My Quote in Washington Post Elaborated: Pitfalls of Mortgage Cancellation Tax Relief Act, H.R.3648

Below is my quote in today’s Dec 7th 07 The Washington Post story, “Those Who Avoided Risk Call Plan a Raw Deal

  • [Lead up to quote; red emphasis added]… The aggravation has been building for a while and stretches beyond the agreement announced yesterday. For instance, under one congressional proposal, there would also be a break for short sales — that is, when owners sell a home for less than is owed on the mortgage and the lender forgives the difference. Now, the amount that’s forgiven is regarded as income, and the seller owes tax on it. The proposed legislation would forgive that tax.

  • [My quote] Without the threat of the tax, sellers might not be as reluctant to consider a short sale, said Northern Virginia real estate broker Frank Borges LLosa. He predicted the number of such [short] sales could double. 

    Maybe Congress should allow a 50 to 75 percent break instead, he said.I am not saying not to help out these people,” LLosa said. “It’s very sad. I have spoken to people who have lost their homes. I just don’t know if a bailout is the right thing for the marketplace as a whole.”

I’ve discussed Short Sales previously in “SOL” Homes: Virginia MLS Foreclosures, REO, Short Sales Defined, but here is a quick recap:


Short Sale: Usually a Realtor MLS listed house that is heading toward foreclosure. The deal requires 3rd Party Approval (the bank) because the seller is trying to sell for BELOW the loan amount and is hoping that the bank will approve the deal, and eat the loss. Only about 5-15% actually get to closing since banks oftentimes say, “no” (blog post coming soon on this, so make sure you subscribe Update: Here it is).

Example of a regular Upside Down Sale: (loan amount is over the sales price)

  1. 2005, $500k home was bought with a $475,000 loan and $25,000 cash (5% down).
  2. 2007, home price drops to $450k.
  3. To sell at $450k, seller must bring a $25k check to closing.

Example of a Short Sale:

  1. 2005, $500k home was bought with a $475,000 loan and $25,000 cash (5% down).
  2. 2007, home price drops to $450k.
  3. To sell at $450k, they show the contract to the bank and ask for a short sale approval.
  4. Upon rare approval, the bank eats the $25k.
  5. Seller still gets a taxable 1099 for bank’s loss, also called Phantom Income (at least for now).
  • The benefit for the seller is not having a bankruptcy and or foreclosure, which is worse for their credit.

  • The benefit to the bank can be lower foreclosure, legal and remarketing costs.

For those that they can’t afford an Adjustable Rate Mortgage that is resetting much higher, this can be the savior, with the exception of having to deal with the Phantom Tax. But now the “Mortgage Cancellation Tax Relief Act, H.R.3648” wants to remove the 1099 tax bill.


This sounds great and dandy for a polititian to “keep from kicking people that are already down,” but if you remove the penalty for doing a short sale, this will lead to… MANY MORE short sales.

More Virginia short sales will drive down prices, thus hurting others in financial trouble, and their neighbors that didn’t buy risky loans.

And regarding any legislation to FREEZE rates for distressed homeowners, Freeze Interest Rates? From Bankruptcy to Profit?

-Written by Frank Borges LL0SA- Broker (please report typos)

Sneak Preview: My next blog post will talk about FAKE Short Sale prices, and how you can lose $10,000 as a seller competing against these oftentimes fake listings, and how only 5-15% ever get to closing.

  • 7
  • December
  • 2007

20 Responses to “My Quote in Washington Post Elaborated: Pitfalls of Mortgage Cancellation Tax Relief Act, H.R.3648”

  1. Rosemary Brooks -Mother & Daughter (866)-750-8282 says:

    Consult a professional tax person, real estate attorney or the sort and that you will know what is best for you. Being in a short sale is not something people are standing in line to do, this is something that is forced upon due to a hardship that you are experiencing. I think there should be relief somewhere in this vicious cycle to help the owner start over and not just fall below the ground just because the economy or a hardship put them in a bad place.

    Families having to move during the holidays, winter months or any time is bad news. If they could not pay their house note, how in the world will they be able to pay their tax bill?

  2. Brian Block -- Northern Virginia & D.C. Real Estate says:

    Frank, I agree with your thoughts here. I’m sure there can be some compromise to help these people in dire financial situations while still maintaining decent home values. Interesting stuff, especially since I may have a short sale listing coming up pretty soon.

  3. Michael Eisenberg, Bellingham Realtor says:

    I am not to sure I agree here Frank, You have someone who can’t afford to stay in there home so they have to take give the home back and pay a penalty to the government for this privilege, this is only going to put them further in debt.

    I don’t see this leading to more short sales as they aren’t going through this short sale process to save any tax dollars, they just can’t afford the payments on their home.

  4. FRANK LL0SA Va Broker- says:

    Hello Michael,

    Thank you for your thoughts. If there is no ramification for dumping a house $20,000 lower versus $50,000 lower (as there is now), this will result in LOWER prices.

    I get it, that they can’t afford it, and will get deeper into debt, but this bailout will make it WORSE for everyone else.

  5. Rick Turner says:


    Right on! Shame on the buyer who wasn’t smart enough to realize he or she couldn’t afford the place at the outset…who now penalizes me (who did do the math) because of the bailout, and consequently, my property value is deluted.

  6. Kevin McGrath - says:

    That was my thought exactly. 5 years – that would make it manageable. Now – how do we get that idea out there?

  7. Stella Barbour - Real Estate Agent - Serving Northern Virginia says:

    I thought that you can already pay if off within 5 years??? Maybe I was misinformed. I think that the tax relief should be by individual basis. If I have a client who is doing a short sale due to a situation that was unexpected such as severe or terminal illness or child’s terminal illness, (which I have had clients with this situation, even with health insurance they are paying bills over $30K and used equity in their homes) it still prevents the foreclosure and the forthcoming bankruptcy and other debt gets paid instead of easy way out with a Chapter 7, then it should be considered. What about the client who was never told what ARM is??? Do they have to suffer the consequences even though they were not educated or explained anything in the mortgage process and they trusted their mortgage broker (who is now being investigated by Feds). I really think that certain individuals should be able to “be approved” for the tax relief. Maybe a process that if the lender, agent, appraiser, and/or any other professional was involved in their deal and they are being convicted of fraud, then those individuals should have the relief and more.

  8. E Jeffrey Dolfinger says:

    IRS form 982 boys and girls! There is no phantom taxas long as the borrower is insolvent and can prove it in part or whole and the amount of tax due is directly related to that. Bankruptcy is defined as financial insolvency, so there is no tax if a chapter 7 was filed and discharged. If a bankruptcy was not filed a foreclosure/short sale situation is a pretty good start so even a half brained tax person should be able to understand the code and mitigate or redue the burden. You can Google the IRS Code 982. the new bill is just smoke form 982 has been around at least since 95

  9. Harriet says:


    It doesn’t seem ethical to post a house for sale if the seller can’t make up the difference without prior bank approval. It seems as though the MRIS would have an interest in the integrity of the system.

    I also notice many listings that are marked “short sale” in the MLS but aren’t even that. The agent puts in the comments “not a short sale or foreclosure — just a great price!” or something of that sort. That also seems like a misuse of the system.

  10. homeschool4joy says:

    This is an honest question from a newcomer to the area who has been watching the market closely (while renting) for a year and a half. Your examples of short sales are for relatively small increments ($25,000, $50,000) as compared to the short sale listings where we are looking to buy, in Manassas or Bristow. Here, I have seen asking prices $100,000 and even more below what the seller paid a year or two ago. From what I have read here, there is no chance of these short sales ever actually happening, since even smaller differences have such a difficult time. But with the way the market here is headed (tax assessments are expected to be about 20% less than last year, with another major drop predicted for the following year), even a $100K drop would not be enough for us to consider buying such a depreciating asset. So basically, should we not even bother trying to pursue these listings? Or do the special circumstances of this particular local market (almost 18 month inventory, one of the highest foreclosure rates in the state, highest rate of subprime lending in the D.C. area in 2005, etc.) mean that such dramatic numbers might actually lead to a sale?

  11. FRANK LL0SA Va Broker- says:

    Hey homeschool.

    Manassas is unique. It is MUCH worse off versus Arlington. It is similar to Reston (see my blogs on Reston)

    First of all, ignore tax assessments. Consumers latch onto them as some real value of a home. They are to be ignored.

    As for Short Sale homes trying to sell for $100k under the previous purchased price, I’m not saying they won’t take the offer, I’m saying be prepared for a 3-6 month battle of waiting and contracts that never get accepted. You might be the 1 in 20 that gets on to closing, but will you get a “better” deal than a bank owned home or a seller that bought in 1993 for $120,000 that needs to sell? Not necessarily. Look at everything and take the Round Robin approach (see Round Robin blog post)

    As for trying to get another $100,000 off list, have your agent (or us if you don’t have one) do some research. Has one property in the entire zip code sold for $100k under list? My bet is no, and lowballing sounds sexy, but they don’t work in my opinion.

    Even if you have an agent, email me directly if you want to beta my new site that will let you search the MLS specifically for keywords such as Short Sale, REO, bank owned etc.

    But again, many buyers start looking for these homes, but then end up buying regularly listed homes.

    You might be better off with a Bank Owned REO (see the SOL blog), but those are “as-is” and risks with no home inspections.

    Renting is FAR cheaper than buying, even after the tax consequences. If you are trying to make buying cheaper, I don’t see it happening with the current homes, even at $100,000 off the former purchase price.


  12. homeschool4joy says:

    Frank, thank you for taking the time to explain things so well. We have actually seen some houses sell for $100K less than the last asking price, and they were not foreclosures, which is why we were starting to think we would possibly buy when our lease term was up. As a military family looking to settle after this tour, we would love to stop moving all the time. However, more huge homes come up for rent every day at lower rents than we are paying now, so that definitely remains an option. Sometimes I wonder if anyone else notices how crazy things are down in our neck of the woods…time will tell. In any case, I will utilize your search engine and have taken to heart your words of wisdom. Thanks!

  13. Anonymous says:

    Frank you may be right in regards to the parade of horribles, but guess what? That will accelerate the road to affordability for everyone who is currently priced out of the market around here. No need to worry about the taxman, as they will just jack up the rates to insure the hyperinflated property tax revenue of 05-06 stays at that level!!!

  14. Short Stories says:

    I am amazed that everyone feels this way. Aren’t you in real estate sales?

    i am sure you will not post this comment either.

  15. FRANK LL0SA Va Broker- says:

    Hey Short Stories,
    Why wouldn’t I post your comment. I posted a comment the other day from some guy saying I was an idiot.


  16. mpls realtor says:

    short sales are not rare….fyi they are about 50% of what is currently listed on the MLS systems all around the counrty. they were rare in 2003 when the market was booming. now they are a part of everyday life!!

  17. FRANK LL0SA Va Broker- says:

    I don’t think I said they were rare.
    They just only close 1 out of 20 times.
    I call them “fake listings.”

  18. Matt K. says:

    Thanks Frank,

    I wish I had come across your blog a week ago. I am currently waiting on a response to my offer on a short sale in Maryland. I was notified that the house is going to foreclosure on April 1st. Now I see why! I paid for an inspection, which I have to chalk up to live and let learn. I have spent a lot of time reading your blogs. Thanks for the invaluable information.

  19. Anonymous says:

    Yes you hit the nail on the head. Two homes have already gone short in my neighborhood in Michigan. Both owners can afford the house still but bought zero down with arm. Rather refinance they have moved and re-bought new homes on fixed loans and now are selling short since the HR 3648 protects them from 1099’s/tax liability. It’s fast becoming the new fad and will kill those of us with conventional loans and substantial downpays.

  20. […] to remove the Phantom Tax associated with short sales, (see my quote in the Washington post on Short Sale) there is also legislation out there to freeze Adjustable Rate Mortgages for […]

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