Foreclosure can be costly
Earlier this month, the attorneys general throughout the nation announced they are investigating foreclosure practices.
Why? There have been questions raised about the adequacy of paperwork filed in foreclosures and whether lenders have done what is required of them – giving people some time to make good on their payments after their loans go into default. Also, the attorneys general are taking a look at the process through which a mortgage is transferred from a lender to a secondary servicer that buys loans and collects on them.
Deputy Arkansas Attorney General Jim DePriest said the long and short of it is that borrowers may have a lot of defenses they can raise when served with a foreclosure notice. He pointed out that the investigation of foreclosure practices will undoubtedly take a long time and the borrower who chooses to do nothing when served with a notice shouldn’t sit back and wait for the results of the probe – a foreclosure notice is still to be taken seriously and borrowers wanting to keep their homes are advised to take action.
Mortgage Bankers Association of Arkansas President Justin Moore said it is a very good idea for borrowers to avoid foreclosures. He said there has been a trend for borrowers to simply turn their keys over to the lender and walk away from the loan – to simply let a house go through foreclosure or a short sale. He said borrowers don’t understand the full ramifications of letting that happen.
For one thing, a foreclosure will ruin a borrower’s credit, making it difficult or impossible to take out a mortgage, purchase a car or generally buy anything on credit for as long as ten years.
Second, a borrower who lets a home go through foreclosure or a short sale could face further collection attempts or problems with the IRS. Let’s say, for example, a homeowner is struggling with a mortgage and gets served with a foreclosure notice.
The homeowner opts to do nothing and simply lets the bank take the house. The homeowner owes $150,000 on the mortgage and the bank sells the home at auction for $100,000, leaving the borrower owing $50,000 on the original note.
The bank can do one of two things and both of them could spell trouble for the borrower. The bank might choose to bring an action against the borrower to collect that $50,000 plus legal fees and costs. Should the bank prevail, it could choose to garnish the borrower’s wages and take up to 25 percent of every paycheck until the debt is paid.
The bank might choose to simply write of the $50,000 owed on the mortgage. That sounds great for the borrower until one considers that $50,000 will count as income. That’s right – the borrower could be taxed for that income, leaving a hefty tax bill that the IRS will make sure it collects.
Moore said a borrower who sells a home through a short sale could be looking at a similar set of problems. A short sale means, essentially, that a bank agrees to sell a home for less than what is owed on it. The bank might choose to write off the debt, collect what is owed or require the borrower to take out another loan to cover the debt.
Borrowers can potentially avoid those problems if they choose to fight foreclosures. According to DePriest, borrowers may have some very solid defenses to raise when facing foreclosure. However, it is up to them to raise them in court – doing nothing could mean the foreclosure will go through without a hitch, leaving a borrower with no home, bad credit and some potential liabilities in the future.
Column written and distributed to Arkansas publications on behalf of the Mortgage Bankers Association of Arkansas.
Benton resident. Rogue journalist. Recovering attorney. Email = Ethan@FirstArkansasNews.net.