Monday, June 21, 2010

Got Questions? Get Answers...Mr. D Is Lost In Mortgage Sea


I purchased a home in 2006 for $1,075,000. It is a beautiful lake front home in NC. I have a first for $985,000 and the balance in a second. I invested another $+/-$200,000 in landscaping shoreline, etc...

My income has been impacted due to the economy in the last 2 years. I have tried refinancing with one appraisal coming in at $1,275,000 and one at $985,000. Neither would qualify for 80% equity.

The house has been on the market for 2 years offered for both lease and/or sale with no offers. Real estate professionals say there is a 10 year supply of million dollar homes in my area.

I could take money out of my 401k to keep things going but here is my thought process. If my mortgage is $6,500/month and it may take years to recover or get back to zero, it makes sense from a business perspective to put that money elsewhere.

My loan is with one of the big banks and they have denied me any type of modification or other and said they couldn’t consider it unless I was at least 90 days delinquent. To further clarify, the mortgage is in both my name and my fathers name with me as the primary and him as the co-borrower. He is retired but has retirement money in annuity and ira. He also owns a home in GA that has some equity in the amount of maybe $50-100k. My wife however is not on the mortgage as the home was bought 2 years before we got married.

So I am considering all options including just stop paying, deed in lieu, short sale and loan modification. What are the consequences, likely hood of outcomes and advice do you have as I am lost at sea?


Mr. D.

First of all thanks for writing.

One key point to recognize is that any decision you make regarding your mortgage will expose your father to the same consequences. Furthermore, he will need to sign off on any option you decide to implement.

It seems as if you have a general understanding of your options. However, I still want to go over each one again. After each option, I will point out the risks. I will also underline key points that are a bit more specific to your situation.

A short sale occurs when a lender let’s you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may be willing to accept less than the full amount due on a mortgage. If you owe the lender $400,000 then the lender may agree to let you sell the property for $350,000. Keep in mind that the $50,000 difference will become a deficiency.

A deficiency balance can be forgiven or it can become a judgment. If the deficiency is forgiven then there may be a tax liability. The lender may refuse to forgive the deficiency and instead seek a deficiency judgment. This is a legal judgment obtain by a lender after filing the proper legal paperwork in court. If the lender successfully obtain a deficiency judgment then the lender has the right to seize the cash in your bank accounts, garnish wages, or place a lien on personal property, business assets or real estate. You may not owe a deficiency in certain circumstances. The Federal Mortgage Forgiveness Debt Relief Act and Debt Cancellation provides relief to homeowners from paying taxes on any forgiven debt. Also certain states have anti-deficiency statues. This means that state law prevents a lender from pursing a borrower for any debt deficiency. A state that prevents a lender from pursing a borrower for any debt deficiency is called a non-recourse state. North Carolina has an anti-deficiency statute which seems to apply in certain circumstances. I recommend you speak with an attorney to see if this anti-deficiency may apply in your circumstances. A link to the statute is here:'sNewAnti-DeficiencyStatute.aspx

There is certain debt that cannot be attached by a creditor. Under Federal law, there are strict limits against attaching a 401k loan. Essentially, if money is transferred into a 401k just to prevent a lender from collecting then a lender may be able to attach the money. This is generally hard to prove. It may not be a good idea to deplete your 401k account.

A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property.

If you decide to utilize a short sale or a deed-in-lieu the lender normally requires evidence that the property has been listed for sale. Furthermore, a lender may ask to see your financial information as part of any negotiation.

It’s best to work with a real estate broker or attorney who has experience in short sales. It’s a time consuming process involving multiple parties. It requires substantial paperwork. If you do work with a professional make sure you negotiate a “pay for success” agreement. Many states have no upfront fee regulations.

If you let the property go to foreclosure sale then the lender will sell your property at an auction. If the lender takes the property back at the auction sale, then you will not have any deficiency. If the lender sells the property at auction for less than what is owed then there will be a deficiency.

As I pointed out before, if a debt is forgiven then it may be consider a taxable event. Forgiven debt is considered income. You should contact an accountant to determine if you may have any tax exposure to forgiven debt. Especially, if you are in a higher income tax bracket.

The lender for the second mortgage may forgo foreclosure proceedings and sue you and your father personally for the loan. Most second mortgage lenders or HELOC lenders recognize that it will not collect any money from the sale of the property once the loan goes into default. However, these lenders are willing to negotiate a settlement of the outstanding balance. For example, the second mortgage lender may take 15 to 30 cents on the dollar with a monthly payout on the settlement amount. You must negotiate a forgiveness of the difference owed to the lender if they agree to settle.

It’s sad to say that you need to be delinquent before a lender will enter into good faith negotiations to modify your loan. It is currently a fact that a lender has no incentive to modify a loan if they are collecting payments.

Your father’s 401(k) should be safe from any creditor collections efforts if a deficiency arises. However, if a creditor successfully obtains a proper legal judgment then the judgment can be placed as a lien against your father’s property or other assets.

The likelihood of success is based on one rule: You need to fight extremely hard to get what you need from the lender.

The next important issue is to preserve you and your families’ cash, savings, and wealth and to limit your exposure once you have decided to implement a solution.

Please read the following articles and posts. This will help you significantly.

What You Need To Know About Debt Forgiveness, Obligations, and Deficiency.

Recourse v. Non-Recourse State.

If you have any other questions please feel free to contact me.

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