As I understand it, the lenders do not pay ANY tax on the insurance money. Just like we don't pay out any tax on an insurance claim that is paid to us, or life insurance policy money received (in most cases).
The lender (and I could be wrong) tries to collect from the owners. When it gets to be considered a loss/default, they "Charge off" the balance and all related expenses. That is taken as a loss on their taxes. Then they
1. Still try to collect from the owners through CA's and sometimes judgments. But on their books, they have recorded the debt as uncollectable.
2. They file claims with the mortgage insurance companies, if the loan has an insurance policy on it. Claims are paid out based on the type of insurance policy.
** if the loan had PMI on it, then the gov't backs the loan and will pay the amount due (principle only, no interest or fees) to the lender
** if the loan didn't have PMI on it, then the lender had an option to purchase a separate mortgage insurance policy on the loan. (It's usually purchased on the bundle of loans sold/bought, especially if the bundle is 2nd mortgages.) If the loan defaults, the lender files a claim and may be awarded a percentage of the loan (almost never full value of the principle on the loan, and no interest or fees).
3. HAFA was a gov't program created in 2010 to help home owners stay in their homes. Not many people reported success with the program. For some people, it insured their loan while they were going through a loan modification. It was to ease the lender's minds and hopefully avoid short sales and foreclosures. (I have this impression from what I have read and heard about the program.)
With regards to my situation, the lender, posing as the owners of the house, submitted an application to HAFA. It didn't qualify - the home has been vacant for more than a year. So now the lender is looking for any other gov't backed programs out there to provide a little financial relief if they accept the short sale offer. They did not appear to have PMI or other insurance on the first loan.
And the longer they take to figure things out, the more the house values drop in my area. 
I sincerely doubt my original offer on the house (which was it's fair market value at the time, minus a give back at closing) will be the appraised value. Yes, the chill is in the air as home values continue to plummet this season.
I have my coffee, my hot chocolate, a good book, a blanket, and myfico. I am settling in for the winter. 
***
This information is how I understand it. I could be wrong.
@IOBA wrote:As I understand it, the lenders do not pay ANY tax on the insurance money. Just like we don't pay out any tax on an insurance claim that is paid to us, or life insurance policy money received (in most cases).
The lender (and I could be wrong) tries to collect from the owners. When it gets to be considered a loss/default, they "Charge off" the balance and all related expenses. That is taken as a loss on their taxes. Then they
1. Still try to collect from the owners through CA's and sometimes judgments. But on their books, they have recorded the debt as uncollectable.
2. They file claims with the mortgage insurance companies, if the loan has an insurance policy on it. Claims are paid out based on the type of insurance policy.
** if the loan had PMI on it, then the gov't backs the loan and will pay the amount due (principle only, no interest or fees) to the lender
** if the loan didn't have PMI on it, then the lender had an option to purchase a separate mortgage insurance policy on the loan. (It's usually purchased on the bundle of loans sold/bought, especially if the bundle is 2nd mortgages.) If the loan defaults, the lender files a claim and may be awarded a percentage of the loan (almost never full value of the principle on the loan, and no interest or fees).
3. HAFA was a gov't program created in 2010 to help home owners stay in their homes. Not many people reported success with the program. For some people, it insured their loan while they were going through a loan modification. It was to ease the lender's minds and hopefully avoid short sales and foreclosures. (I have this impression from what I have read and heard about the program.)
With regards to my situation, the lender, posing as the owners of the house, submitted an application to HAFA. It didn't qualify - the home has been vacant for more than a year. So now the lender is looking for any other gov't backed programs out there to provide a little financial relief if they accept the short sale offer. They did not appear to have PMI or other insurance on the first loan.
And the longer they take to figure things out, the more the house values drop in my area.
I have my coffee, my hot chocolate, a good book, a blanket, and myfico.
***
This information is how I understand it. I could be wrong.
IOBA-- I could use a dose of your patience! Good luck and great attitude to have.
