As our federal government continues to flail and waste time disputing who caused the housing market collapse, I just sit here wondering what we’re going to do when Fannie Mae And Freddie Mac finally crash.

A long time buddy of mine send me a link to an article that really summarizes this concern for me.  Christopher Whalen wrote a commentary on HousingWire titled On GSE reform: Be Careful What You Wish For that should make all tax-paying US citizens scratch their collective heads. I want to share a few quotes from Mr. Whalen about Fannie Mae And Freddie Mac.

Who Really Controls Fannie Mae And Freddie Mac?

Think about it. These are organizations that are funded by the government, so their accountability for profitability (think survivability if they are private businesses) is very loose. Who needs to profit when the government is backing you. So what motivates the GSEs (Government Sponsored Enterprises) if not sound financial decision making? Mr. Whalen points out:

… the close operational integration of the top four banks and the GSEs, including Fannie Mae And Freddie Mac and the Federal Home Loan Banks, which are the largest GSEs of all. You cannot separate the GSEs from JPMorgan Chase, Citigroup, Wells Fargo and Bank of America — the four horsemen of the financial apocalypse that exercise illegal cartel control over the secondary market for residential mortgages. The big four zombie banks run the GSEs in the same way that they exercise control over special purposes entities and the private mortgage insurers.

Fannie Mae And Freddie Mac Only Exist On Public Funding

The road to hell is said to be paved with good intentions, and Fannie Mae And Freddie Mac were established with good intentions in mind. But they have evolved to a cancer that is killing housing, and I believe is holding back the economy. Mark Calabria of the CATO Institute notes:

“By focusing on ‘the role of government’ in housing, [Nocera] moves the debate away from the reckless immoral behavior of Fannie Mae And Freddie Mac. He can claim this is about social policy and paint himself as a caring progressive, despite the massive regressive theft that Fannie Mae And Freddie Mac have actually been.”

Fannie Mae And Freddie Mac Performance: Far Worse Than The Catastrophe Reported

Everybody knows that Fannie Mae and Freddie Mac have been hammered. Nobody argues that they are a viable, economic entity. But did you know that the reality of their financial situations is far worse than what most are reporting? On this, Mr. Whalen observes:

In the case of the GSEs, the loss on a bad loan is not recognized until the underlying collateral is sold — meaning that there are tens if not hundreds of billions of losses embedded on the balance sheets of Fannie Mae and Freddie Mac in the form of bad loans

Fannie Mae And Freddie Mac Reality Awaits

What is going to happen when the proverbial s#*t hits the fan? If hundreds of billions of loans go bad, will our banking system survive? Or will the next administration (we know Obama is going to continue to ignore this through elections) decide to bail out the banks by printing another trillion dollars?

I know there are “way smarter” people out there who pay attention to this, I’ll be looking for their thoughts and ideas. I can promise you this, the lack of leadership in Washington today might be causing a problem that could collapse our economy. It has happened elsewhere. Are we just a “Super-sized” Greece?

If we do not put some bright, non-politically charged minds, on the task of reforming and dissolving Fannie Mae And Freddie Mac, then what we know of the housing market collapse will pale in comparison to what is ahead.

I have had quite a few conversations lately about the capital gains tax that results from a short sale or foreclosure, and what exactly what you should do when the lender sends you an IRS Form 1099-C.

First of all, as a quick disclosure to first-time readers …

OK, my “I’m not a Tallahassee accountant” disclosure is out of the way, let’s get back to the topic at hand regarding IRS Form 1099-C.

What Is An IRS Form 1099-C

Recently, a long-time reader asked “why did I get a IRS Form 1099-C from the lender, and what does the amount on the form represent?”

I [gave him my "I'm not a Tallahassee accountant disclosure] explained that the Form 1099-C is sent by the lender as a “forgiveness of debt.” The following comes from the language right on the form:

Basically, the way I understand it is the IRS Form 1099-C has one of two purposes for a real estate investor who disposes of a distressed property:

1. Through Foreclosure: The amount on the 1099-C represents the same thing as a sales price would had you sold the property. From that price, you should be able to deduct your cost of sales (in the case of a foreclosure, legals costs paid, etc.), your basis, and you most likely have some recapture to add back in. For simplicity sake, think of the amount as the gross sales price attained.
2. Through Short Sale or some other non-foreclosure sale remedy: The amount on the 1099-C should represent the total loss realized by the lender (loan amount + interest + penalties + legal costs minus net from sales). I have heard of all sorts of numbers that come back from this, but it really should be an amount equal to what they took as a loss. This number then should be added into your formula when calculating your tax on home sales gain [loss] (capital gains tax rate multiplied by [net from sales - basis + debt forgiveness + recapture]).

Scrutinize Your IRS Form 1099-C

Here’s two additional questions to ask your Accountant:

1. Has the lender properly calculated the IRS Form 1099-C amount?
2. Can the lender add to the IRS Form 1099-C any uncollected fees to their loss, or must it be purely principle, interest, and penalties only?

I hope this helps clear-up what to do (tax wise) after you dispose of an investment property through short sale, deed-in-lieu, or foreclosure. If you have any additional questions or comments about the IRS Form 1099-C, post them below in the comments section and I will reach out to some Tallahassee accountants to chime in for the right answers.