Letter Re: The Hazards of Even Non-Recourse Loans

Just a heads-up, lots of folks in place like California where non-recourse loans are mandated by law (at least for homes) feel pretty smug, thinking that even if they get upside down on a mortgage they can walk away without repercussions. Bad news: the IRS considers the amount of the loan “forgiven” by the bank to be income. That means, to use California numbers, if you owe $500,000 on a house which sells at foreclosure for $200,000, you now owe income taxes on your $300,000 in income you just “received”.

Just a quick “report from the ground”, I live in western Oregon and I work closely with the real estate market. Homes are still selling here and there, but the inventory is building quickly and homes that last year would have sold in a week are sitting on the market for months, plus we’re starting to see some serious price reductions (this is in a very rural community, not one of the big cities). The biggest local builder just sold off his entire inventory of buildable lots and quit building “spec” homes, folks in the business can definitely tell how the wind is blowing. – Bill in Oregon