Shared Appriciation Mortgage Modifications
Recently, at least one major mortgage servicer, has begun sending select borrowers a “Shared Appreciation” Mortgage Modification. As with every other mortgage modification offer, my clients have all seemed very hopeful that this modification is exactly what they were searching for so they can save their houses without the need of filing for bankruptcy.
The terms in the “Shared Appreciation” modification are quite simply atrocious. It is hard to imagine any factual scenario where an agreement like that may ever be beneficial to individuals struggling to pay for their mortgage. Probably the most egregious part of all is that there is the possibility that these agreements will create significant tax liability for the debtors and that nowhere in the modification proposal does it warn of this. Instead, in the very last page of the agreement, it advises the borrower to ask somebody else about what the income tax consequences will be.
The fundamentals in the “Shared Appreciation” mortgage are quite simple. The mortgage company agrees to reduce your mortgage balance to the present value of the residence. The modification period that I saw was for 3 years. The total amount reduced is referred to as the “deferred amount.” Over a period of 36 months, if the borrower makes all monthly payments on time, the mortgage company will forgive 1/3 of the deferred amount. At a later point in time the borrower decides to sell the home at an “arms length transaction” as solely determined by the mortgage company, the mortgage company will take 25% of the appreciated value over the worth of the note when the home is sold.
Focusing strictly on the income tax consequences, this proposal looses any luster that it might have had. At the end of each year of modification period, 1/3 of the balance of the deferred amount is permanently forgiven. The problem is that the amount forgiven is considered income for purposes of your Federal and, more than likely, State Income Taxes. The agreement does not mention this anywhere.
Take the example of the case that I reviewed the other day. The “trial period” modification would have reduced my clients monthly payment by less than $50. Being that there would be an approximate $100,000 of a deferral, the amount forgiven at the end of each year would be $33,333.33. The $33,333.33 will be reported to the IRS as income on a 1099C. After we did our calculations, the modification that was proposed would have created an income tax liability on the borrower in an amount of no less than $3000. However, the amount would likely be significantly higher. The very most saved by my clients on the proposed modification was less than $600. So the offer basically creates a bill of no less than $3,000 and a benefit of less than $600. If everything went right and the clients had a very good year, they would still be $2,400 in the negative.
After reviewing other “shared appreciation” modification agreements, I found that 100% of the modification offers created tax liability far in excess of the amount saved. Although I haven’t seen many, I have yet to see one that will give any meaningful relief to the debtor.
The Law Offices of Michael A. Dye, P.A. is a bankruptcy law firm. Michael Dye is a bankruptcy attorney located in Fort Lauderdale, Broward County, Florida. The firm is a federal debt relief agency and helps individuals file for protection under the United States Bankruptcy Code. For more information, please call (954)745-5848 or visit http://BKBroward.com.