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California: "Primed" For More Mortgage Mess, And Your Emails

I went on "The Call" with news from a Lehman Bros. report suggesting that the housing downturn will be worse in California than the rest of the country (duh), and that it will be worse than the downturn of the early '90s (uh-oh).

Following the Subprime Fallout
Following the Subprime Fallout

I lived through that downturn, as the defense industry disappeared, the S&L crisis dumped inventory into the market, and the Northridge earthquake convinced some homeowners to just walk away. I bought a house in 1992, and by 1994 it was worth a third less. It did not return to its original value until 1999. It's up 150 percent in value since.

A lot of people lost their homes in the '90s, but most of them weren't 110 percent financed in houses that they couldn't afford to buy in the first place. So the next couple of years are not going to be good, and any bailout plan is going to end up in court, meaning the people who will come out ahead will be the lawyers. Man, I shoulda gone to law school.

My story also showed that far from Wall Street, people on Main Street are really angry. I mean, really angry. The angriest are those who are about to lose their homes. Now, many of them were too greedy or too ill-informed to realize that home prices would not continue to rise 20 percent a year. And some were lied to by the few bad apples in the lending industry. Bottom line, we have a mess.

What we haven't discussed much is what happens when there's a short sale, that is, when a homeowner in trouble gets a bank to agree to let him/her sell the home for less than the mortgage is worth, forgiving that extra debt. We interviewed one woman named Lolita Lierdo, who says her mortgage is worth $570,000, but she can only sell the house for $400,000. If the bank lets her do that, the IRS considers that $170,000 forgiven debt as income, which must be taxed. YIKES! Some of you responded:

From Pat G., a loan officer in Maryland:
"Cry me a river!!! These individuals who are crying the blues are the same individuals who would have told me right up front - if you can't get me into that house, someone else will."

From Craig T:
"Please explain again how Lolita Lierdo is a victim? I don't care WHAT the mortgage people told her - her mortgage is $570k?? Is she kidding? Did she ever think she could handle a loan that size? Right. Because every single one of these jokers was just 'reaching for their American Dream.' Because home ownership is a 'right'...Well, surprise! SOMETIMES YOU LOSE MONEY IN SPECULATION! It's no different than the internet slaughter that took place in 2000 - a game of hot potato with the last sucker holding the bag. I am a professional stock trader, and when I lose money from speculating, I have to take the hit and I blame only myself. In our culture of victimhood, however, this is only the natural progression. It's always someone else's fault, the bank, the government, big oil, the 'man.' Always."

Derek C. MAKES AN IMPORTANT POINT THAT I LEFT OUT regarding being taxed on a short sale:
"It should be noted that IRC Section 108 (a)(1)(B) provides for the 'Exclusion from gross income' and debt discharge if the person is 'insolvent' at the time of the discharge (meaning you don't have to pay taxes if you can prove insolvency). As a CPA and an Enrolled agent I would say that over 90% of the people whom I have seen do a short sale or have their home foreclosed on is insolvent at the time of the debt forgiveness or foreclosure. Therefore it is not taxable."

Mark T. points out that the House has passed a bill to stop the IRS from taxing debt forgiveness in these short sales, though it has yet to be passed in the Senate and sent to the President:
"I am in So Cal and short sales is almost all we do...I do not believe the media knows just how bad this is."

From Clint G:
"OH GIVE ME A BREAK! I just love this stuff when everyone jumps on the band wagon and then they all want to be bailed out."

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  • Based in Los Angeles, Jane Wells is a CNBC business news reporter and also writes the Funny Business blog for CNBC.com.

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