Is 'morality' the most relevant issue when letting underwater house go?

By Ilyce Glink and Samuel J. Tamkin

Q: I was listening to your radio show recently with some interest about the condition of the Chicago real estate market and was astounded by your response to one of your callers.

The man was a house painter who was near foreclosure on a house valued at $70,000 to $80,000. The property has a mortgage for $170,000 to $180,000, which means the homeowner is seriously underwater.

He is hiding money in another property that he had put into his daughter's name and was milking his current residence dry as long as he could get away with it. You were eagerly giving him advice on upcoming changes to the tax regulations so he wouldn't get caught.

You are as bad as he is. While I agree that the real estate market meltdown started with unscrupulous politicians bending to the will of banks and financial institutions looking to increase revenues, that does not alter the fact the people should have their own sense of personal responsibility.

Now, losers like your caller are just walking away while hiding their money elsewhere. Who do you think will ultimately pay for this? In reality, many of us already paying for this because of our own greatly reduced market values.

It doesn't help the situation when "experts" like you enable lowlifes looking to take advantage of the system.

A: The homeowner you are referring to had bought a tiny, inexpensive, broken down disaster of a house and was using his under-utilized tradesman's skills to fix up the house by himself over time.

He had already taken action and had not broken any laws. We would never tell someone to break the law, and that's not what had happened.

If you're looking for a so-called "moral" answer, we don't believe that what the homeowner has done is necessarily wrong or amoral. He is within his rights on the mortgage to stop paying. The lender has the right to take back the property. That is the agreement at the heart of every single loan. There is no "personal responsibility" clause included in the mortgage. It's a business transaction.

If the lender wants to sue him for the deficiency on the mortgage, the lender may be able to do that and may be able to go after these assets. And the homeowner may lose.

The tax regulation cited is The Mortgage Forgiveness Debt Relief Act of 2007, and it has been extended through December 31, 2013. According to the IRS.gov website, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. The Mortgage Forgiveness Debt Relief Act generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2013 (as extended). Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).

(The tax exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.)

If the lender doesn't take back the home before the end of the year, the homeowner will owe taxes on the missing $100,000 (unless the act is extended again). That tax could amount to nearly $50,000, and it could take years for the homeowner to pay that off, or he would have to go through bankruptcy to have it discharged, which in this case is frankly a waste of court time.

The homeowner has been earning next to nothing for years since the housing crisis. He's broke. His family is broke. It hardly seems he is getting away with something. To the contrary, if he and his family are nearly destitute, they could wind up living on the streets. Is this what anyone wants? Does this somehow help your own home value? Not really.

The housing crisis was caused, in good part, by the banks. Their behavior was very much a part of what caused the credit markets to seize up. This country is still at least two million jobs short of where we were before the Great Recession. Wages for the bottom 70 percent of the country are lower than where they were. And, since 1979, wages have barely budged. More than 7 percent of homeowners are still delinquent on their mortgage, about four times the normal.

We have a lot bigger problems in this country than this one homeowner and whether he pursues a deed-in-lieu of foreclosure or a short sale, or allows his house to go into foreclosure.

(Ilyce R. Glink’s latest book is "Buy, Close, Move In!" If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce through her website, http://www.thinkglink.com.)

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Sun archive: Dream Home

Dream Home takes readers into the houses of Baltimore area residents who have found their ideal home

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