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That is not quite correct and I think that things may have been a bit turned around so I will clarify..
I think what you are referring to is when a lender forgives an outstanding debt on a mortgage
or some portion of the mortgage is discharged due to a foreclosure. Typically any time a debt is forgiven, it is considered income to the debtor so they have to report it and pay taxes on it.
However, the Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately)
This has a "sunset provision" which expires on Dec 31, 2013 currently, unless they extend it (which they likely will). So as the law stands now, on Jan 1, 2014, if a lender forgives a mortgage debt or it is otherwise discharged, that is considered income to the debtor and they have to pay income taxes on it.
As for a lender pusuing a homeowner, if the lender pursues a non-judicial foreclosure where a trustee sells the house under a deed of trust
, then by law, they can't go after the homeowner if the mortgage was used to purchase the house. If they actually file suit in a judicial foreclosure, the can pursue the debtor for the deficiency. But in CA, only around 2-3% of foreclosures are judicial simply due to the time and costs involved.