My story and my plan. Any advice?

[ontheedge]

Hi! I found this forum last week and have found it very helpful. I think I have a pretty good handle on what my options are, but I thought I'd see if anyone had any suggestions. My story got pretty long. But, I do summarize my financial situation below after a big bold heading.

I closed escrow 5 years ago, the day after Thanksgiving. My financing was 80/20. My house is now worth about 60% of what I paid.

I refinanced the Heloc 3 years ago when the rate hit 9.5%. The value of my home had increased by over 20% and I added $10,000 in high interest credit card debt and still a bit below 80% LTV. (Oh the good ol' days!) I don't know for sure, but after reading a thread here, my guess is that that loan is not non-recourse. It's a 30 year fixed at 7.25%.

The Countrywide/BoA first has been 5.25% interest only. It readjusts on December 1 to 1 year libor + 2.25%. Based on the current Libor, the rate will go down to 3.5%, but my payment will increase by $170. That would have been no problem if my husband hadn't lost his one stable client in June. Fortunately, I have a well paying stable job and we always cosidered his income our slush fund. But, it was also supposed to be the back up for Jan 1, 2010 when our first readjusted payment would be due.

I have a lot of credit card debt and when the rate on one card caused my monthly payment to skyrocket, I took a loan on my 401K (at least I'm paying interest to myself). That's a $350 payment every month. And I still have $456 a month in credit card payments. Most of that is at permanent rates of 3.99% or 4.99%. But a BoA card now at 0% goes to 9.99% in April 2010 and another card's introductory rate goes up in April 2011. I've been playing the balance transfer game for years. Not as easy these days!

Yes, I've made some bad decisions and have been living above my means for the last 20 years. Despite my best intentions 5 years ago, old credit card habits are hard to break. I did cut back.

In the face of my increased mortgage payment, I've for the first time created a budget and a plan to have the credit cards paid off in 5.5 years (by paying only $50 per month over current minimum). It'll be tough, but if there are no big surprises, I think and hope we can scrape by.

I'm current in all mortgage and debt payments. My biggest worry is the annual adjustment on my mortgagge. If I could just get a modification to a 40 year at 5% or 30 year at 4.25%, I could scrape by. But, I don't qualify for HAMP because the mortgage on my first is less than 31% of my gross income.

So, here's the down and dirty:

Monthly Gross Income: $6250
Current 1st mortgage + insurance & prop tax: $1707
1st mortgage + ins & tax beginning 1/1/10: $1886
2nd mortgage: $567
Monthly 401K secured loan: $303
Monthly credit card debt: $456 (+$50 to payoff in 5.5 yrs instead of 97 yrs at minimum payments!)
Credit Rating: Around 750. Not too shabby... for now.
Value of house: Approx. 60% less than when I bought it with 100% financing which I later added $10k to in refi of 2nd.
I don't know who the investor is on my loan, but it's not FHA or Freddie Mac (or is that FannieMae?).
I like my little 825 sq ft 1923 bungalow, 1/2 finished basement, big yard, roses and fig tree and don't have any desire to move. I am prepared to stay put at least until the value of my home slowly creeps up to what I owe.

My plan after research on mortgage mods and credit card settlement:

1. Call BoA and tell them that I know I don't qualify for HAMP, but want to request an in-house mod. Isn't it in their best interest to immediately get a higher rate than they would as of Jan 1 and enable me to continue to pay my mortgage into the future and not default on my mortgage or BoA credit card? I've read enough on this forum to predict the likely answer. But, it's worth asking, right? When I'm not taken seriously by a phone rep. or their supervisor, maybe try an email to VP's office.

2. If that doesn't work (and even if it does), I do my best to keep to my budget and keep up on all payments. If I can't do that, my fist default will be on the BoA credit card because it's the one whose low rate expires first. Before default, I try to get BoA to lower the rate. Fat chance until I've been late for a while. Don't pay anything more until they offer an acceptable settlement (40-60% maybe). Let each credit card fall one by one. If mortgage rate goes too high next year, try for a mod again.

3. Consider bankruptcy, but only as last resort.

I'd really appreciate any advice and input, especially about how to approach the bank.

Also, I noticed on the loan app I signed at closing that the broker inflated my income even though I gave him my pay stubs (it was a no doc loan). How much leverage might that give me with the bank? I'm a paralegal and should know to review what I sign more carefully.

Lessons learned:

1. Never again listen to real estate agents and mortgage brokers who tell you real estate values may level off, but never go down significantly, especially in the SF Bay Area, and you'll have no trouble refinancing in 5 years. And don't beleive them even after doing web research and finding out that the few people saying the bubble is going to pop and values are going to sink into Mariana's Trench are called "kooks."

2. Remember that you probably can actually manage another $100 a month for a 30 year fixed if YOU JUST WROTE A BUDGET!

3. Always listen to your mother when she says "take the fixed rate", especially if she'll probably help when you call her and say you're $100 short on your mortgage payment.

4. BUDGET BUDGET BUDGET!!!!!!!

5. Hindsight is 20/20!

[KFish]

Why are you so against bankruptcy? Just curious, not that I think its a good idea. But once you start getting late payments, your credit will tank bad either way from what I hear. You may want to talk to an attorney to see if it is even an option.

Tough situation that many share with you! I wish you the best of luck and keep us posted, we all learn from each other's experiences.

[davephx]

I doubt she would pass the Means Test for Chap 7 $6250/month income with so she would be stuck with 13. And if only paying $4xx on credit card debt it can't be that much.

ontheedge - very well organized layout and great lessons learned. On the other hand you are in far better shape than most of us here.

The credit card and mortgage sides are totally different. The mortgage side could care less what you do with the credit cards I bet and vice versa. Your well organized logic isn't what the banks deal with only math formulas. Income too high no qualify especially with the relatively low payments on first.

[PhildVegas]

Don't forget the nasty tax bill you'll receive on the balances of the credit card debt that you may get the bank to "forgive" in a settlement. The totals that you're talking about could carry a hefty price tag. It might be worth consulting with a tax accountant.

[BadBobMo]

Yes call the bank no need to say anything about HAMP just let them know that your back is up against the wall and what can they do for you. Your shooting for Lower interest rate, let them know that also go for 40 yr. term.
If that does not get you anywhere then you need legal advise period.
For Me it's called "Credit Gone Bad"! I would BK-13
1st mortgage-My house is now worth about 60% of what I paid. "Keep the House"
2nd mortgage: $567 this debit is unsecured/BK-13 to strip down to $0.00
Monthly credit card debt: $456-BK-13
Monthly 401K secured loan: $303 "Not Sure what I would do" Put if the other debit is gone you should be alright.
Good Luck

[nativelasvegan]

I agree with badbobmo. I would definitely try to get a loan modification first, consider talking to an attorney for the BK next.

[davephx]

Don't forget the nasty tax bill you'll receive on the balances of the credit card debt that you may get the bank to "forgive" in a settlement. The totals that you're talking about could carry a hefty price tag. It might be worth consulting with a tax accountant.

This can be avoided however if your net worth is underwater like your mortgage!

[ontheedge]

Thanks everybody for your responses.

Why are you so against bankruptcy?

The belief that I should pay my debts and concern over how a BK will affect my husband's excellent credit rating. But the more I look at the possibility and the more numbers I crunch, the more I consider it as a real option, especially if I could strip the 2nd. After some research, I don't think it will hurt my husband's rating. I'll have to confirm that with an attorney. If my husband can't get a more stable client base or an actual job soon (he's trying to do both) his credit rating will not be as big a concern.

I doubt she would pass the Means Test for Chap 7 $6250/month income with so she would be stuck with 13. And if only paying $4xx on credit card debt it can't be that much.

I don't know what you consider that much, but I have $30K in cc debt. Payments are low because I transferred about half of it to 2.99% and 3.99% until paid rates a few years ago. Another $10k is at 0% until April. It'll take me 97 years to pay off my current cc debt if I paid only minimum. Paying $50 more a month pays it off in 5.5 years, but I'm not sure I can consistently do that. You're right that I don't pass the means test and would have to file Chap 13. But, being debt free in five years, except for the first mortgage, doesn't sound so bad.

On the other hand you are in far better shape than most of us here

True. And I'm trying to keep it that way. But, it's going to be hard with only about $400 per month left after paying mortgage, minimum cc payments and utilities. Too bad the banks don't tend to want to work with people until after they stop making payments.

The credit card and mortgage sides are totally different. The mortgage side could care less what you do with the credit cards I bet and vice versa. Your well organized logic isn't what the banks deal with only math formulas. Income too high no qualify especially with the relatively low payments on first.

Yea, that's why I expressed doubt as to how much luck I will have getting BoA to modify.

Yes call the bank no need to say anything about HAMP just let them know that your back is up against the wall and what can they do for you. Your shooting for Lower interest rate, let them know that also go for 40 yr. term.
If that does not get you anywhere then you need legal advise period.
For Me it's called "Credit Gone Bad"! I would BK-13
1st mortgage-My house is now worth about 60% of what I paid. "Keep the House"
2nd mortgage: $567 this debit is unsecured/BK-13 to strip down to $0.00
Monthly credit card debt: $456-BK-13
Monthly 401K secured loan: $303 "Not Sure what I would do" Put if the other debit is gone you should be alright.
Good Luck

Thanks. I'm not to concerned about the 401k loan. It will be paid off in a 4.5 years through mandatory payroll deductions. I'm paying 4% interest back into the plan. Considering the unstable stock market and current savings rates, it's not such a bad return. I probably should have considered Chap 13 before taking that loan when Chase wouldn't give me a break after I transferred a huge balance and didn't get the first bill. One late payment and I had a 25% interest rate and huge minimum payment! As you say "Credit gone Bad." I thought I had cut way down on using my credit cards until I really looked at my spending over the last year. It's amazing I've lasted this long. What's really amazing is that I have $200k in available credit that I could access through cash advances! I wonder how long that could last on a Caribbean island! [Not that I have the nerve to do that or the desire to leave my family behind and never return].

I spent a lot of the weekend crunching numbers and getting paperwork together. I'll call BoA tomorrow. Regardless of what they say, I'm going to make an appointment for a consultation with a bankruptcy attorney too. I may need Chap 13 even if I get a mod.

I'll post updates, at least on the mod request.