How do I best address my interest only, deep underwater, timebomb of a mortgage mess?
September 8, 2011 8:06 PM   Subscribe

How do I best address my interest only, deep underwater, timebomb of a mortgage mess?

My wife (then girlfriend) and I bought our home (3/1, 1008 sqft) in late 2006 for $435K, current value is maybe $260K on a good day. We did a 100% financing 5/1 ARM with IO option for 10 years on the first, purchase money HELOC second motgage to avoid PMI. At the time, it was just the two of us, we were both working good jobs, probably pulling in near $100K per year combined. We were a bit hesitant to do an IO option, but our broker sold us on it as a way to maintain flexibility in case of emergency, etc. We have never missed a payment, or been late on a payment. Unfortunately, we have also not really made much headway in paying on the principle. After 5 years, we still owe $433K. Our 5/1 is resetting in December.

Today, we are a single income family ($89K) and my wife stays at home with our 2 year old. It is very important to us that she takes care of our child, and anyway, she could maybe only net $200 or $300 per month after factoring in child care costs. We have still never missed a payment, but it is at the point now where we are right at the threshold of what we can afford. There are some months that we need to dip into savings to pay the mortgage. Our payments would go up with any refi into a conventional P+I loan, since we are making the IO payments right now. The very real possibility of maintaining this course for the next 5 years and then getting hit with the end of the IO period and $3,700+ per month mortgage costs is weighing heavily on us.

So what to do? We realize that we made a poor decision buying when we did, with the loan we did. Do we just stick it out and hope that in 5 years our house might be back to zero equity and try to refinance then? Do we take out another mortgage with the extra buying power we supposedly have (I'm told that we can qualify for $250K even with the existing mortgage), buy another and rent our current house? Do we try for a short sale even though we can afford the (interest only) payment? Play chicken with the bank and hope for a modification? We want to be proactive, because it is obvious to us that the situation is not sustainable in the long run. Our bank doesn't seem to care, because we pay. We really like our house, but we aren't willing to sacrifice our long-term financial stability for it.

What would you do in this situation´╗┐? Is there some option I am overlooking?

We are in southern California, if that matters.

Thanks, MeFites.
posted by anonymous to Work & Money (20 answers total) 2 users marked this as a favorite
 
Have you talked to an attorney about strategic default? You live in one of the states where you can still do that, from what I remember. Your credit will be fucked for the next few years, but at 175k underwater, it might make financial sense to take the hit and walk away from the huge debt. Talk to a lawyer about it, of course.
posted by deadmessenger at 8:18 PM on September 8, 2011 [2 favorites]


What I would do is first find out what you can rent for what you can afford to pay (not right at the edge, say 35% or so of your gross income so $2200 or so a month). Especially if you can get a house/apartment/condo closer to where you work so your commute and gas costs are also cheaper. If you can find something acceptable for this then just walk away. Call you bank and arrange for a default. Banks are usually happy to have keys turned over and not have to go through the foreclosure process and risk a damaged house. Your credit will take a (big) hit. It will be gone in a few years, you are not your credit score, you are not morally obligated to hold on to a failed investment that is sinking you or making you live right on the edge. You are morally obligated to turn over the house to the lien holder in good condition. Trashing or stripping the place is NOT ok, it is not revenge. The bank said in the mortgage paperwork if you don't pay the mortgage you don't get the house, so walk away. No one did anything really wrong. You bet the house would be worth more, the bank bet you could pay off the loan, sometimes bets don't work out, this is the nature of capitalism. In a normal market your house wouldn't have been horribly overpriced and you could have sold it and not had to walk away, now you do. You are not your credit score. The difference between what you are paying in rent and what you would pay into the (currently underwater) mortgage is your future savings/investment/downpayment. Don't spend the money you will be saving (if any) on consumption of STUFF, invest it in your future, make the compound interest work for you, not the bank. This is where renting pays off, and can pay off big. Houses are not great investments, they are great forced savings accounts.
posted by bartonlong at 8:21 PM on September 8, 2011 [10 favorites]


Seconding (on preview thirding) strategic default, though it sounds like it may not be so strategic as preemptive. Lots of people are going to come in here and tell you that it is immoral to do so; that you are a bad person and that you are setting a bad example for your children and that they would sell a kidney rather than default. Fuck them. The mortgage lender knew the deal - if you don't pay the mortgage, they get the house. The bank will have no moral qualms taking the house if you stop paying. You should do what is the right business decision for you, just as the lender will.
posted by procrastination at 8:25 PM on September 8, 2011 [7 favorites]


I would discuss options with a lawyer, but I would also talk to the mortgage holder. Explain your situation and see if they will extend the IO or refinance to another 5/1. You have nothing to lose by telling them what you can and are willing to pay and seeing if they will work with you. I would look at it as what your alternatives are. What would it cost to rent a similar place? If you default (agree it is a very valid option) you will still need a place to live. Figure you have a few months in your current home with no payments until the eviction happens. If you can pay $1,200 in rent, then if you can work out a deal similar to that for your current home, stay.

IF you did 100% financing, IO, you are simply renting now until such time as you can pay the principle. You are not really underwater as much as you have a rental house with a call on buying the place for the $435k price. That option is expiring soon and you do not want to exercise it, but if you can extend it at reasonable terms, it may be worth it to rent your own house than to rent another with absolutely no upside versus one with limited upside.
posted by JohnnyGunn at 8:32 PM on September 8, 2011 [1 favorite]


If there was no cash out and it was all purchase money, I'd aim for a short salle or a deed in lieu and then if those options failed, walking away from the property. In california you have a number of protections (I am not a lawyer) that limit your liability beyond the house, specifically if everything is purchase money (no refi's, no helocs with cash out). Specifically I would not look at a refinance as a refinance could remove your protections granted by a purchase money loan in california and leave you liable to a deficiency judgement and limit your options.

You need to talk to a real estate attorney specializing in this, spend an hour with them and then explore the options from there. A lot of this will depend on whether you want to keep the house, stay in the area or are comfortable renting. Do not despair and do not dig yourself a deeper hole.

If you can live without credit (solid stable income, good health and healthcare, vehicles in good shape and reasonable savings) I would be tempted to look at a short sale and whatever comes after that, including walking away. I would start at the forums at loandafe,org, take anything you read with a huge grain of salt and consult with an attorney who practises real estate law and who can provide you with sound advice directed at your specific situation.
posted by iamabot at 8:45 PM on September 8, 2011


my underwater kingdom for an edit window...that's loansafe.org...
posted by iamabot at 8:46 PM on September 8, 2011


for those of you telling the OP to default and start renting instead, not sure how you all think they are going to be able to rent a decent apartment in southern california with a totally fucked up credit rating. in my experience anyway (of those i know who have tried). and btw, it will be fucked up for more than just "a few years."
posted by violetk at 9:18 PM on September 8, 2011 [2 favorites]


The point of a strategic default is to line up all your ducks first, before you default. So the OP would have to find a rental, make sure to have reliable transportation, etc. before defaulting on the home loan.
posted by annsunny at 9:27 PM on September 8, 2011 [1 favorite]


So the OP would have to find a rental, make sure to have reliable transportation, etc. before defaulting on the home loan.

but how many renters would accept that based on his debt to income ratio? even if he lied and told them he would be selling the house (in the so.cal market?), i still think it would be a difficult proposition to find a place willing to rent to them. if i was the renter, i'd be doing due diligence and it wouldn't be that hard to figure out what's going on with the OP's housing situation.
posted by violetk at 9:38 PM on September 8, 2011


maybe get one of your names off the title so that if you decide to default, only one of your credit ratings will be taking the hit? make sure it's the person with the income whose name comes off.
posted by violetk at 9:39 PM on September 8, 2011


for those of you telling the OP to default and start renting instead, not sure how you all think they are going to be able to rent a decent apartment in southern california with a totally fucked up credit rating.

I have unbelievably horrible, awful, terrible credit, and have had no trouble renting in Southern California (or in Oregon, Massachusetts, Arizona, and New Hampshire, for that matter). I've never been turned down. In fact- the worst thing that's ever happened is that I was once asked to put down a slightly larger security deposit. And like I said, that's happened ONCE.
posted by MiaWallace at 9:39 PM on September 8, 2011 [7 favorites]


Our payments would go up with any refi into a conventional P+I loan, since we are making the IO payments right now.

Whoaaaa. Are you sure? What's your interest rate? Check out your free options for mortgage advice. Look into HUD-approved mortgage counseling and the Making Home Affordable program.

If your mortgage is currently with an actual bank, sure, ask about restructuring. If your mortgage has been sold several times and you're currently stuck with some sort of mortgage servicing company out front of who-knows-what mortgage company, I'd advise being more wary of restructuring with the existing lender.

We were a bit hesitant to do an IO option, but our broker sold us on it as a way to maintain flexibility in case of emergency, etc.

I'm currently refinancing my way out of a 5/1 option ARM mortgage myself, and I wish I'd seen this Business Week article four years ago to alert me to why my mortgage broker may have been so reassuring. I thought I knew EXACTLY what I was doing, believe me, I asked a whole lot of questions, and some of the terms still were, um, obfuscated.
posted by desuetude at 9:42 PM on September 8, 2011


First, this is a complicated situation, so don't think you are going to immediately find the "right answer," because what is right for you might be different from what is right for someone else, and because there may be too many unknowns (e.g., would your bank even approve a short sale?). Settle in for the information gathering phase.

Set up meetings with experts:
- on refinance options and dealing with banks as a struggling homeowner (call the places that desuetude linked to)
- on short sales (call realtors that your friends recommend and ask them to recommend a realtor who specializes in short sales)
- on legal issues (ask the short sale realtors for attorney recommendations)

A refinance might be your best bet if you don't mind being underwater for some time. About the short sale option, ask the realtor about the process and timeline, what they think of your particular bank's system. Ask what they've seen in terms of qualifying as having a hardship. (The counselors from step 1 will also have information on this.) You might ask them to connect you to a mortgage broker to get advice on how hard it'd be to qualify for mortgage after a short sale or foreclosure. Run the situation past the lawyer and ask about any potential risks, such as losing your savings.

Whatever you do, I would not burn through your savings trying to close an increasing gap. Personally, I would view a bank-run modification with caution. I would read stories like this first.
posted by slidell at 10:31 PM on September 8, 2011


I'm watching/helping/advising a half dozen folks in the same boat right now, including my ex.

Lawyer up; a good one. Not one that runs commercials after midnight promising all your problems will go away. Not your closing attorney, because they should have told you not to sign in the first place. Not the family friend or the guy who does your taxes. Someone who specializes in property law, who knows the banks and the judges and practices in your town. Spend savings there, because if a lawyer can't navigate you through this, then you'll just eventually burn through those savings anyway and have precisely zero, or less than, in the end.

Negotiate with the bank (with a lawyer). Play hardball; play chicken. Don't be proud. Don't trust the functionaries to be looking after your interest. Document obsessively. Consult another lawyer if *anything* starts to smell funny.

I'm tempted to say, sure, it's "important" for your wife to stay home with your kid, but you're pretty close to looking at an extra 200-300 month and a godsend. Especially when a $3700/mo mortgage represents, what, almost 4/5ths of your take home? I take that back...and extra 200-300 a month is nearly irrelevant to that level of swirling the bowl.

Realize it could be decades before your house almost doubles in value so you aren't under water, if ever. Realize a short sell still requires a buyer, and there might not be one; in fact, in SoCal, there probably won't be. Understand the tradeoff between the credit rating hit you'll take walking versus having an underwater, unsellable, but reliable roof over your families head.
posted by kjs3 at 11:52 PM on September 8, 2011 [1 favorite]


If you want a referral to a competent So Cal bankruptcy lawyer to discuss this with, memail me. Not that bankruptcy is your only option, or even your best option, but it is one of the options and talking to a bk lawyer (this guy does consults for free) will better inform you so you can make your decision with more confidence.
posted by Aizkolari at 5:25 AM on September 9, 2011


The bank won't consider a mortgage modification while you are current. The fact that you won't be able to afford the new payment in a few months is not relevant to them. Skipping a mortgage payment and then filing for a modification may be a decent strategy. A modification hits your credit report as paid off for less than the full amount. It's not nearly as damaging as walking away.

Talk to a lawyer that specializes in this stuff.
posted by COD at 5:33 AM on September 9, 2011


if you don't pay the mortgage, they get the house.

Make sure that's all they get. In some jurisdictions that's the whole story. In others the lender can sue you for the balance if selling the house does not satisfy the debt. Check the law where you are.
posted by massysett at 6:52 AM on September 9, 2011


If your mortgage is Fannie Mae, they just announced they will refinance anyone who has NOT skipped a payment. If not, I'm sorry.
posted by kashtana at 1:05 PM on September 9, 2011


If your mortgage is Fannie Mae, they just announced they will refinance anyone who has NOT skipped a payment. If not, I'm sorry.

Do you have a link to back that up? Everything I have seen today just reads as "Fannie Mae is looking at options to help more homeowners".
posted by woj at 2:33 PM on September 9, 2011


Nthing to get the lowdown on all of your options before you actually get behind on your mortgage. There are programs that require you to be current, there are programs that require you to be delinquent, there are all kinds of variables.

Also nthing to the nth-nth-nth degree to be wary of advice/reassurances from anyone who could make money off of your mortgage in any way.
posted by desuetude at 6:11 PM on September 9, 2011


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