I am a senior citizen living in Florida but ten years ago built a house in New Mexico for my son and his wife to live in. They have both been unemployed and they can no longer help me in making mortgage payments. The house [modular home] has depreciated and well below the outstanding loan. I have a 401K, an annuity and some investments in the market and live off a small pension and SS. My homestead in Florida and 401K would be protected but what about these other assets? All my major assets are in a revocable trust. The mortgage is in my name only, how will this affect my wife's credit?
Your primary risk is exposure to any deficiency.
You are correct when you say that you have protection from creditors’ actions against your 401k and your homestead in Florida. Your other assets may be exposed unless you obtain proper legal and financial advice as it relates to asset protection. You need to implement legal asset protection strategies that legally hide and/or shield your assets from creditors.
A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note or mortgage loan, in full. A deficiency judgment can arise from a short sale, a foreclosure auction sale, and a deed-in-lieu.
Please read this link to learn more about deficiency judgments, debt obligations, and debt forgiveness.
If the property is in a state that does not allow for deficiency judgments then this may not be an issue. A state that does not allow for deficiency judgments is called a non-recourse state. These non-recourse states have anti-deficiency statutes. However since this seems to be an investment property, you may not have protection in a non-recourse state. You need to be clear on the law in New Mexico. You will need to speak to a qualified attorney who is licensed in New Mexico and understands your needs.
Read this link about Recourse and Non-Recourse states.
You may also consider contacting the bank on your son’s behalf to discuss the situation. An offer can be made to give the property back to the bank in exchange for the complete and full satisfaction of all of the debt that is owed to the bank. This is called a deed-in-lieu of foreclosure. This will eliminate any deficiency judgment risk. The key is to get any agreement with the bank in writing.
You can request a principle reduction from the bank. However, principle reductions are very rare. I raise this issue because it is worth the try. Clearly, if the bank is prepared to reduce the principle and modify the loan terms, you may be able to keep the modular home. Just be careful if the bank request you turn over your financial information. You must get a written letter from the bank stating that it will consider reducing the principle and consider offering a loan modification. If you do not get this in writing then you should not turn over any financial information. I am sure you understand this point.
You risk exposure to a deficiency judgment since the loan is in your name. In order to obtain a deficiency judgment, a bank must go to court and file the proper papers. Then a court must grant a deficiency judgment to the lender. A deficiency judgment can last for some time. For example, in New York, a deficiency judgment can last up to 20 years.
Keep in mind that even if a deficiency judgment arises it can be settled for less than the full amount. Most lenders do not pursue deficiency judgments. Instead the lender sells its rights to a deficiency judgment to a third party collection agency for a discount. A third party collection agency can pay thirty (30) cents on the dollar or in other word 30% of the deficiency’s face value. A third party collection agency that pays a discount for a deficiency may be willing to settle with you for less than the full value of the original deficiency.
Your first step is to use every legally available means to protect your assets. You mentioned a revocable trust. Normally, a trust is used to legally hide assets, however if the details of a trust are exposed, it may not protect the assets. You should confirm with a qualified attorney how your assets are protected in a revocable trust.
Since you bought the property only in your name and since your wife did not sign any loan documents for the house (primarily the promissory note) then it will not affect her credit score. Even if your wife signed the mortgage but not the promissory note, it would not affect her credit score. The promissory note gives a lender the right to report to the credit bureau, since the promissory note is evidence of a loan of money. A mortgage is simply a security lien against the property. A mortgage is not a promise to pay money.
It is critical you speak with the proper professionals to determine your best financial course of action so you can protect your assets and understand your risks.
Please feel free to contact me with further questions.
Augustine A. Diji