A foreclosure assistance company, YouWalkAway.com, conducted a national survey of their clients who were considering foreclosure. Approximately 34 percent of those surveyed said the expiration of the Mortgage Debt Relief Act contributed to their decision to strategically default on the mortgage. Of those planning to strategically default, approximately 74 percent would quality for relief under the Mortgage Debt Relief Act of 2007.
Mortgage Debt Relief Act
The Mortgage Debt Relief Act of 2007 was created to relieve former homeowners from paying taxes on the difference of the loan amount and the amount the property sells for as a result of a short sale or foreclosure auction. If the mortgage is more than the sale amount, the difference would have been considered income before The Mortgage Debt Relief Act was passed.
For example, a house sold for $150,000 and the mortgage was $200,000, the difference is $50,000. Under the Mortgage Debt Relief Act, the former homeowner would not have to pay taxes on the $50,000. If it is not extended, the homeowner would owe taxes on the $50,000 difference.
A strategic defaulter is someone who intentionally stops paying their mortgage, even though they are financially able to pay it. The decision is made to “walk away” because they are upside down in their mortgage (owe more on the mortgage than it is worth) and don’t see any relief. They stay in their home until it is sold or foreclosed for free, which can be many months or years.
The foreclosure process takes about one year on an average, so those who wanted to take advantage of this relief, would have had to start the process in late 2011 to have it completed before the December 31, 2012 deadline. The Mortgage Debt Relief Act of 2007 was originally set to expire in December 2009, but was extended to December 31, 2012. Early in 2012, H.R. 4290 was introduced to extend it again, but has not passed.
If this act expires, the number of strategic defaulters will drop drastically, because they won’t want to pay the tax bill. Those who financially can’t pay their mortgage and whose home is sold as a foreclosure or short sale, will also have a large tax bill they can’t pay. If the home is foreclosed or sold as a “short sale”, their credit score will be extremely low and they will have difficulty getting credit for about five years. This is something many don’t consider.