Those Underwater Mortgages: A New Wrinkle — Better Make It Two New Wrinkles

Wrinkle No. 1. The latest dispatch from the underwater mortgage front has it that, evidently stung by criticisms that they are out to make a buck rather than help underwater homeowners in San Bernardino County, the promoters of this scheme have indicated that they mean to expand their program to include not only underwater mortgages that are current (i.e., those where the borrowers continue to make payments), but also those that are in default. See Imran Ghouri, San Bernardino County: Mortgage Aid Expansion, Press Enterprise, September 7, 2012 — click here.

In the meantime the home market in San Bernardino County is improving, making the market value of those mortgages higher as time goes by, which may make for interesting date-of-valuation problems. This may make a lot of new home buyers cautious about when they’d finally be free of their mortgage, as this is probably one of the biggest financial commitments a person can make in their life. This is where tools like Mortgage Calculator can be of use, as they can provide an estimated value for monthly and yearly costs of the mortgage, which can be used to deduce when they’d be able to pay off the entire amount they owe.

Wrinkle No. 2 . Everybody (and that includes us) talking about this problem has been so busy going on about the novelty of it all, and about the tricky valuation problems that ascertainment of just compensation in these cases would pose, that no one has been paying attention to existing albeit temporary federal legislation (enacted in 2007) suspending the tax liability of homeowners who receive reductions (of up to $2 million) per household in their outstanding mortgage debt. And that legislation is set to expire at the end of this year about three months from now. There is talk of extending it, but so far at least, it’s talk. There is no guarantee that such an extension will be enacted.

What that means is that if the condemnation of underwater mortgages proceeds and loan balances are reduced as proposed, that may result in substantial tax liabilities being imposed on those underwater homeowners whose mortgage balances are reduced in this fashion. See Jim Puzzanghera, Debt Relief May Bring a New Pain, L.A. Times, September 7, 2012, at p. B1.

Stay tuned.

This post was edited on September 7, 2012