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?
