Regarding Foreclosure

[opebo]

Perhaps this question aught to be in the legal section, but it is timely in discussion of economics during this depression:

When a foreclosure is accomplished by the 'lender', does his seizure of the property under lein constitute his full recourse?  Or can he attach the income and other property of the debtor?

For example, lets say you have a house upon which you owe $500,000, but also own another property/stock/bond/whatever, worth $500,000.  Let us also say for argument's sake y our income is considerable.. say $100,000/year.  The bank seizes your house and sells it for $50,000, leaving $450,000 'owed', but with no direct or specified lein against either your income.  Does the debtor still owe the $450,000? 

I'm just not clear what is promissed in a 'promisory note'.

[Swing low, sweet chariot. Comin' for to carry me home.]

I don't think so.  I believe the bank can only take the house that is being foreclosed.  And I have heard the bank can NOT sell it for a profit.

That keeps foreclosure being undesirable to the banks.

[opebo]

I don't think so.  I believe the bank can only take the house that is being foreclosed.  And I have heard the bank can NOT sell it for a profit.

That keeps foreclosure being undesirable to the banks.

Actually I just read up on it a bit more.. it seems that if it is a non-recourse loan the bank cannot pursue the debtor's other assets or income.  Most but not all home mortgages are this type, but many other types of real estate loans are not.

[Swing low, sweet chariot. Comin' for to carry me home.]

I don't think so.  I believe the bank can only take the house that is being foreclosed.  And I have heard the bank can NOT sell it for a profit.

That keeps foreclosure being undesirable to the banks.

that was a messed up sentence

should have said...

That keeps foreclosure from being desirable to the banks.

[Snowguy716]

You are not responsible for the excess money in a non-recourse loan; however, this is still very bad for the borrower, because the difference between the bank sale and the loan value is considered normal income to the borrower and is taxable.

In this case, the person would have $550,000 of taxable income that year even though he only made $100,000 from his job.

THat was poorly worded:

Basically for the borrower, you take the value of the loan ($500,000) and subtract the amount the bank sold the home for ($50,000).  The resulting amount is considered as part of the borrower's income even though the borrower never received that cash... so you're adding $450,000 to your personal income for hte year and you have to pay taxes on that.

It would be a crappy situation, which is why a lot of people have many problems even after they negotiate new terms with their lender to avoid being kicked out of their home.  The family is still partially responsible for the difference between the old loan and new loan because that amount is considered taxable income.

[Swing low, sweet chariot. Comin' for to carry me home.]

Basically for the borrower, you take the value of the loan ($500,000) and subtract the amount the bank sold the home for ($50,000).  The resulting amount is considered as part of the borrower's income even though the borrower never received that cash... so you're adding $450,000 to your personal income for hte year and you have to pay taxes on that.

It would be a crappy situation, which is why a lot of people have many problems even after they negotiate new terms with their lender to avoid being kicked out of their home.  The family is still partially responsible for the difference between the old loan and new loan because that amount is considered taxable income.

!!!  Is that true?!  are you sure? 

[Sam Spade]

Opebo - You're essentially correct.

If the loan is non-recourse, the lender can't go after your other assets (or garnish your income).  If the loan is recourse, the lender can go after all that stuff (they have to file a judgment first, but yes).

In some states, home mortgages are required to be non-recourse, as memory serves me.  I have no clue about where you are.

As to Snowguy's point, I used to know the answer to that question.  I need to go reexamine the Code, but it sounds plausible.

[??????????]

They do that to when they repo your car. They sell it for whatever they can get and then go after you for the rest.

[Sam Spade]

My memory is getting bad.  Anyways, Snowguy is right.  Go examine the Crane doctrine.

[Sam Spade]

They do that to when they repo your car. They sell it for whatever they can get and then go after you for the rest.

Those type of loans are almost always recourse loans.  Read the fine print.  It's always there.

[bullmoose88]

Can't the bank get a deficency judgment for the difference of the amount owed and the amount received for the property sold at auction?

[Sam Spade]

Can't the bank get a deficency judgment for the difference of the amount owed and the amount received for the property sold at auction?

I'll make sure, but I'm almost certain that's only with recourse loans.

[opebo]

Can't the bank get a deficency judgment for the difference of the amount owed and the amount received for the property sold at auction?

I'll make sure, but I'm almost certain that's only with recourse loans.

Yes, that's only with recourse loans.  Apparently the only common typeof loan that is a non-recourse loan is that on the primary residence (and I have no doubt that this is an archaism of liberal days and unlikely to survive much longer).

As for me I'm in Thailand and can never borrow any money due to the most frightfully bad credit imaginable - I'm just asking for people I know.  But it is interesting to think that all this effort to 'make people pay back' loans is so terribly counterproductive, particularly in an economic downturn.  Especially when the easy solution is so ready at hand.

[RomneyGekko Situation Hairgel]

You are not responsible for the excess money in a non-recourse loan; however, this is still very bad for the borrower, because the difference between the bank sale and the loan value is considered normal income to the borrower and is taxable.

In this case, the person would have $550,000 of taxable income that year even though he only made $100,000 from his job.

THat was poorly worded:

Basically for the borrower, you take the value of the loan ($500,000) and subtract the amount the bank sold the home for ($50,000).  The resulting amount is considered as part of the borrower's income even though the borrower never received that cash... so you're adding $450,000 to your personal income for hte year and you have to pay taxes on that.

It would be a crappy situation, which is why a lot of people have many problems even after they negotiate new terms with their lender to avoid being kicked out of their home.  The family is still partially responsible for the difference between the old loan and new loan because that amount is considered taxable income.

I used to deal with this a lot when I worked at the IRS.  Most Americans have NO idea they owe taxes on debt forgiveness.  Some people were excessive and yeah should be punished this way, but I've also come across people who didn't have sh**t for income and still got hit with the tax bill.  I've even had a few cases where they didn't even make enough earned income to file, but got socked with debt forgiveness.  It's like getting blood from a stone.

[opebo]

I used to deal with this a lot when I worked at the IRS.  Most Americans have NO idea they owe taxes on debt forgiveness.  Some people were excessive and yeah should be punished this way, but I've also come across people who didn't have sh**t for income and still got hit with the tax bill.  I've even had a few cases where they didn't even make enough earned income to file, but got socked with debt forgiveness.  It's like getting blood from a stone.

What is usually done with these people?  Are they allowed to pay it back bit by bit the rest of their miserable lives, or are they sent to the Big House to be buggered?

[RomneyGekko Situation Hairgel]

I used to deal with this a lot when I worked at the IRS.  Most Americans have NO idea they owe taxes on debt forgiveness.  Some people were excessive and yeah should be punished this way, but I've also come across people who didn't have sh**t for income and still got hit with the tax bill.  I've even had a few cases where they didn't even make enough earned income to file, but got socked with debt forgiveness.  It's like getting blood from a stone.

What is usually done with these people?  Are they allowed to pay it back bit by bit the rest of their miserable lives, or are they sent to the Big House to be buggered?

Many different things could be done.  If the situation is that bad and it's documented, it could just be written off.  Assets could be levied, wages garnished, etc.  I can't give an exact answer because each case is unique.

[angus]

I'm just not clear what is promissed in a 'promisory note'.

Ours was the property.  The house, the lot, the driveway, and all permanment fixtures and improvements.  I suppose it may not always be the case, but I suspect that this is normally the case. 

In any event, you should read anything that you sign, so you can be certain of what you are promising as collateral.  We signed about a million papers one morning.  The several people in the room seemed a little miffed by our desire to read every document we signed--making me think that these closures usually are fifteen-minute meetings but ours went an hour and a half--but I'm a big fan of reading before signing, and my wife is even more particular.  It was almost funny, at times, to catch a glimpse of the incredulous look on the faces of the real estate agent, the notary, the county official, and the banker, during the process. 

In my estimation it is even more bizarre that in our culture they'd expect anything less.  But the fact that they found it odd that we'd read what we sign instead of relying on their synopses just makes me realize why so many folks are in the terrible mess that they're in.  ("...and this one just says that you agree to check with the association before you build a pool...", "...and this one just says that you will place your garbage can to the left of your drive way, no less than three inches from the curb and no earlier than 7 pm the night before the pickup day...", "...and this one says that you'll not put up a trailer or any kind of mobile home in the yard...", "...and this one says that you'll keep your grass no shorter than one and seven-eighths of an inch and no longer than four and one-quarter of an inch...", "...and this one says you'll only attempt to conceive children during the first four hours of the third full moon of every second year which is divisible by seventeen, provided that it falls on a monday or a thursday...").

[opebo]

In any event, you should read anything that you sign,

Oh, well I never sign anything, as any potential creditor is away my promises are worthless.  But I'm sure you're right about serfs in general.

Your description of the process was very interesting, and one reason I think that the courts should not take seriously 'contractual obligations' incurred by ordinary people.  They should always be assumed to have been duped by the 'professionals'.  It really is a safe assumption.