(snip)"If they previously refinanced and their lender decides to foreclose, they may not only lose their house, but the bank also may be able to go after their other financial assets including stocks, savings and their paycheck.
And even if the bank doesn't go after their other assets, a foreclosure may mean a big tax bill from the IRS and state Franchise Tax Board for any shortfall between what the bank gets for the sale of the owner's home and the value of the loan."(snip)
"In a study released in February, First American Real Estate Solutions in Santa Ana estimated as many as 8,000 Orange County homeowners could lose their homes to foreclosure over the next four years.
Some homeowners with little of their own money in their homes may think they will do what strapped homeowners in the '90s did: turn over the keys to their lender if things get really bad and walk away.
But Hall and other financial experts warn that things may be different this time because so many people have refinanced. The difference is the recourse loan.
In the past, when a lender foreclosed, the homeowner usually still had the original loan they got when they purchased the house. Original loans, considered purchase money, are non-recourse loans that limit lenders to recovering only what they can get when they sell the house. They can't go after the owner to pay any difference between the foreclosure sales price and the loan balance.
But in California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower's assets once they obtain a court judgment.
"They can literally go after everything you have," Hall says.
There are a few limited exceptions. Retirement accounts are excluded, and declaring bankruptcy could protect some homeowners."(snip)
"Even if a lender doesn't go after a homeowner's personal assets, a foreclosure can trigger income tax consequences.
Hall notes that lenders usually want to get rid of foreclosed properties as quickly as possible and often will sell them at auction prices much lower than the true market value. If the house is listed or sold for less than the loan value, the homeowner will not only lose his house but also may have to pay income taxes on the difference because it is considered debt relief income.
For instance, if the foreclosed homeowner has a $500,000 loan and the lender sells the house for $450,000, the homeowner will have to pay taxes on the $50,000 difference. The $250,000 tax exemption for singles and $500,000 for joint filers does not apply to debt relief income, in this case the $50,000.
The tax owed on the debt relief is based on the homeowner's ordinary income tax rate, not the lower capital gain rates. The exclusion, however, may still be available to reduce any capital gains in the difference between the sales price and the homeowner's basis.
"Some would say that's a disaster, but it's better than having the lender take you to court, obtain a judgment and then go after (your other assets)," Hall says."(snip)



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