This Turned Out To Be a Poor Investment
December 22, 2011 9:57 PM Subscribe
Has anyone here strategically defaulted on a mortgage in recourse state? Would you be willing to talk about it?
I'm going to try to keep this quick and dirty:
We have great credit and enough income to buy a second home without having to sell this one first. We have a preapproval letter at the ready, in fact.
We have been wanting to move for awhile, with the plan of keeping our current house as a rental. However, we just became aware that, in order to meet the new rental codes here, we would need to sink tens of thousands of dollars into the this house, which is deeply underwater as it is. Selling for what we owe is but a pipe dream, and we would be just barely breaking even renting it out as things are- if we were to sink a bunch of money into it, it would mean renting it at a large (too large) loss. Furthermore, our young family has outgrown this place, which is a big part of why we have been looking for a different house.
We live in a recourse state, so our worst fear would be that we be sued for the bank's loss, or have wages garnisheed. It is my understanding that the only way to avoid this is to file bankruptcy.
Pertinent facts:
-I am on the title of this house, but not the mortgage, which is in my husband's name only. We both have excellent credit, but I stay at home with our children, so he is the one with an income.
-Our income is under the median for our state (I think this matters in bankruptcy, now).
-We have not missed any payments and do not qualify for any type of loan modification.
Has anyone been through a foreclosure like this, where they had another, different house to move into? How long did it take? Did you get sued?
We have no real idea yet of what we are going to do. We are just feeling out our options. I won't hesitate to contact a lawyer if this grows any more serious, but right now I am just trying to get some ideas of what to expect should this turn out to be our best option.
I'm going to try to keep this quick and dirty:
We have great credit and enough income to buy a second home without having to sell this one first. We have a preapproval letter at the ready, in fact.
We have been wanting to move for awhile, with the plan of keeping our current house as a rental. However, we just became aware that, in order to meet the new rental codes here, we would need to sink tens of thousands of dollars into the this house, which is deeply underwater as it is. Selling for what we owe is but a pipe dream, and we would be just barely breaking even renting it out as things are- if we were to sink a bunch of money into it, it would mean renting it at a large (too large) loss. Furthermore, our young family has outgrown this place, which is a big part of why we have been looking for a different house.
We live in a recourse state, so our worst fear would be that we be sued for the bank's loss, or have wages garnisheed. It is my understanding that the only way to avoid this is to file bankruptcy.
Pertinent facts:
-I am on the title of this house, but not the mortgage, which is in my husband's name only. We both have excellent credit, but I stay at home with our children, so he is the one with an income.
-Our income is under the median for our state (I think this matters in bankruptcy, now).
-We have not missed any payments and do not qualify for any type of loan modification.
Has anyone been through a foreclosure like this, where they had another, different house to move into? How long did it take? Did you get sued?
We have no real idea yet of what we are going to do. We are just feeling out our options. I won't hesitate to contact a lawyer if this grows any more serious, but right now I am just trying to get some ideas of what to expect should this turn out to be our best option.
They will sue. Don't think for a second that they won't. If you have PMI on your mortgage then you can rest assured that they will sue.
posted by Crotalus at 2:43 AM on December 23, 2011 [1 favorite]
posted by Crotalus at 2:43 AM on December 23, 2011 [1 favorite]
Unless you are willing to file bankruptcy or you have an FHA-insured first mortgage, I strongly advise that you not do this. All states which have recourse mortgages also allow wage garnishment for debts. Having been through two chapter 13 bankruptcies, one pre-reform, the other post-reform, doing a bankruptcy right after buying your second house will also be difficult to accomplish due to more stringent requirements under the 2005 bankruptcy reform act. Your odds of being sued are quite high since many mortgage securitization trusts provide extra fees for loan servicers that sue for delinquent balances.
If your loan is FHA insured, it is my understanding--though this may have changed in the 3 years since I last looked at an FHA loan--that once the bank makes a claim to the FHA for the loan insurance proceeds, the bank gives up the right to sue. However, the FHA may still have that right. If you have private mortgage insurance, you don't have an FHA loan and the insurer will almost certainly seek a judgment.
You said that rental codes will require updates: Do these codes require this for an owner-landlord with a small number of properties or just one property? I've seen ordinances written which exempt small landlords from most requirements as long as the house passes a general inspection and is otherwise safe. I would definitely go this route if you must move.
posted by fireoyster at 2:47 AM on December 23, 2011
If your loan is FHA insured, it is my understanding--though this may have changed in the 3 years since I last looked at an FHA loan--that once the bank makes a claim to the FHA for the loan insurance proceeds, the bank gives up the right to sue. However, the FHA may still have that right. If you have private mortgage insurance, you don't have an FHA loan and the insurer will almost certainly seek a judgment.
You said that rental codes will require updates: Do these codes require this for an owner-landlord with a small number of properties or just one property? I've seen ordinances written which exempt small landlords from most requirements as long as the house passes a general inspection and is otherwise safe. I would definitely go this route if you must move.
posted by fireoyster at 2:47 AM on December 23, 2011
Since you have excellent credit, do you have a lot of outstanding debt? Could you take out a personal loan to cover the deficiency left from selling your first house?
posted by fireoyster at 2:49 AM on December 23, 2011
posted by fireoyster at 2:49 AM on December 23, 2011
Have you approached the bank about a short sale? If they think you strategically defaulted, you'll be ineligible for any type of government backed loan for seven years. It sounds like you're pretty confident that you're in a financial position where that wouldn't be an issue, but hey, a lot can happen in seven years. Short sales's only two, non-strategic foreclosure three. Banks have become more willing to do shorts over the past year or so; the process is often still a pain in the ass, and I'm not saying you're guaranteed of getting one approved. But I certainly wouldn't rule it out, and it would get you out of the loan at a price that would make the bank a lot happier, and may make them a lot more willing to sign a release saying they won't go after you for the rest of the funds. At a minimum, if the bank takes a short sale at a 20% loss, that's a lot better then selling at foreclosure at a 40% loss plus months of legal fees and penalties, in terms of what you might have to pay to get out of this situation.
Regarding one of you being on the title but not the mortgage --- talk to a lawyer about whether that gives you any leverage in your state. It varies quite a bit state to state how a circumstance like that impact's the banks ability to foreclose (not that there's any of them where it would prevent it).
posted by Diablevert at 4:48 AM on December 23, 2011 [2 favorites]
Regarding one of you being on the title but not the mortgage --- talk to a lawyer about whether that gives you any leverage in your state. It varies quite a bit state to state how a circumstance like that impact's the banks ability to foreclose (not that there's any of them where it would prevent it).
posted by Diablevert at 4:48 AM on December 23, 2011 [2 favorites]
Just to put one more option on the table, price out adding on to your current house to provide the extra space you are needing. The other options you are considering carry a high price tag (legal fees, credit issues, tax issues, etc), which may make even an extensive and expensive rehab project cost-effective. Plus, right now no one is building, so materials are cheap and contractors are hungry; costs to build are about as low as I have ever seen.
Similarly, make sure you are considering all the costs of foreclosing and bankruptcy when you are doing the cost/benefit analysis of turning your current house into a rental. Compared to those other costs, a few tens of thousands in upgrades may look cheap, and may be far and away the best long term option.
posted by Forktine at 5:36 AM on December 23, 2011 [1 favorite]
Similarly, make sure you are considering all the costs of foreclosing and bankruptcy when you are doing the cost/benefit analysis of turning your current house into a rental. Compared to those other costs, a few tens of thousands in upgrades may look cheap, and may be far and away the best long term option.
posted by Forktine at 5:36 AM on December 23, 2011 [1 favorite]
I had a foreclosure in a recourse state in Feb 2011 and have not heard one word yet about what they are pursuing me for. (I don't think for a second that I am home free, though) (USDA/Rural Development loan)
I am in another recourse state now and we are considering a short sale. The realtor is saying we can probably walk away without owing anything. The tax consequences of forgiven debt (assuming the mortgage company forgives) are non-existent in most cases until the end of 2012.
(I know this looks terrible and like I am just buying houses willy-nilly. I tried to sell the first house for 8 years before foreclosure, extenuating circumstances, blah blah)
posted by getawaysticks at 5:54 AM on December 23, 2011 [1 favorite]
I am in another recourse state now and we are considering a short sale. The realtor is saying we can probably walk away without owing anything. The tax consequences of forgiven debt (assuming the mortgage company forgives) are non-existent in most cases until the end of 2012.
(I know this looks terrible and like I am just buying houses willy-nilly. I tried to sell the first house for 8 years before foreclosure, extenuating circumstances, blah blah)
posted by getawaysticks at 5:54 AM on December 23, 2011 [1 favorite]
You might find this New Yorker "Talk of the Town" piece relevant.
posted by The corpse in the library at 9:01 AM on December 23, 2011
posted by The corpse in the library at 9:01 AM on December 23, 2011
You are in a very similar position as me. I spoke with a lawyer about this just last week and got a lot of great information.
MeMail me and I'll give you the scoop (I don't have time right now and will likely forget!)
posted by coolguymichael at 10:48 AM on December 23, 2011
MeMail me and I'll give you the scoop (I don't have time right now and will likely forget!)
posted by coolguymichael at 10:48 AM on December 23, 2011
Response by poster: Regarding the needed repairs: it turns out all the insulation in our basement is actually asbestos, and it's in bad shape. And no, there is no small landlord exemption here.
We don't have PMI, we came into the house with 25%+ equity, then six months later the financial meltdown happened and the real estate market went to hell in a handbasket.
Our lender considers a short sale a type of loan modification, so they won't agree to anything until we've missed several payments. We are no where near that point yet, but I am not hopeful. It's hard to even find an agent to do a short sale here.
I am extremely hesitant to put anymore money into this house. We have replaced every appliance, put in three new appliance hookups, put in a supplemental heating system and repaired the existing heating system, replaced a whole bunch of plumbing and electrical stuff, ripped out nasty old flooring and refinished the maple hardwood floors underneath, insulated the walls and attic, put in a new hot water and chimney liner, new vents throughout the gables and ridge, put in all new windows and exterior doors, ripped out and reinstalled the driveway, and fenced in the yard. We've owned the house for just shy of four years. Even after all this work, the house is worth about 60% of it's mortgaged value. The equity we came in with is long evaporated, and despite the sweat and expense, we've earned no equity by fixing it up.
We have a conventional loan, not a government loan.
There is no way for us to add on. We have discussed this at length with professionals and gotten good quotes, the problem is that our lot is very small (1/10th of an acre) and we would end up with no place for our kids to play outside. Our house is already tall, there's no going up. (You know those old SF Victorians that are tall and skinny? My neighborhood looks like a downmarket version of that.)
posted by Leta at 12:23 PM on December 23, 2011
We don't have PMI, we came into the house with 25%+ equity, then six months later the financial meltdown happened and the real estate market went to hell in a handbasket.
Our lender considers a short sale a type of loan modification, so they won't agree to anything until we've missed several payments. We are no where near that point yet, but I am not hopeful. It's hard to even find an agent to do a short sale here.
I am extremely hesitant to put anymore money into this house. We have replaced every appliance, put in three new appliance hookups, put in a supplemental heating system and repaired the existing heating system, replaced a whole bunch of plumbing and electrical stuff, ripped out nasty old flooring and refinished the maple hardwood floors underneath, insulated the walls and attic, put in a new hot water and chimney liner, new vents throughout the gables and ridge, put in all new windows and exterior doors, ripped out and reinstalled the driveway, and fenced in the yard. We've owned the house for just shy of four years. Even after all this work, the house is worth about 60% of it's mortgaged value. The equity we came in with is long evaporated, and despite the sweat and expense, we've earned no equity by fixing it up.
We have a conventional loan, not a government loan.
There is no way for us to add on. We have discussed this at length with professionals and gotten good quotes, the problem is that our lot is very small (1/10th of an acre) and we would end up with no place for our kids to play outside. Our house is already tall, there's no going up. (You know those old SF Victorians that are tall and skinny? My neighborhood looks like a downmarket version of that.)
posted by Leta at 12:23 PM on December 23, 2011
we would be just barely breaking even renting it out as things are- if we were to sink a bunch of money into it, it would mean renting it at a large (too large) loss.
Speaking as a landlord, you probably should sit down with an accountant to lay out the tax situation for you under this scenario. The short answer is that a tax loss can be a Good Thing, and even a real-dollar loss can save you enough on taxes to be worthwhile. You will be able to write off all the mortgage interest you are paying on the old place and write off or depreciate associated expenses.
posted by dhartung at 3:03 PM on December 23, 2011
Speaking as a landlord, you probably should sit down with an accountant to lay out the tax situation for you under this scenario. The short answer is that a tax loss can be a Good Thing, and even a real-dollar loss can save you enough on taxes to be worthwhile. You will be able to write off all the mortgage interest you are paying on the old place and write off or depreciate associated expenses.
posted by dhartung at 3:03 PM on December 23, 2011
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What sort of rental-required repairs would cost in the tens of thousands of dollars (in a small house, no less)?
posted by jon1270 at 12:52 AM on December 23, 2011