Tax Lawyer's Blog

There is an epidemic of blame shifting in the housing crisis.

People who knew or should have known that they would not be able to honor the terms of the mortgage notes they signed when they expected housing values to rise are, now that housing prices have declined, attempting to shift the blame to their lenders for giving them the loans in the first place.¹

Joe Kristan tells us about a recent Tax Court case where the taxpayer went as far as accusing his lender of stealing his property through the foreclosure process:

With the ongoing wave of foreclosures, it’s not surprising that folks who have lost their houses are trying to find a tax break for it. A couple in Tax Court yesterday lost an attempt to call their foreclosure a “theft loss.” From the opinion:

The record demonstrates that the foreclosure and sale of the
residence were properly executed within the full force of California State and
Federal Law. The legality of the foreclosure was confirmed by multiple sources,
including the Office of Thrift Supervision and the Office of the District
Attorney for Riverside County. In their brief it appears that petitioners are
alleging that recording errors occurred during the foreclosure procedure that
constituted criminal activity. However, petitioners have not provided adequate
evidence to support their claim that such errors occurred or if they did, that
such errors constituted criminal activity.

Judge Wherry questioned whether the taxpayers effectively focused their efforts (my emphasis):

This Court has previously questioned whether an illegal foreclosure
action is a theft for purposes of section 165(c). See Johnson v. Commissioner,
T.C. Memo. 2001-97. We need not decide this issue, however, because petitioners
defaulted on their loan and have failed either to show that the foreclosure
action was illegal pursuant to the deed of trust securing that loan or to
substantiate the alleged theft loss. The Court is sympathetic to petitioners’
economic problems and the need to annually pay property taxes without regard to
employment status. But practical considerations would dictate that Mr.
Nagel seek other gainful employment to assist Mrs. Nagel in her efforts
to support the family and avoid foreclosure in lieu of spending excessive time
and effort fruitlessly fighting the foreclosure, property taxes, and income tax
obligations.

Ouch.

Read the whole case Nagel, T.C. Memo. 2011-184.

Footnotes:

¹  This attitude is the inevitable consequence of a responsibility-less society. The left has convinced the masses that corporations and the rich are their enemies; they they are out to cheat and take advantage of them; that anything bad that happens to them in their lives is not their fault, but rather the fault of a system that is stacked against them.

It is left to us conservatives to tell these folks not what they want to hear, but what they need to hear:

1. It is your duty to determine what it is you can and cannot afford;
2. It is your duty to disclosure your true financial circumstances on your loan application and not to inflate your income figures in order to increase your chances of obtaining the loan; and
3. It is your duty to repay the loan regardless of whether the investment you made with the proceeds turned out to be a good one or a bad one.

Suppose for a moment that housing values continued to rise rather than decline. How many homeowners do you think would have agreed to share their appreciation with their lenders?

None, of course.

Anyone who suggests that his lender is at fault for not cancelling his debt obligation simply because the value of his home has decreased is, in effect, asserting an absurdity: Namely, that lenders are required to share in their borrowers’ losses but precluded from sharing in their borrowers’ gains.

Were this the standard, no lender would ever give another home loan.

And we wonder why the banks aren’t lending.

Related Posts:

• The Home Mortgage Welshers: Making Other People Pay for Your Mistakes
• Man Facing Foreclosure and Tax Liens Bulldozes his House

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