Coile, chairman of Rockville-based multiple-listing service MRIS, writes an occasional column analyzing the local housing market.
Unless you’ve been living under a rock, you’re probably aware that since hitting a peak in 2007 home prices in our area declined and have been climbing back over the last couple years.
Many homeowners who bought at the peak of the market borrowed 100 percent of the sale price or close to it. As prices plunged, they went “upside down,” meaning the amount they owed on their mortgages far exceeded the value of their property. Some of these homeowners are still underwater and pondering how to get out.
The recent government shutdown has eclipsed some very crucial news for those in this situation. The Mortgage Forgiveness Debt Relief Act of 2007 sunsets at the end of December, just two weeks from now. Congressional action will be required to extend it, and by all indications, with everything else currently on Congress’s plate, it is not looking likely.
Why is this such a big deal? The Mortgage Forgiveness Debt Relief Act provides an enormous benefit to some homeowners engaged in so-called “short sales.” In a short sale, an underwater property is sold at fair-market value and the current mortgage holder agrees to release its lien on the property without having the mortgage paid in full. The discrepancy between the amount owed and the payoff is simply forgiven, or wiped off the books.
While not a free pass, the Mortgage Forgiveness Debt Relief Act is a tremendous help to some short sale sellers. It was passed to provide relief to insolvent homeowners caught in the global economic meltdown by not taxing forgiven debt as income. If the act is not renewed, the amount of the mortgage that isn’t paid back to the bank will, as of January 1, be considered income and taxed just as if it had been received in cash.
How does that play out in practical terms?
Let’s say you bought a house for $500,000 in 2005 with 100 percent financing. In 2006, you got a $100,000 home equity loan to build an addition and remodel the kitchen. Between the two loans, you currently owe $575,000, but you can only sell your home for $400,000, of which the lenders receive $375,000 after expenses.
Surprise! For a short sale that settles after the act expires at the end of the year you may receive a 1099-MISC for $200,000 in “income” and will owe federal and state income taxes on that amount.
In light of this, if you are currently underwater on your mortgage, you essentially have four choices:
• Get going: If you are a short sale seller, speed is life. If you are already under contract to a buyer, it’s time to jump into high gear. Provide any requested documentation from your mortgage holder today. As in, tonight before you go to sleep.
Seriously. If you don’t get the transaction closed before midnight on Dec. 31, you could be responsible for tens of thousands of dollars in unwelcome income taxes.
• Go faster: If you are not already in a short sale transaction, that ship may have sailed. Short sales take time to process, even once you’ve found a buyer, and the clock is ticking.
That said, if you do want to give it a try you can have a big impact on the timeline by committing to moving quickly and by working with an experienced team of professionals. First find an agent well-versed in short sales, consider bringing in an attorney to help negotiate with your lender and seek competent tax advice. Put your home on the market immediately. Start communicating with your lender in parallel with marketing the property for a buyer.
• Make a call: If you find yourself in a financial tough spot and can’t see a way to ever bring your mortgage right side up, then you should really talk with your lender. You may not be thrilled with them, but you really do have a common interest in finding some sort of resolution.
The lender would much rather work with you to resolve the situation than have to go through the lengthy and expensive foreclosure process. If you start now, perhaps you can negotiate a deed-in-lieu of foreclosure before the end of the year. Don’t do anything without competent legal advice, but a simple call to the bank will get things rolling.
• Hunker down: It’s possible that this is all going to be okay. In the past year in the Washington market, prices have rebounded and are up 9.6 percent through November compared to the same period last year, according to RealEstate Business Intelligence, a subsidiary of MRIS.
In our heavily congested metro area, land and housing are finite commodities, and if you wait long enough — maybe even years — prices will definitely rise.
Over the course of a 25-year career in real estate, I’ve watched the market go through many, many cycles. My sense is that we’re going to be okay in the long term.
It may take years, but if your home currently meets your family’s housing needs, just hold on. If you’re patient, it should recover its value over time.