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Foreclosure 'Strategy'

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Posted On: 02/17/2010

QUESTION: What's a 'strategic' walk-away?

ANSWER: The Chicago Booth/Kellogg School Financial Trust Index says more than 25 percent of all foreclosures are strategic walkaways - "strategic" meaning that owners actually have the financial means to make their payments. Given that more than 300,000 foreclosure filings have been going out each month according to RealtyTrac.com, we're talking about a very large number of owners.

QUESTION: I'm likely to lose an investment property to foreclosure. I bought it at the worst possible time, and the value has gone down ever since; I'm now way underwater with it. Is the money I do not repay to the lender regarded as taxable income? Someone told me the Mortgage Debt Relief Act of 2007 only applies to one's primary residence and therefore any investment mortgage debt not paid is taxable. Is this right?

ANSWER: Yes. The IRS says "the Act applies only to forgiven or canceled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately." Please see a tax pro for specifics.

QUESTION: If I get a loan modification will that lower my credit score?

ANSWER: If you're facing foreclosure then you can pretty much bet your credit has already been hurt.

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If you're current on your payments but can't get a new, lower cost mortgage because the equity in your home has fallen significantly then your credit score will be reduced with a modification. However, the bigger issue is that with a modification you may be able to substantially reduce your monthly mortgage payments so taking a credit score hit for several years may be worthwhile.

For details, speak with your lender regarding its specific credit reporting policy.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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