How to get out of my mortgage mess?

February 15, 2013 11:08 AM

stuck in a mortgage mess with friends, seeking advice to help me get out of it

Two and a half years ago Kent and I signed an FHA loan of $500,000 for a mutual friend, Bob, who could not get a loan himself as he was commission based. The house is located in Costa Mesa, CA 92626. So, the gentlemen's agreement is 1) Kent and I are on the mortgage and title, 2) Bob lives there and makes the mortgage payments, 3) we'll add Bob to the title later so Bob can refinance it under his name later and keep Kent and me out of mortgage OR sell the house 2 years later as a flip, possibly for a small profit.

Of course it did not go as planned (stupid me!). Refi under Bob's name was not approved. Bob couldn't sell the house as there is not enough equity to cover the selling cost, and he does not have any saving in the bank to cover the cost.

To make it worse, 6 months ago Bob started to run into all sorts of financial troubles and has been late on his payments, 30 days, 60 days, 90 days. The bank has been calling us for late payments and sending breach letters. We have been on the edge of foreclosure several times. Bob made some partial payments, just barely enough to bring the account to 60-90 days late before the letter expired. We are constantly 60-90 days behind these days. Kent and I have never lived there or paid any money to the house. We don't really consider it our house anyway even though we know we are financially obligated to the loan. We looked into the short sale option. Kent rejected the idea. He is afraid of disclosing his financial situation to the bank, and the bank may go after us as neither Kent nor I ever lived there (violation of FHA loan requirements for the primary residency??)

So we stuck now - Bob does not want to sell "his" house, Kent does not want a short sale, and I can't get out of the loan. I accept the fact that my credit will be screwed for years as long as I don't have to take any money out of my pocket. If you have any advice or suggestion of any sort, financial or legal, please do share with me. I simply ran of ideas as to how to get out of this mess. Thank you for reading this.

posted by dy to work & money (21 answers total)

Lawyer..... That's really your only option.
posted by jmsta at 11:12 AM on February 15 [8 favorites]

You seem to have a few options, none of which will preserve both your financial situation and your friendship with Bob, all of which will require you to seek real legal advice from a California lawyer:

Walk away from the house - this will, of course, destroy your credit. Some of your family and friends will find this morally repugnant. But Bob can live there rent-free until the bank forecloses, which can take a year or more, and Kent won't have to go along with a short sale.

Sell the house and pay the shortfall yourselves, getting an unsecured promissory note from Bob requiring him to pay you back.

Evict Bob and get a more reliable tenant in there.
posted by payoto at 11:15 AM on February 15 [4 favorites]

I'd say something about how bob's screwing you, so screw his feelings. But, really, lawyer. You needed to do that when you got the first delinquent notice. You lied/committed fraud, now you're in the throes thereof.
posted by k5.user at 11:16 AM on February 15

We don't really consider it our house anyway even though we know we are financially obligated to the loan.

Alas, the mortgage holder will not quite see it your way. Jmsta's advice is sound...
posted by thomas j wise at 11:16 AM on February 15 [1 favorite]

Yes, you need a lawyer.

Another option that you could discuss with your lawyer (if you have any faith in Bob at all, and are willing to put in some financial risk) is for you and Kent to take on the mortgage payments, and have Bob reimburse you after the fact.

If after a couple of years of this nonsense, Bob isn't paying consistently, then try for the refi again, and if that fails, sell. Hopefully by then Kent will be willing to just take the short sale hit.
posted by sparklemotion at 11:19 AM on February 15 [1 favorite]

As this question deals with potential fraud with a Federal agency, I'd suggest you get this anonymized pronto.

And consult a lawyer. And be prepared to lose friends.
posted by inturnaround at 11:20 AM on February 15 [1 favorite]

IAAL, IANYL, TINLA. I have primarily a creditor's rights practice.

An FHA loan application requires that the borrowers certify that the purchased home will be the primary/principal residence. Congratulations! You and your friends have committed fraud.

I have pulled up a California FHA loan application and here is the certification it has. I bet yours is identical or very similar:

"I/We certify that the information provided in this application is true and correct as of the date set forth opposite my/our signature(s) on this application and acknowledge my/our understanding that any intentional or negligent misrepresentation(s) of the information contained in this application my result in civil liability and/or criminal penalties including, but not limited to, fine or imprisonment or both under Title 18, United States Code. Section 1001, at seg. and liability for monetary damages to:the Lender. its agents, successors and assigns, insurers and any other person who may suffer any loss due to reliance upon any misrepresentation which I / We have made on this application."

I checked 18 USC 1001. It looks like a potential sentence with a maximum of five years.

My non-legal advice is you all get together to determine how to get out from under this fraudulent transaction ASAP. Be prepared for everyone to take haircuts. If this continues, the next house in your futures could be the Big House.
posted by Tanizaki at 11:21 AM on February 15 [11 favorites]

I have an alternate frame for you - you and Kent co-own a home with a tenant who hasn't been paying the rent in a timely manner. At the moment, Kent has to agree to any action you might take or else you'll lose the house to foreclosure.

Why would you agree to lose all your investment by letting the house go into foreclosure if you could afford an alternative - like making the mortgage payments yourselves.

I would also encourage you to talk Kent about how he sees his plan playing out. Maybe he doesn't see the foreclosure train barreling down the tracks?

I agree that getting a paying tenant would be smart; but Bob might decide to report your fraud if you evict him, so you'll want to think about that.
posted by Heart_on_Sleeve at 11:21 AM on February 15 [3 favorites]

Forget about all of the answers you're seeing here and go see a lawyer about this right away.
posted by MoonOrb at 11:24 AM on February 15 [2 favorites]

I agree that getting a paying tenant would be smart; but Bob might decide to report your fraud

Has there been fraud? OP applied for a loan, received a loan, and now is on the hook to pay back the loan. That his friend Kent is living in the house doesn't really make that fraudulent, does it?

This is why you might want to talk to a lawyer, OP. On a non-legal level I can say you need Kent to either pay on time or evict him, like any other tenant. This is exactly why you don't sign loans / lend money / etc to friends. They feel free to take advantage of you in a way a stranger would not. Which naturally leads to resentment and anger. Which leads to no longer being friends.
posted by Justinian at 11:34 AM on February 15 [1 favorite]

That his friend Kent is living in the house doesn't really make that fraudulent, does it?

It does if the loan is only available to resident homeowners, as this loan appears to be. Cf. Tanizaki's answer above.
posted by KathrynT at 11:40 AM on February 15

Whoops, yes, thanks.

Yeeeah, you need a lawyer bad, OP.
posted by Justinian at 11:41 AM on February 15

Yes, lawyer up - and ask the mods to anonymize this for you as a quick search of your activity here (email address listed previously) and Google has turned up your address, phone number and name.
posted by Rodrigo Lamaitre at 12:34 PM on February 15 [2 favorites]

Whoa, dude you are in deep sewage here. Lawyer up quickly.
posted by DWRoelands at 12:39 PM on February 15

What Bob wants doesn't really factor into it, he's not going to be the one going into foreclosure or jail. Worse yet, he doesn't seem to care (some friend!) Morally, it may be his house, but morally he's also screwing you over so kick out your tenant, which is what he is, lawyer up, pay the loan if you can and take your house back. Or sell. Yes, chances are Bob won't be your friend after this but let's face it, looking at the facts, he's not your friend anyway so you're best rid of him and the whole situation.
posted by Jubey at 1:14 PM on February 15 [2 favorites]

I am not telling you to lie in this situation. But in terms of having all the information that you need, my understanding is that you are allowed to rent an FHA bought property after it's been a primary residence for at least one year. It's possible, being over two years, that they will not press that issue.

However, a lawyer would be able to tell you for sure what you are looking at.
posted by SpacemanStix at 1:16 PM on February 15

Bob is not on the mortgage or title, so it isn't his house. You need to speak to a lawyer, evict Bob (if the lawyer agrees) and either sell the place or rent it out (whatever the lawyer says is the right next move). You and Kent need to see lawyers together and, if you cannot come to an agreement, you need to see your own lawyer.

Also you should make this question anonymous. On the off chance that Bob and Kent are real names, you should ask the mods to change the names.
posted by jeather at 3:27 PM on February 15

Tanizaki : If this continues, the next house in your futures could be the Big House.

Overly dramatic. FWIW, not living in a house you buy doesn't rank as "real" fraud. More like violating the TOS of a website or speeding. I personally know three people who have violated that portion of their contract (mostly via renting the place out), and honestly, I don't know the financial details of all that many people.

More practically - Tell Kent you will short sell or he can pay the damned mortgage by himself. Simple as that. You've gotten in over your heads, Bob has screwed you both. Cut your losses.
posted by pla at 5:55 PM on February 15

FWIW, not living in a house you buy doesn't rank as "real" fraud. More like violating the TOS of a website or speeding. I personally know three people who have violated that portion of their contract (mostly via renting the place out), and honestly, I don't know the financial details of all that many people.

Please forgive me for responding to an AskMe commenter, but this statement is uninformed. Yes, it is "real" fraud. I have prosecuted about a hundred commercial fraud cases. How many have you?

I do not know about your three friends, but the issue here is that it is an FHA insured loan. That is why it carries stiff federal civil and criminal penalties. Is it guaranteed that OP and his friends will experience these penalties? No, and it is probably unlikely, but it is irresponsibly incorrect to say this is the equivalent of a speeding ticket. The bank might decide to accelerate the note. Even if no one goes to the Big House, OP and friends are very likely at least going to earn themselves places in the federal Financial Crimes Enforcement Network with suspicious activity reports. When he wants to buy another property or refinance a loan, that is going to light up the lender's computer screen and OP will have a bad time getting that loan. What website's TOS can do that?
posted by Tanizaki at 6:20 PM on February 15 [2 favorites]

It has two years worth of equity in it. Conceivably, depending on the local market, comps and how much is owed in late fees and missed payments etc., it could be sold and might even produce a small profit. The last few single family properties I've seen sold here in San Diego were only on the market for about a week to 10 days. That's quick.

The other avenue, mentioned above, is kick Bob out, pay off the lates and find a great renter. That shouldn't be difficult there.

Personally, I think that's a great investment property and I'd ditch Bob and keep the house.

I do take that primary residence thing seriously , and while it's not terribly important here, it's still good to know that it exists primarily to ensure that these loans are not used/abused by investors, corporations, etc.

The finger pointing will happen and the details will be let loose when the lender gets tired of this shit and starts taking action. Your kinda lucky because lenders really backed up and are undermanned for the amount of foreclosures happening.

Decide if you want to keep it or sell it and start doing the leg work. I'd do it quickly before you really start to have serious and irreparable trouble with the lender. Either way find a real estate agent and put them to work.

GOOD LUCK! You can definitely work through this.
posted by snsranch at 6:56 PM on February 15

I suggest you take this whole question offline and go see an attorney.
posted by 99percentfake at 8:00 PM on February 15 [1 favorite]