Sunday, September 26, 2010

Got Questions? Get Answers...JA Wants To Buy Another Home First Then Strategic Default On The Current Home

First off, your website is great, thanks for all the information you've posted. I know you cannot take the place of paid legal advise but I was hoping to get your opinion on my situation.

My wife and I currently live and own a home in Oregon. It's small and we are ready to move on. We owe about what the house is worth so selling it has not worked. Due to our income and low debt we have qualified for a home loan on another house and plan to buy it and move there.
We would rent out our current house, and if we run into any financial trouble, just stop making payments on the rental and focus on keeping our new primary residence. Since Oregon is a non-recourse state, the lender should not be able to come after our assets or primary residence for not paying the rental house mortgage correct?

Get Answer: The issue of non-recourse/anti deficiency is an important one. Keep this in mind: even if Oregon is a non-recourse state, you need to now how Oregon implements its rules. It may not be an absolute, blanket ban against the collection of a deficiency debt by a lender. Please check this link to learn more about Oregon's deficiency laws : So yes...please consult with a qualified attorney in your area. 

What if we refinance the soon to be rental house to get a better interest rate? 

Get Answer: That would lower your payment and perhaps make it profitable to rent the house. Even with no current equity. Yet you are not totally upside down. 

I was told that if you refinance, your loan becomes full recourse, regardless of what state you are in, is this true?

Get Answer: It may be true. Generally, if a loan was not used to purchase the house then there may not be any protection under relevant non-recourse/anti-deficiency laws.  So please consult with a qualified attorney.

If we want to keep and rent this house long term, a refinance makes the best financial sense, but I don't want to take away the option of a strategic default by refinancing into a full recourse loan. An extra $100 in interest payments per month seem worth the cost to keep all options open.

What is your opinion on this?

Get Answer: Well said. Essentially the $100 monthly cost is your insurance payment for staying protected under Oregon's anti-deficiency laws. Yet, if you refinance the loan you may earn income. Furthermore, if you refinance into a fixed rate mortgage then over time the principle balance will be lowered. You may gain equity if property prices have stabilized in your area. However it may not be likely.  Keep in mind that if the foreclosure sale of your property satisfies the lender in full then there is no deficiency.  Also any difference owed to the lender may be settled for less than what is due or it may be forgiven. Forgiven debt may be considered taxable income. However, under current Federal law forgiven debt may not be taxable if it involves a primary residence. Focus on acquiring the other property as soon as you can. Spend more time considering your strategic default alternative. Please read this link to learn more about debt obligations and deficiency. Also speak with a qualified professional to round out your thinking.  


Thank you for reaching out.

---- Below Is JA's Response To Get Answers...----

Thanks for your response, that was helpful.

I've done a little more research on Oregon's anti deficiency laws and it seems its not as clear for us as recourse vs. non-recourse state like I first thought.

This is what I understand from reading the statutes:
If a non-judicial foreclosure is an option under your loan contract (if a power of sale agreement was signed as part of your loan, which is likely) in Oregon, then the bank can go this route seize your house and sell it with proper notice. They are not allowed to come after you for any debt deficiency resulting from the sell of your house in a non-judicial foreclosure.

If there is no power of sale agreement, or if the bank simply chooses to go this route, they can choose a judicial foreclosure. This will result in a public auction of your house and a deficieny judgement against you for the difference in what the bank gets and what you owe. Because this option is more time consuming for the bank, it is less likely, unless you are significantly under water and the bank thinks you have enough resources to make a deficiency judgement worth thier effort. Luckily for us right now we owe about as much as the house is worth so the bank most likely would not pursue this option. If housing prices continue to fall that might not be the case.

So it turns out the walk away options is less do-able then I had hoped. Especially because the mortgage debt tax foregiveness only applies to primary residences, not rentals. For now it looks like we will proceed with buying the new house, renting out the first house and hoping that property values stabilize or rise. If not, we'll have to think a little bit more about the consequences of a strategic default.



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