Forgive and Forget

The Real Estate world dodged a bullet when the “Fiscal Cliff” fiasco finally wrapped up, extending the Mortgage Forgiveness Debt Relief Act, but damage was done nonetheless.

The Mortgage Forgiveness Debt Relief Act expired the last day of last year, and the assurance of its renewal and extension- a footnote in the Congressional negotiations- was an unknown. That unknown made a lot of people nervous. Sellers of short sales weren’t sure if they would be able to walk away debt-free or not, so some sellers cancelled their sales when the expiration date of the Act loomed near.

Deciding to cancel a short sale is no small decision to make, for two reasons: One- when a short sale is cancelled, the mountain of paperwork required by the bank is generally tossed out, and the laborious process must begin anew. Two- when the short sale is cancelled, the bank might go ahead and foreclose, leaving the seller and the buyer out in the cold.

Jake and Cindy Blackeren made the call to cancel their short sale on Christmas Eve. “We blew it,” said Jake. “Now we’ll probably lose the place in foreclosure. The bank is playing hardball. The short sale negotiator we were working with won’t take our calls, and the foreclosure department is moving ahead.” The Blackerens have another buyer, and their realtor has sent the contract to the bank, but to no avail. “They told our realtor the short sale negotiator sent our package to the foreclosure side,” said Cindy. “If we’re foreclosed on, our credit is worse, and it will be longer before we can qualify to buy again.”

The Mortgage Forgiveness Debt Relief Act has been extended one more year- through the end of 2013. The Act was created to cancel any taxes a homeseller would owe on the amount of the loan forgiven by the bank in a short sale. Without the Act, federal law counts forgiven debt as income, taxed accordingly.

“We simply couldn’t afford to take the chance of facing a tax hit this year. We’re struggling to keep up with our bills as it is,” said Cindy.

Short sale sellers are back in the saddle for now. It’s a rough ride, though, and watch out for those cliffs.