Wednesday, December 13, 2017

Assessing the Risks of a New Foreclosure Crisis

The foreclosure crisis that began in 2007 has now been over for a number of years, yet we have continued to discuss commentators’ concerns that the foreclosure crisis might not, in fact, be over entirely. Many homeowners in the Chicago area remain at risk of losing their homes due to their inability to make monthly mortgage payments on time, and many of those homeowners are dealing with complicated home loans that contain confusing terms. According to a recent article in Forbes Magazine, we may be at risk of another foreclosure crisis. Are the underlying reasons the same this time around? What can we do to prevent another consumer crisis?
Recalling the Reasons for the Housing Bubble Burst in 2007
As the Forbes article explains, most of us directly connect the foreclosure crisis that began about 10 years ago to the housing bubble burst and the subsequent “Great Recession.” What caused the foreclosure crisis the bursting of the housing bubble? In short, “for years beforehand, lenders had been giving out riskier and riskier mortgages, including waiving or lowering down payment requirements.” In addition, subprime mortgage resulted in numerous homeowners finding themselves underwater, or owing more money on their mortgages than their houses were actually worth on the market, meaning that even if they were to sell their properties, they would owe more money to the bank than they could afford.
Are we looking at similar conditions now, in 2017? The article suggests that “low- or no-down-payment mortgages may be making a comeback.” In other words, more homeowners that cannot actually afford to make monthly mortgage payments may be getting home loans that they could be at risk of defaulting on months or years down the road. Indeed, “several banks are now offering various zero-down mortgage programs or down payment assistance to higher-risk borrowers.” But the problem is not exactly the same as it was in the early 2000s. In large part, adjustable-rate mortgages have been linked to the first foreclosure crisis. Now, a different kind of loan may be responsible for consumer difficulties.
Down Payments Taxed as Income
One of the types of down payment assistance that is gaining popularity is a type of home loan that involves the bank providing for a 3% down payment and, in some cases, closing costs. While this deal might sound good to struggling families who want to buy a house, this kind of down payment assistance has hidden costs that many borrowers might not fully grasp. Specifically, “the down payment and closing costs can be taxed as income by the IRS.” What does this mean for the average low-income or moderate-income borrower?
If a 3% down payment and up to $3,500 are taxed as income, that could mean homebuyers could end up in a higher tax bracket, owing significant taxes as a result of making the decision to buy a home. For example, imagine that a borrower wants to buy a $200,000 home. A 3% down payment would total $6,000, and add the $3,500 closing costs to that amount for a total of $9,500. Now, the borrower would be taxed on that amount, adding thousands of dollars in the total tax owed for the year. For many low-income and moderate-income borrowers, this kind of tax bill could be debilitating, adding to additional debt issues.
Contact a Foreclosure Defense Lawyer in Oak Park
Do you have questions about current mortgage offers and foreclosure risks? An Oak Park foreclosure defense attorney can assist you. Contact the Emerson Law Firm for more information.
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