Walk Away ??? in California

[Sparky06921]

My wife and I purchased our 1st home in Sacramento in November 2005. It is our primary residence. Purchase price was $375K. Our loan was an 80\15\5. The first was a 30 year fixed at 6.375%. 2nd was a 15 year heloan at 7.625%. With all monies going to the purchase price of the home. We have never refinanced. And are in no danger of losing the house at this time. Unfortunately the home values in our neighborhood have tanked and homes a few block over and larger are selling for $150-160K. We still owe $335K on our loans.

We have made the decision that it no longer makes financial sense to stay in this house any longer. Using a mortgage calculator we computed that even if our home value rose 6% annually every year from this point on, it would take almost 10 years to break even equity wise. I think we all know that home prices are still falling and we're not going to see that type of appreciation for some time. We've read through the posts on this website and want to thank everyone for their posts and experiences and especially to Professor Shays for his expert advice. We do have some questions and please forgive us if they've already been covered in prior posts.

1) Both the 1st & 2nd are with WFB. We also have our personal checking/savings & 1 CC with them. Once we stop paying our mortgage, should we move our personal accounts to another bank? I'm worried about them trying to tap our accounts.

2) The one CC my wife has with them has a zero balance. Should we expect it to be closed once we default?

3) I have 2 credit cards with zero balances from 2 other banks. These cards have high credit limits. Can I expect my CC limits to be decreased or even cancelled?

It appears based on what I've read from the Professor, that both my loans are no recourse and I will not have any federal tax liability. Will there be any tax liability at the state level?

It also appears that a great many of you are forgoing the short sale route. The agent that sold me the house (a distant friend) is pushing me to pursue a short sale avenue and saying that it will impact our credit scores less. Any truth to this? Are short sales really the hassles they appear to be?

Our ideal goal would be to get out from under this severly depreciating asset and possibly purchase another home in the near future. Thanks for your help

[Irish Gal]

Originally Posted by joe84780

It also appears that a great many of you are forgoing the short sale route. The agent that sold me the house (a distant friend) is pushing me to pursue a short sale avenue and saying that it will impact our credit scores less. Any truth to this? Are short sales really the hassles they appear to be?

Hi Joe,

Welcome! I am underwater too (about $100K) and am going the short sale, but most likely foreclosure route (which I'm ok w/), as so cal mkt is dead for condos. Lenders and agents love short sales. Lenders get some $$$ back vs. a total loss re foreclosure (after they make your and the buyer's life hell in the short sale process, i.e. take forever to give approvals and are still much too unrealistic about current home values, buyers walking away, no lender answers for weeks, mos, etc.). Real estate agents love to push them as they make commission. Most sales today are either short sales or REOs. Agents seem to try to scare sellers with the "save your credit score" rap. FICO states that they score short sales, foreclosures and deed in lieu's the same. Your score will tank either way and from what I've read and heard, foreclosures, in reality, will not have such a negative impact down the road for victims of this housing crisis, as there's just way too many folks who've been pushed into foreclosure by this housing mess. From most of what I've read also, many attorneys advise to just foreclose cleanly and not go through the short sale hassle (depending on the types of loans you have - recourse vs non-recourse, etc.). I would get a legal opinion; most attys will talk to you via tel for free for a consult or pay for a half hour/hour to get legal feedback re your specific situation. There's also a thread specifically on short sales for those with questions and for those who have done it with their feedback. I have 2 non-recourse loans so if I end up foreclosing I am legally protected (lender cannot pursue me). If you end up doing a short sale, I would make sure an attorney reviews the final papers to ensure the lender releases all liability (personal and any deficidency they may try to slip in the contract paperwork). Personally, I would not use a real estate agent to complete a short sale. I would use a real estate attorney who is also a broker to negotiate the short sale and to protect my legal interests (ensuring I was left with no personal liability or deficiency judgment whatsoever post short sale). The lender pays for the attorney, not the seller, so why not use a higher level of service? Many agents say they are experienced short sale agents, when they are not. They give legal advice sometimes when they should not. So, that's my concern. Good luck and keep us posted. By the way, Prof Shays will return to this site on Monday.

[Irish Gal]

Here's an article posted recently re short sales:

EXCLUSIVE: Lawyers say lenders set stage to collect on 'short sales'

Foreclosure may be better option for some struggling homeowners

By ZACH FOX - Staff Writer | Saturday, April 25, 2009

A "short sale" might not be the end of a homeowner's problems.

The practice, which has exploded in popularity as homeowners struggle to pay their mortgages, is supposed to allow a borrower to sell a home for less than the mortgage amount, walk away, and avoid a credit-killing foreclosure.

Not so fast, say local real estate attorneys.

Lenders appear to be inserting language into short sale contracts that allow them to sue for any "deficiency," or the amount lost by a bank by selling a home for less than the mortgage ---- opening the door to collection agencies and court judgments that can run into the hundreds of thousands of dollars for some North County homeowners.

What's more, the nation's premier credit scoring firm says that short sales and foreclosures are equally damaging to credit scores.

Yet short sales have surged in popularity, as homeowners struggling with falling values and rising unemployment seek a way out.

It's not clear how many short sales in fact fail to protect former homeowners from subsequent collection efforts. But local real estate attorneys and other professionals say such vulnerability may be widespread.

One real estate agent who specializes in short sales, Chris Mackey of Carmel Valley, said about 50 percent of the short sale contracts he has seen include the language before he requests its removal. Banks generally have removed the language, he said.

Major lenders Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. (owner of the former Washington Mutual) declined comment for this story or, through spokesmen, said officials were unavailable for comment.

However, the North County Times obtained a short sale contract issued by Countrywide Financial Corp., which together with parent company Bank of America services roughly 20 percent of the mortgages in the nation.

The contract warned the homeowner, who owned a house in El Cajon, that Countrywide "may pursue a deficiency judgment for the difference in the payment received and the total balance due ... " The owner, who is still negotiating with the lender, declined through a lawyer to comment.

Attorneys say such clauses mean that a borrower's troubles might not end with the short sale ---- the lender could sue the borrower for a deficiency at a later date or turn over the unpaid debt to collectors after the short sale closes.

Indeed, under some conditions borrowers may face fewer troubles by letting their properties fall into foreclosure.

Ins and outs

For borrowers who do not know the ins and outs of short sales, "you absolutely should get an agent or somebody who is an expert and help you with the process," said Bart Blechschmidt, a partner with Galuppo & Blechschmidt, a Carlsbad real estate law firm.

Blechschmidt said his firm charges between $1,000 and $1,500 to negotiate a short sale.

Keeping up with mortgage payments ---- and thus keeping the house ---- is getting harder for thousands of families in San Diego and Riverside counties, where unemployment rates shot into record territory in March.

Meanwhile, home values have plummeted more than 40 percent since 2006, leaving roughly one-third of San Diego County mortgage holders "under water," or owing more than their homes are worth, according to First American CoreLogic, a data firm. The figure is higher in Southwest Riverside County; three of every four mortgage holders in Lake Elsinore is under water, for example.

Such conditions have led to an increase in the popularity of short sales.

Of about 14,000 properties for sale across the county on one real estate listing service, 5,610 "required lender approval," which usually means they are short sales, according to data provided by Larry Dean, owner of Hansen Realty in Escondido.

In a foreclosure, the homeowner leaves immediately, his credit ruined, and the bank is typically left auctioning an empty house, often at a depressed value and leaving the lender with losses.

Short sales are touted as helpful to both lenders and borrowers: Banks hope to recover more money when homeowners stay put and assist in an orderly sales process. And borrowers hope to suffer less damage to their credit score when banks agree to settle for less than the full mortgage.

All the same to FICO

However, a spokesman for Fair Isaac, creator of the widely used FICO credit score, said its mathematical models make no distinction whatsoever between a short sale and a foreclosure.

Yet short sales do offer a key advantage. Mortgage giant Fannie Mae will back a loan from a borrower two years after a short sale. Borrowers with a foreclosure on their record must wait five years, a Fannie Mae spokeswoman said.

To walk away free and clear, borrowers must make sure all loans are extinguished and debts forgiven, said Blechschmidt, the Carlsbad lawyer.

But in some cases the lender can pursue a deficiency judgment in foreclosure, as well, depending on the type of loan.

Whether the lender pursues a deficiency depends upon a multitude of factors, including the borrower's story or payment history, and whether the loan had been sold to a third-party investor, said Martin McGuinn, a San Diego lawyer who represents banks and debt collectors.

It's possible those lenders won't sue the borrowers at first because "that's why they're in a short sale anyways, they don't have the money," said Susan Anderson, manager of the Coldwell Banker real estate brokerage in Vista. So banks "are saying, 'Down the line, if you have the money, we'll go after it.' "

If done the right way, short sales do allow borrowers to move on free and clear.

Letters, no cases

Despite one report from a real estate agent of an active lawsuit involving a lender suing a borrower, the North County Times couldn't confirm any cases.

And local lawyers who represent borrowers say they haven't heard of any.

"I'm aware of letters, but I don't know where that's gone," said David Bright, a real estate attorney in Escondido. "Stay tuned, fasten your safety belt. We have to wait and see what these lenders do. They might not think it's worth it politically."

But one short sale specialist, real estate agent John Woodall of San Marcos, said he doesn't buy the scares from lawyers that short sales open the door to deficiency when foreclosure would have allowed a free-and-clear walk away.

"I just don't see a judge or jury saying, 'We appreciate you trying to do the right thing, but you still have to pay all the money back,' " Woodall said.

It wasn't clear last week whether homeowners merely face a risk, based on contract language, or real lawsuits. The North County Times has found no local case of a lender suing a borrower after a short sale.

Legal briefing

Borrowers can face deficiency judgments at any point on certain types of loans. But California law allows special privileges for what is known as "purchase money" loans, or the original loan used to purchase the home.

On such mortgages, a bank cannot legally sue the borrower for nonpayment. The bank's only means of recouping the loan is to foreclose on the house.

Therefore, a homeowner late on payments on a purchase money loan cannot face a lawsuit ---- even if the owner put no money down.

But all bets are off if the borrower refinanced the mortgage. Especially on home equity lines of credit, lenders can sue the borrower for the unpaid amounts following either foreclosure or short sale.

However, lawyers said, if the borrower negotiates a short sale, the bank might issue a contract that says it will agree to sell the house and release the borrower from the "trust deed," the contract saying the borrower must pay back the loan in full.

Lenders might include a clause in a short sale contract that releases the lien but creates the possibility for a lawsuit to collect debts at a later date, said John Brady, a San Diego attorney.

Effectively, lenders will try to transform a purchase-money loan into one in which the bank can sue to collect, Brady said.

"They're being sneaky," he said. "They're trying to keep the door open to be able to collect on any deficiency."

[knownick]

Hey Joe, your situation sounds almost exactly like ours. We are in the Sac area, both loans with WFB, 80/15/5 purchase, etc.

I'm a little bit farther along in the process than you are, so I'll do my best to answer your questions.

1) I would definitely move your checking and savings accounts to another bank ASAP. As far as I know Wells made no attempt to take money from those accounts, but when their collections agents called they would tell me exactly how much money we had in our accounts and would ask why we're not paying. The simple fact that they had access to look at those accounts was more than enough incentive for us to stop using them ASAP.

2) It wouldn't surprise me if they closed your wife's card or drastically changed the terms.

3) Yes, I would expect your credit cards to start lowering your limits shortly after you start missing payments. To give you an idea, my AMEX (which we don't carry a balance on) has had its credit limit cut from $28k to $1,700.

We're in a similar boat to you in that there is no hardship, at least not in the way other people are experiencing, and the bank has been unwilling to work with us in terms of any modification, etc. We've considered a short sale but have heard so many horror stories about getting them to go through that we haven't tried yet. WFB has been a real bear to deal with through all this and we have no reason to think they'd suddenly start playing ball with a short sale.

Which isn't to say they won't - if you go this route I'd be very interested in how it worked out for you and what the bank's response was.


Good luck to you.

[knownick]

As for tax liability, there is a state law that mirrors the federal mortgage forgiveness act, but as of right now, is is only applicable for debt forgiven in 2008. There is a bill in the assembly right now to extend that act, and most people feel it will pass - but as things stand right now there is a potential for state tax liability, unless you can prove insolvency.

[tryingtostay]

Originally Posted by joe84780

1) Both the 1st & 2nd are with WFB. We also have our personal checking/savings & 1 CC with them. Once we stop paying our mortgage, should we move our personal accounts to another bank? I'm worried about them trying to tap our accounts.

2) The one CC my wife has with them has a zero balance. Should we expect it to be closed once we default?

3) I have 2 credit cards with zero balances from 2 other banks. These cards have high credit limits. Can I expect my CC limits to be decreased or even cancelled?

It appears based on what I've read from the Professor, that both my loans are no recourse and I will not have any federal tax liability. Will there be any tax liability at the state level?

We are walking away for similar reasons. Not a big financial hardship, but I'd rather have money to pay for family expenses and save for college for my kids than paying for this house we are so far upside down on.

we're chosing foreclosure over short sale. SS seems to draw the process out longer as banks don't want to foreclose on something they may make more money on. Since the impact on your credit score seems to be about the same, we just want this process to be done with faster so we can fix our credit score faster.

I'd move to a new bank right away. When your credit scores are poor enough, you can't open checking accounts. I'd open at least one now. You can open online accounts easily and/or try your local credit union if you want to avoid "bailout" banks

I'd expect your wife's card to close within months of non-use the way the market is right now, even without a default on your record. Even people with perfect scores are getting hit. Or, what may happen, is that they slash her balance really far down. Just depends on the bank and the computer's mood, I think.

American Express and store credit cards seem to be the first to drop their limits, either at the 30 or 60 day late mark. Other cards have been dropping limits at the 90 day mark. I have 2 cards at the 5 month of nonpayment mark that have remained unchanged. But the American Express cancelled my card at the 5 month mark.

Expect the worst, and then be happy if it doesn't happen.

I'm crossing my fingers for the tax law for CA to pass, too.
There's a good discussion about opening a safe deposit box. I'd read through that

good luck!

[Sparky06921]

Thanks for the info everyone,

knownick
How many payments have you missed now? At what point did they start calling you? Have they been harrassing you or calling you at work at all? Have you come right out and told them you're not paying anymore? Thanks -Joe

Originally Posted by knownick

Hey Joe, your situation sounds almost exactly like ours. We are in the Sac area, both loans with WFB, 80/15/5 purchase, etc.

I'm a little bit farther along in the process than you are, so I'll do my best to answer your questions.

1) I would definitely move your checking and savings accounts to another bank ASAP. As far as I know Wells made no attempt to take money from those accounts, but when their collections agents called they would tell me exactly how much money we had in our accounts and would ask why we're not paying. The simple fact that they had access to look at those accounts was more than enough incentive for us to stop using them ASAP.

2) It wouldn't surprise me if they closed your wife's card or drastically changed the terms.

3) Yes, I would expect your credit cards to start lowering your limits shortly after you start missing payments. To give you an idea, my AMEX (which we don't carry a balance on) has had its credit limit cut from $28k to $1,700.

We're in a similar boat to you in that there is no hardship, at least not in the way other people are experiencing, and the bank has been unwilling to work with us in terms of any modification, etc. We've considered a short sale but have heard so many horror stories about getting them to go through that we haven't tried yet. WFB has been a real bear to deal with through all this and we have no reason to think they'd suddenly start playing ball with a short sale.

Which isn't to say they won't - if you go this route I'd be very interested in how it worked out for you and what the bank's response was.


Good luck to you.

[knownick]

Originally Posted by joe84780

knownick
How many payments have you missed now? At what point did they start calling you? Have they been harrassing you or calling you at work at all? Have you come right out and told them you're not paying anymore? Thanks -Joe

We stopped paying back in November. They didn't waste a whole lot of time before they started calling. The second (Wells Fargo Bank) calls a lot more than the first (Wells Fargo Home Mortgage). The two might as well be independent companies and have no idea what the other one is doing.

The frequency of their calls depends on a lot of things, including how often you talk to them. If you answer the call, they usually back off for a week or so. If you continually duck them, they'll keep trying several times a day sometimes. They have called me at work, but I don't answer there. I haven't bothered to ask them not to call there, so I have no idea if that would be effective or not.

I have not come straight out and told them that we won't be paying any more. I'm rather enjoying the free rent at this point and don't feel any need to give them cause to accelerate the process. As of now they have not filed a NOD, but I imagine it will happen fairly soon now. In the past I told them the truth, that we were waiting on hearing back from them regarding a loan modification. They've pretty much told us to take a walk for the final time now, and I haven't spoken to them since then.

The second seems to be more aggressive in their collection efforts and calling - presumably because they've got everything to lose. Ironically now that the first has told us they're not willing to give us a modification the second has started calling with "special offers" to reduce our interest rate and what not. But without the first willing to do anything, it's really too little too late at this point.

[Sparky06921]

Thanks for the info knownick.

I noticed in some of your previous posts, you had consulted with an attorney and had them review your loan documents to confirm non recourse on your second. I'm interested in doing that as well. Would you be able to refer me to the person you spoke to? Also, do you have a ballpark figure on much would it cost me to have this done?

Thanks,
Joe

[Moe Bedard]

Joe,


the attorneys that are on this forum have already had their credentials and backgrounds checked and have been authorized to be on this forum by LoanSafe........if you are not located in California or in their area of practice.........you could ask them to refer you to an attorney that is in your area.............they would be more than happy to help point you in the right direction........
Loan Modification Attorneys

[knownick]

Ok, thanks for the clarification. I understand the need to make sure people are linking to reputable, non-predatory sources, and also understand an honest Sunday mistake.

So to try this again, Joe:

I used the second referral service on this page at the CA Bar Association website:

Certified Lawyer Referral Services

I tried the county referral service first, but they didn't get back to me for over a week, and even then it was only to tell me they do NOT refer out for foreclosure matters whatsoever.

The attorney we met with charged us for one hour of her time, $190. A little spendy, but money well spent for the peace of mind.

Good luck.

[Moe Bedard]

Thank you

[fishman61]

I am currently in the short sale with Wells Fargo, my first and 2nd are all original purchased money and the property is in CA.
My agent found a buyer very quickly, with a very good offer. But, I got a short sale denied letter two weeks ago due to the 2nd was not agree with the 1st. Last Friday night, Wells Fargo called me said my short sale, the 1st mortgage is actually approved after re-opened a week ago which I didn't aware of. My agent told me, that denied letter was sent during he was still negotiating.
So now, my short sale status is the 1st is full approved and needed to close on May 18; but the 2nd is approved with conditions. My agent didn't tell me what conditions are, he said he will continue negotiating.. and he told me this is normal in short sale. He said I don't need to worry, the escrow will close on time. He already referred me a mover and set a day with the buyer for me to move out.

My questions are, if the 2nd still pending, can the escrow close on time? When will I see the short sale contract? On the date of escrow?