Even as the federal government prods the mortgage industry to avoid foreclosures through loan modifications and short sales, California may soon let such help become costlier for borrowers.
Debt forgiven on a home loan is considered income and normally subject to taxation. In 2007, however, Congress forbade the Internal Revenue Service to tax forgiven mortgage debt through 2012. Also in 2007, California adopted a ban on state taxation of mortgage-balance forgiveness through the following year. But the ban was never extended.
In February the state Senate passed a bill that would put forgiven mortgage debt off-limits to state taxation from 2009 to 2012, aligning California with the federal law. But the bill has not passed the Assembly. And Gov. Arnold Schwarzenegger — who is trying to close a $20 billion budget deficit — has said he would veto the legislation because of an unrelated provision that would increase penalties for companies that abuse tax credits.
If the bill were enacted, homeowners could seek refunds for 2009 taxes already paid. But in the meantime state income tax returns are due April 1 — or a penalty will be assessed. The State Franchise Tax Board has indicated a willingness to work with taxpayers to create a payment schedule. However, the state charges interest at a rate of 4%.
"The last thing [homeowners] should have to think about is paying taxes on debt they couldn't repay," state Sen. Lois Wolk said in February when she introduced the legislation. Her district includes Stockton and Tracy, two cities in San Joaquin County that have been hit hard by foreclosures.
Wolk's bill would exclude from taxation up to $500,000 of mortgage debt on primary residences that was forgiven as the result of a short sale or loan modification.
Many defaulted borrowers are unaware that they will be hit with sizable tax bills, according to the California Association of Realtors and tax experts.
"A lot of people just don't have a choice, and though a short sale may be easier on their credit, they still face tax consequences," said Michael Gray, a San Jose accountant who has written on the subject on his blog, taxtrimmers.com.
California "can't afford to" extend the tax credit because of its budget deficit, Gray said. "While legislators hate to be in the position of creating an additional hardship for California taxpayers, they can't make their own budget work because California is so far underwater."
Meanwhile, in Washington, a year after it introduced the Home Affordable Modification Program, the Treasury Department is about to begin offering incentives to lenders to pursue short sales (in which the borrower sells the home for less than is owed on the mortgage and is released from further obligation). The Home Affordable Foreclosure Alternatives program is to start April 5.
Eye on B of A
B of A suffered the new black eye this week when a story surfaced in The Wall Street Journal about a doctor in Phoenix who bought a foreclosed home from the lender, only to find a couple of weeks later that the locks had been changed and the possessions he had started to move into the house removed.
The doctor, Scott D. Kassing, estimated about $2,000 worth of property was removed, according to the Journal.
This article came after a much more widely circulated story a week earlier about a Pittsburgh-area woman who sued B of A for padlocking her home, shutting off the utilities and confiscating her possessions — including her parrot.
According to the earlier Journal article, the lender has since apologized to the woman, Angela Iannelli, saying a third-party contractor was mistakenly sent to the home to change the locks and secure the property. She recovered the parrot several days later.
Iannelli's case is one of 11 wrongful lockouts that have occurred at homes mortgaged by B of A in the past seven months, out of about 112,000 lock changes, the company said. B of A told American Banker this month that those 11 incidents led the company to adopt quality-control procedures to ensure that third-party contractors in the field always seize the right home.
Among the changes, B of A has updated the checklist its contractors use when seizing properties to include a detailed description of the property in addition to the address. And by next month, the contractor also will be required to call the servicer and describe the home to a representative to ensure the descriptions match.
The case of the Arizona doctor was not one of the 11 mistakes previously acknowledged by B of A. It is different from the others since it involved a property purchased out of foreclosure, said B of A spokeswoman Jumana Bauwens. "While many of these improvements were under way," she said, "this latest case made clear the need to extend our process improvement efforts to other related areas of our business, and that is already under way."
Organic Loan Growth
Everyone's talking about the forthcoming sequel to "Wall Street," but the new movie that may best capture public sentiment about the current financial crisis is a work of science fiction.
Early in the trailer for "Repo Men," we see Liev Schreiber playing a smooth-talking salesman (not unlike the one he portrayed in "Glengarry Glen Ross" on Broadway a few years ago). "Let me just assure you," Schreiber tells a prospective customer, "that our credit department will find a plan that fits your lifestyle."
Cue the voice-over from a Cockney-accented Jude Law: "He'll sign it. Everybody signs it. But what they won't tell you is, if you can't pay the bills, some union man will break into your house and reclaim our property." The property in this case isn't a house or a car. It's artificial organs like hearts and livers, which, in the future world the film depicts, are advertised on television for prices in the high six figures. Law and Forest Whitaker play the titular repossession agents, who gun down delinquent debtors and harvest the collateral from their corpses.
Some consumer advocates, at least, are amused.
"The movie takes two of the worst miseries of the current credit system — overwhelming medical debt and rampant foreclosure — and twists them into one debt nightmare," Angela K. Littwin, an assistant law professor at the University of Texas at Austin, wrote Monday on the blog CreditSlips.
One reader of the blog concurred, writing in a comment on Littwin's posting: "It's not much different now. The only difference is, they use harassing phone calls and collection agencies now instead of repo men."
Littwin wrote that the movie could be a sign that "there's enough anger at lenders to, say, get us a Consumer Financial Protection Agency with teeth. … [I]t does suggest that this is our big chance."
Perhaps. The trailer includes a scene where a hapless debtor pleads, "I can pay." "Sorry, that's not my department," Law replies before shooting him (a line reminiscent of Schwarzenegger's old action movies). Not a very flattering depiction of the credit industry.
Then again, some people in the business may appreciate this line spoken by Whitaker's character about the importance of enforcing contracts: "What do you think keeps a world together? It's rules. It's people abiding by the terms of the deals that they signed themselves."
"Repo Men" opens in theaters Friday.
"All the federal government programs [to prevent foreclosures] have failed and they've failed miserably and they're going to continue to fail until you get the banks to write down the principal. And they're not going to write down principal. They're going to make sure their rights are protected. We're postponing the inevitable."
— Richard Smith, president and chief executive of Realogy Corp., which owns the Century 21, ERA and Coldwell Banker realty brokerage franchises.