patrick.net

1. If the mortgage is underwater nothing really happens unless the owner is trying to sell or refinance the home. If they are trying to sell or refinance the home they may have to cover the loss out of pocket unless they are able to negotiate something with the lender.

2. A downpayment helps make the loan more secure for the lender by lowering their risk. This is why a lot of lenders are now requireing a down payment. The only advantages I see for a buyer to put down a large down payment would be to avoid PMI/MMI or to obtain a lower interest rate. Considering the low interest rates and interest tax write-off only putting down the min down payment to secure the desired loan and interest rate seems to be a reasonable move so long as you keep a cash reserve.

3. I think walking away only helps people who cannot afford the home and will be forced in to bankruptcy because of it. If you have money and walk away I am sure that the bank will go after you for what you owe them in fact I would not be supprised if walking away actually increased your legal liabilities.

Any truth to #3 as I personally know of some one who sold one property via short sale but sold another for a nice profit all in the same year? Wonder how that works out with the IRS? I know the ss was BofA/Countrywide not sure about the 2nd property.

Depends on whether you live in a non-recourse state and whether the loan you have is non-recourse or not. IANAL but as I understand it in Cali if you only have one loan and you default all the bank gets is the house. They COULD try and haul you into court for the balance but it would cost them a bundle and they may lose so this is extremely rare.

If you have a second mortgage or you refinanced then the rules change and you may be liable for the taxes on the balance between your loan and the value of the house. I can't be bothered to dig it all up now but some Googling on your part should clear it up.

Leigh, short sales are different than default. Technically in a short sale you owe taxes on the difference but I recall there were some generous exemptions put in place as part of the various Wall Street rescues.