Let's say a dear friend of yours has hit hard times. She lost her job while trying to take care of her sick children. She is behind on her mortgage. Besides, the current market value of her home is less than the money she owes on it. You have a boatload of money which is either going to earn a negative real rate of return sitting in a bank, tied up in treasuries, funding public pensions via muni bonds or in a tanking stock-market. So, you decide to help her out by giving her $100,000.
Now, there is a guy who lives down the street from her. He bought a mini-mansion at the height of the housing boom using no-money down with a variable rate and negative amortization for the first three years or something crazy like that. Say, he now owes about $2,000,000 on that loan. Of course, he could walk away, but he likes his domicile (lesser European monarchs would have considered themselves lucky to have residences of such size and scope).
The bank does not want him to leave either. They'd rather have a steady payment stream than an empty house they can't sell.
So, the guy gets in his Ferrari and meets with the bank rep, and they agree to restructure the mortgage. The bank forgives $1,000,000 of the amount he owes.
Does anyone pay any tax on this? Apparently, the answer is no.
What if this were a small business that owed $2,000,000 and the bank forgave half their debt? Would that $1,000,000 increase in the net worth of the small business have been taxed? My gut feeling says yes, but who knows?
Why should we be asking this question in the first place?
Why, if you borrow money to acquire a house, you are treated more preferentially than when you borrow money to buy a tractor-trailer?
This is especially relevant now that the $1000 down mortgage is back.
Buy new with $1,000 down,the advertisement says, the words resting atop a trim green clapboard house offset by a bright blue sky.The time has come. Stop wasting rent check after rent check and start building equity in your own home. And with only $1,000 down, affordable monthly payments and no private mortgage insurance required, the dream is closer than you think.
It sounds too good to be true. But it is true. This offer does not come from a subprime lender, looking to reel in thousands of unqualified and ill-advised homebuyers, only to slap them with add-ons, fees and variable rates. It is not a teaser or a trick. The advertisement references a program initiated by the National Council of State Housing Agencies and Fannie Mae, the taxpayer-backed, government-sponsored enterprise that buys up mortgages from lending banks.
If nothing else, this will be a great display of the moral hazard created by bailouts of so-called homeowners (you do not own the house until you have paid it off! Is that really so hard to understand?)
Say you were not able to participate in the craziness of the housing bubble. What have you seen since 2007? For one thing, you have seen politicians in a great race to take from your pocket and put into the pockets of people who "bought" real estate and the people who financed them.
The politicians are falling over each other trying to make sure those people do not lose "their" homes.
Are you going to say no when someone backed by a government agency offers you a new house in exchange for $1,000 and "affordable" mortgage payments?
After all, if something goes wrong, you can tell the government to make your neighbor pay your mortgage.