How to stop the drop in home prices…

…I agree with Professor Feldstein that principal reductions are the only way out.  I don’t agree this translates to an increased tax burden.  This increase would only happen if the government paid lenders the difference between the market and mortgage values.  Through the bailouts, that’s effectively already occurred.  There’s no reason not to mandate the reductions and impose the “loss” (quotes for a reason) on the banks.

There are some who take issue with the Professor’s statement that most mortgages are “effectively” non-recourse.  The fact is that most states are recourse – they can sue you for the difference in sale and mortgage value.  The reality, which I think the Professor is alluding to, is that they will not unless you have a significant amount of assets.

That said, if you are doing a short sale or a deed-in-lieu under no circumstances…let me repeat that…UNDER NO CIRCUMSTANCES should you trust that to be the case.  You should absolutely require the bank to put in writing that they agree to a “full release of liability from the lien.”  Further, require them to issue a 1099C cancelling the debt.  Failure to do so means they can pursue you for the aforementioned difference in sale and mortgage value.  Their promises are worth “poo.”  Get it in writing and filed with the IRS.

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