants to cut its losses and avoid costs of later litigation and rapidly declining asset value, it can approve a short sale AND forgive the personal liability of the loan. Forgiveness is possible but not likely, since it costs relatively little to get a debt judgment in court, then monitor property records to make sure the borrower doesn't win the lottery or something.

[steve eveleth]

This came straight from the IRS books folks...from my tax man,,,good stuff. I have to walk from 5 properties & do not expect to pay a dime in taxes....enjoy steve eveleth www.steveshomesearch.com

There are several ways cancellation of debt may not be taxable:
1. Bankruptcy
2. Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
3. Non-recourse loans: A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.

In addition, if the property is a rental instead of your own home then the foreclosure/sale by the lender could result in a loss to you since the foreclosure would be considered as a sale. However, if your current cost basis is less than the foreclosure amount then there may be a gain.