The Difficulties of a Short Sale for South Bay Mortgagors

The cost of living in the South Bay is arguably the highest in California. As such, the average mortgagor has more to negotiate when dealing with negative equity in residential property. Apart from needing the express approval from the lender to affect a short sale on a property, the mortgagee needs to find it to be commercially advantageous.

If indeed the mortgagor is likely to be able to maintain their responsibilities under the loan agreement, the enshrined equity of redemption may well be called upon to reflect some mutuality as lenders insist on the original debt obligation being satisfied. Give residence in the South Bay is tantamount to employment in the surrounding Silicon Valley and its buoyant local economy, but for unemployment, the likelihood of a mortgagor in a higher wage bracket obtaining classifications of hardship is slim.

If however circumstances have spiraled out of control, given the average high-tech wage is bordering on $150 000 per annum, the IRS along with any lien holder to speak of, will be likely to insist on the sum due as well. This is simply a reflection of commercial sense.

While quick to interpret any financial advantage as taxable income, the IRS will certainly find the shortfall written off by the lender in a short sale to be a net financial advantage and therefore one attracting a tax liability. In pursuing a scheme of divisible solutions to address an insurmountable dilemma, Congress has legislated to relieve distressed property of this burden in Congress Bill H.R. 3648: Mortgage Forgiveness Debt Relief Act of 2007. Of course, this measure cannot be entertained indefinitely and along with S.B. 1055 forgiving the equivalent California State tax liability, has been implemented prospectively till the end of 2012.

Quizzically, creditors are obviously willing to accede to accepting a part debt in satisfaction of the whole however, unless it is legislated otherwise with statute such as the above, the liability remains enforceable unless some fresh consideration or detriment moves from the mortgagor. In times like the present, a nominal amount may be all that the parties agree to in order to receive the approval of the law. With legislated debt modification, both public and private debts will be free of this requirement.

Of course, with the season of public infrastructural spending being well underway, it does the government no good at all to reduce its revenue streams in such a fashion. With the containment of critical markets its foremost concern, large tax liabilities being forgone by the public purse pale in significance to the alternative; a property market that spirals downward throughout all segments. This will most likely be the case if high-end properties exert pressure on the market from their lofty position. Additionally, high income owners such as these are unable to participate in the property market any further due to impecuniosities.

If such capital allocation is able to endure, these dejected mortgagors of the South Bay will be able to finalize their affairs and re-enter the market to support it by taking advantage of the upward swing when the market turns. Had this not been the case, a considerable amount of capital would leave the property market in the South Bay and the local property market would stagnate for an extended period of time.

Posted by Eureka Expert on Mar 9 2010. Filed under Foreclosures, Housing, Lending, Short Sales. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry