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Thread: One in Five Subprime Borrowers Said at Risk of Foreclosure

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    Default One in Five Subprime Borrowers Said at Risk of Foreclosure

    http://money.aol.com/news/articles/_...00010000000001

    One in Five Subprime Borrowers Said at Risk
    AP
    NEW YORK (Dec. 20) - Foreclosures of subprime mortgages are expected to rise sharply in the U.S. in coming months, with nearly one in five subprime borrowers at risk, a consumer advocacy group said in a new report.

    The Center for Responsible Lending, which is headquartered in Durham, North Carolina, said late Tuesday that some 2.2 million subprime home loans made in recent years already have failed or will end in foreclosure.

    "These foreclosures will cost homeowners as much as $164 billion," the report said.

    It also said that more than 19 percent - or nearly one in five - subprime mortgages originated in the past two years will end in foreclosure.
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: One in Five Subprime Borrowers Said at Risk of Foreclosure

    ^^^ and what's not stated in the CRL report is that these at-risk subprime borrowers are not 'evenly distributed' throughout the economy. In point of fact, the #1 at-risk borrower group is urban minorities ... with most of their subprime mortgage financing being enabled and guaranteed by the GSE's and HUD under gov't directive to expand minority home ownership. Thus the relative percentage of foreclosures on subprime mortgages, and the relative devaluation effects on surrounding properties, is very likely to be concentrated in areas of high minority residency.

    A major sub-group of that #1 high risk group is in fact illegal immigrants who have managed to obtain mortgage financing under TIN's. As DHS efforts disrupt more and more illegal immigrant employment by big US corporations (i.e. Swift), it is guaranteed that these mortgages are going to go belly-up in particular cities where such busts have taken place.

    All in all, the US taxpayer will probably foot 1/2 of the bankruptcy bill through GSE bailouts, and foot the other 1/2 of the bill via increased property taxes !

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    Default Re: One in Five Subprime Borrowers Said at Risk of Foreclosure

    Actually, there is now some 'professional' commentary coming out that interprets the report you cited as overly OPTIMISTIC !



    (snip)"A report released this week by the Center for Responsible Lending, a Durham, N.C. based research group, predicted that 1 in 5 sub-prime mortgages originated in the past two years would end in foreclosure. While most on Wall Street dismissed this survey as overly pessimistic, it actually represents a rather rosy outlook.

    One of the report's deficiencies is that it fails to account for how the foreclosures it does expect will impact those loans that it regards as safe. A 20% default rate would put millions of homes back on the market, and would also inflict severe losses on sub-prime lenders, causing them to pull in their horns and tighten their lending standards. More inventory and higher rates will put more downward pressure on home prices. Many over-stretched borrowers, who made little or no down payment, will find themselves struggling to make mortgage payments on properties with negative equity. Higher rates and lower prices will also remove the cash out options that many borrowers expected would bail them out of ballooning adjustable rate payments.

    Therefore, the secondary effects of the 1 in 5 sub-prime default rate will be a chain reaction of rising interest rates and falling home prices engendering still more defaults, with the added foreclosures causing the cycle to repeat. In my opinion, when the cycle is fully played out we are more likely to see an 80% default rate rather than 20%.

    The main problem is that the majority of these loans were made to people who really cannot afford to repay them and were collateralized by properties whose true values were but a fraction of the loan amounts. Once the music stops and prices return to earth, borrowers who put little or no money down may decide to simply mail in their house keys rather than make additional mortgage payments. Why would anyone stretch to spend 40% of his or her monthly income to service a $700,000 mortgage on a condo valued at $500,000, especially when there are plenty of comparable rentals that are far more affordable?

    In addition, even those who can comfortably afford to pay may choose not too. Basically, zero-down, non-recourse mortgages give borrowers a free put option should real estate prices decline. The bigger the drop, the more incentive there is to exercise. Rather than throwing good money after bad, borrowers could simply return their over-priced houses back to their lenders and buy one of their neighbor's deeply discounted foreclosures instead.

    Also, the idea that sub-prime foreclosures will not affect the broader market is absurd. These loans simply represent the weakest links in the mortgage/housing chain. Once they break the entire chain falls apart. The added demand from these marginal buyers helped produce and sustain the bubble. Remove it and the bubble deflates. Also, falling home prices and rising interest rates effect every homeowner, and the temptation to walk away from an upside down mortgage is not restricted to sub-prime borrowers."(snip)


    But don't forget (as the article's author has apparently forgotten) that the IRS counts any difference between the purchase price / loan amount being liquidated via bankruptcy and the 'recovery' price the property actually brings at auction as 'loan forgiveness' i.e. ADDITIONAL TAXABLE INCOME to the person going bankrupt. Thus in the example below, a person going bankrupt on a $700,000 mortgage for a house whose current 'recovery' value at auction is only $500,000 will, on paper at least, have an additional $200,000 in taxable income ... typically translating into an additional $60,000+ due to the IRS ... a tax debt which that person CANNOT go bankrupt on, and which will eventually be extracted by the IRS by one means or another.

    The other option for the bankrupt person, who besides losing all of his assets and possessions now has a huge new tax debt which will be garnished from future paychecks (ahead of the bankruptcy court ordered Chapter 13 payments to creditors, actually), is to simply 'give up' - stop working - sign up for social welfare programs - and thus avoid handing over the majority of his next 5 years worth of paychecks to the IRS, banks and credit card companies. In point of fact, that person would have a higher standard of living as a social welfare program recipient without an income than if they continued to work !

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    Default Re: One in Five Subprime Borrowers Said at Risk of Foreclosure

    I am starting to wonder if the new bankruptcy laws are smoke and mirrors.

    I know someone who recently was forced to file bankruptcy with a messy divorce. She did the same thing the last time she got a divorce years ago. She said the process wasn't any differant. She still had to go on a payment plan in both situations. The only differance she saw was the title of who accepted the payment. She said she didn't recieve any counsel on debt management, not even a brief lecture.


    If someone went bankrupt on a mortgage they owed $700,000 on, paid off $500,000, but was left with a bill of $200,000... How is a debt considered income?


    Im nervous about next year. I am glad of one thing,Most of my debt is gone.
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: One in Five Subprime Borrowers Said at Risk of Foreclosure

    since you asked ... it all stems from the 'tax basis' i.e. the original purchase price of the property, and 'unrealized gains' in property value that have occurred for various reasons that must be immediately 'realized' if that property is sold and not 'rolled over' into a second more valuable property (as is always the case in a foreclosure / bankruptcy scenario ) ...

    (snip)"But in general, if you owe more than your tax basis, you will owe taxes after a foreclosure or short sale. For example, suppose that after you bought your first home, you sold it at a gain of $150,000. You then rolled over that gain into your second home, which had a purchase price of $400,000 and a mortgage of $300,000. Because of this rollover, your tax basis is $250,000 ($400,000-$150,000), rather than the amount of the purchase price. A foreclosure by the lender constitutes a sale at the price of the current amount due on the loan, $300,000. The difference on which taxes would be due, then, is $50,000.

    Another example would be where your home's value appreciates and you refinance. Say you buy the house for $300,000 and now owe $275,000 on the mortgage. You refinance for $350,000. You now owe $350,000, but you have $75,000 in cash from the refinancing. In the event of foreclosure, you would also owe taxes on the whatever you realized from refinancing but have not yet repaid.

    A similar result would occur if you took out a second mortgage or a home equity line of credit and later lost your home in foreclosure without having repaid the balance due on the new obligation.

    The representations that these companies [i.e. mortgage holding financial institutions - sic], rather than you, will become liable for taxes if you deed your property to them is not true. First, the Internal Revenue Service cautions that deeding your property to one of these companies does not constitute a bona fide sale. Rather, the IRS views the company as an agent, working for a fee, to help sell the property. And even if the IRS accepted it as a bona fide sale, the transfer of the property would constitute, for income tax purposes, a sale by you to the company, resulting in tax liability to you, not to the company as the buyer. Furthermore, if you underpay your income tax because of this plan, the IRS says you will be liable for the tax deficiency plus interest and penalties."(snip)

    from


    The basic principle involved is similar to 401k borrowing - you can only avoid paying the 'deferred' taxes due on withdrawn money if you actually pay back the money you borrowed before the 'contract' expires. Simply withdrawing the money from a tax-deferred investment, be it via a 401k withdrawl before age 65 or via a home equity loan / refinancing that goes into foreclosure before the 15-20-30 year loan term expires, brings all of the deferred taxes due on the 'equity' you converted into cash immediately back into play.

    The tax consequences of falling property values and forced sales are the subject of this California based realtor's article --> Thus more than a few Californians are discovering to their dismay that in buying a house in the 90's for say $200,000, by seeing real estate values appreciate to $600,000 over the course of ten years, by refinancing for $500,000 and extracting $300,000 in home equity a couple of years ago to be spent for various items other than home improvements, and who are now facing foreclosure or a 'short sale' as a result of job loss / outsourcing / ARM interest rate increases or whatever, that the $300,000 in refi home equity 'cash-out' which they have already spent on new cars / fantasy vacations / 60" plasma TV's / whatever now immediately converts to taxable income as a result of the foreclosure or 'short sale' - taxable income which they must now immediately declare to the IRS (actually their mortgageholder will automatically report it to the IRS) and pay taxes on !

    The IRS considering 'debt forgiveness' to be taxable income is yet one more reason that some 'insolvent' former homeowners may elect to simply quit working and remain 'insolvent' for the rest of their lives !
    ~
    Last edited by Melonie; 12-24-2006 at 01:52 PM.

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