Strange situation -- success with caveat -- HELP needed!

[orcina_orca]

Here’s my brief saga of gloom:
Home in AZ, bought 05/2006 for $380000
Loan w/ Wells Fargo for $340000 Interest only at 7.25% 2/1 arm, mthly pmt $2200. Adjusted to 8% interest only in 05/2008, w/ monthly pmt at approx $2550
Lost job, medical expenses, and various other financial difficulties. Stopped paying Dec 2008, set for foreclosure sale end of June 2009. As of 03/2009, Zillow showed home price to be $260000. Simultaneously contacted NACA/WF Executive team 2 weeks before sale date. NACA proposed mthly pmt of $1350 to WF. Sale date postponed by 60 days. WF called me 06/23 to make an offer for PI/TI combined pmt of $1880/mth, at 3.25% fixed interest for life of loan. They added foreclosure fee and late payments on to $340000, making total owed to $365000.
I rejected the offer right away, asking for a reduction to at least in the $1400 range. A week later WF called back to tell me that the house was now appraised by them at $230000. WF and the private investor of my loan are willing to “set aside” the difference of the amount owed and the current valuation (approx $110000). They are offering me approx $1450/mth at 4.0% interest (PI/TI) for the life of the loan. But, they say that the $110000 difference is due if I sell the house, refinance at any point, or in 30 years when the house is paid off. When I asked if the $110000 will be a non-recourse loan they say that it is too new for them to even know about it at this point. Although they say that if I sell the house I’ll likely be able to do so at the prevailing market price, which is now $230K and still falling fast. Apparently, I’ll know at an appropriate time if and when a situation arises for me to sell the house or refinance how to pay back the rest of the $110K.
Now my question is, has anyone heard of the term "set aside amount" (which WF insists is a new term that they've just started using recently)? Can I sell the house, say, tomorrow at the current market price and not be held responsible for that $110K difference? I know AZ is a non-recourse state, but does this also apply to this difference, or can WF or the investor sue me for this money? I’m thinking this is a good opportunity for me, but since I do not have any intention of staying for 30 years I’ll likely sell this sometime in the next 5-7 years. What happens then?
I haven’t responded yet to their second offer so need some help ASAP. I am supposed to call WF to give a final answer after their office reopens next week. Any advice would be greatly appreciated!

[AZChick]

Wow, I'm not sure but find this very interesting. So basically you'll be on the hook for 110K whenever you choose to sell the house? Does that mean that it is now going to be a recourse loan once you try to sell the house? Wow, that is a bit troubling. Personally I don't know if this is something I would consider, way too many risks involved especially with the Mortgage Debit Relief Act ending in a few years....

[orcina_orca]

Hi AZChick:
Thanks for responding. What I don't know is IF it will be a recourse loan at that point or even now when I sign the paperwork. I honestly don't know what to do. One thing that comes to my mind is that I could hope to get around it by perhaps selling the house before then (say, to my parents). This is only if I am not responsible for the 110K. If I am still responsible, it wouldn't matter either way.
When the Mortgage Relief Act end, would I have been responsible in the event of foreclosure if it came to that?

[Sparky06921]

Not sure what the market will be like in AZ in 5-7 years which is when you would most likely be selling the property. If I uderstand what you explained about this offer, you would owe them $110k once you sell the property in lets say 5-7 years, which is when you want to eventually move? Essentially your property would have to be worth and sell for $110k more than what your loan balance is, in order for you to walk away and break even without any money in your pocket.

Using $230k as your current loan balance as of today and a simple mortgage appreciation calculator. If your house appreciated 6% every year from this day forward, it would take a little over 5 years for your house to appreciate $110k over your loan balance. That is if I'm understanding it correctly? Will the market turn around tomorrow in AZ and start appreciating 6% annually? I don't think so.

If it were me, I might consider it if I loved my house and wanted to stay in it forever. If I was planning on selling my house in lets say 5-7 years, I would walk away now and take the credit hit. In 5-7 years, I would have pretty much repaired the damage to my credit and saved enough to jump back into the market under hopefully more favorable conditions. The offer is unique and sounds like a win win for the bank and investor. I guess only you can decide if it's a good offer for you in your situation. Best of luck & let us know what you decide.

[orcina_orca]

Thanks for the advice, Joe84780. You are correct in your extrapolation of my current situation. But the way I'm looking at it right now is that it would also take me approx $1400 to rent a decent house or apt right now. My current house would in addition give me a tax break of at least $150/mth should I choose to keep it, and some equity (hopefully, unless real estate keeps dropping!).
Of course, I'm still hoping against hope that the $110K is a non-recourse "loan" for which they cannot come after me. The best scenario (but not likely) is if I turn around and sell it to my spouse for 230K. In principle, that would help me "buy in" at the low current price and "ride" it when the price eventually goes up, would it not?

[CW California]

Originally Posted by orcina_orca

Thanks for the advice, Joe84780. You are correct in your extrapolation of my current situation. But the way I'm looking at it right now is that it would also take me approx $1400 to rent a decent house or apt right now. My current house would in addition give me a tax break of at least $150/mth should I choose to keep it, and some equity (hopefully, unless real estate keeps dropping!).
Of course, I'm still hoping against hope that the $110K is a non-recourse "loan" for which they cannot come after me. The best scenario (but not likely) is if I turn around and sell it to my spouse for 230K. In principle, that would help me "buy in" at the low current price and "ride" it when the price eventually goes up, would it not?

As long as you do not sign a new note or deed of trust would it not stay a recourse? Modifying the terms is one thing but don't sign a new note.

[auroraproblem]

Originally Posted by orcina_orca

Thanks for the advice, Joe84780. You are correct in your extrapolation of my current situation. But the way I'm looking at it right now is that it would also take me approx $1400 to rent a decent house or apt right now. My current house would in addition give me a tax break of at least $150/mth should I choose to keep it, and some equity (hopefully, unless real estate keeps dropping!).
Of course, I'm still hoping against hope that the $110K is a non-recourse "loan" for which they cannot come after me. The best scenario (but not likely) is if I turn around and sell it to my spouse for 230K. In principle, that would help me "buy in" at the low current price and "ride" it when the price eventually goes up, would it not?

Remember that their loan was an 'investment', offer them something to counter. Perhaps offer $75k or whatever you feel is more suitable. Why should they collect the entire amount when faced with a $110k or $0 choice. Eventually the decision can only be yours, but I would think with such a drastic loss for them, they would haggle a bit.

[dogatemy]

Originally Posted by orcina_orca

Now my question is, has anyone heard of the term "set aside amount" (which WF insists is a new term that they've just started using recently)? Can I sell the house, say, tomorrow at the current market price and not be held responsible for that $110K difference?

I ran into this years ago with a house I bought while I was in college. The City of Philadelphia offered me a $40k grant if I bought a town-house, renovated it and resided in the home for 15 years. If I sold the house prematurely then I was obligated to get a release from them allowing me to sell the house and I needed to pay back the $40k out of the sale proceeds. I assume you will see the same thing here. The bank will put a lien on the house for $110,000 and will probably even add similar language to the loan.

There is no reason I can see why the bank would not make every reasonable effort to make you responsible for that $110k in the event you sell the house prematurely and the sale price is not high enough to cover the debt.

[AZChick]

I agree with dogatemy, they will make sure they get their money. Also, when you even factor in the realtor fees from selling it, you will owe money. It just seems way to risky. Also, assuming that the property will appraise at a rate of 6% a year is way too risky. I'm sure there'll be a lien on the house. If you love the house and plan to stay forever go for it, if not, this is a very gray area. Also the MFDRA will expire in 2012 I think, so if you're thinking of walking before it's too late you should be aware of that.

[AZ Meltdown]

I don't think the AZ RE market is coming back anytime soon, and expect it to continue dropping for 2-3 years

Sorry, but this mod seems to be yet another example of the lender giving little to nothing to share the losses on their poor investment.

Without a REAL principle reduction, I would continue to walk away. And did.

[AZChick]

I second AZ Meltdown, principle write down is the only way to go, otherwise it's just the lender manipulating numbers that will still be in their favor.

[orcina_orca]

Thanks for the comments everyone! And to think that I was actually getting excited...
Well, one thing I cannot dispute: the $110K is actually interest free for 30 years (or however long it is before we sell). If we walk without repaying it, it's essentially living at $1400/mth mortgage in a home for which I used to pay $2500+. Plus the tax break. That alone seems pretty lucrative to me.
If they can't come after me for the 110K, Arizona being a recourse state, it's essentially principal write-off is it not? But I also see your points. At this point, I do not know what to do. I called WF and was told that they'd get back to me in a timeframe that could be anywhere from 2 weeks to essentially 2 months. Until they decide, they are willing to push back the foreclosure date (and let me live free).

[AZ Meltdown]

No, a principle write down would permanently reduce your mortgage balance.
You would probally still have a hit on your credit report.

The WF offer would probally be a lien on the home. It must be repayed any time in the future that you sold the home and before you would recieve any of the equity.
The only way the WF offer would work to your advantage is if we had wild inflation, something like 20% or more for years.
Then that 110K of interest free debt would be inflated down to little or nothing.

Of course with that level of inflation most of us would be scrambling to survive.
So it is not something to wish for.

But I am all for you dragging out the foreclosure process as long as possible.
Good luck!!!

[orcina_orca]

Thanks everyone! After spending many sleepless nights, and going one way and then another, I've decided to give this a shot. I start my new payment from Spe 1st, and this is about half of my original (which was around $2600). Now my PI+TI = $1200, plus another $250 for escrow and insurance. Here's what I am planning to do. I will keep this for maybe another 6 months and then when I feel the housing market has reached a bottom, have my parents buy a house for me, at which point I will pay the monthly mortgage on their behalf. So at that point I will walk. I believe if they want to foreclose on methen, it will take them another 4-6 months, which means living free for another few months and getting my finance settled. Hopefully since AZ would still be non-recourse then, they would not be able to come after the $110K.
I'm hoping this will work. Well, one can only hope, and in my situation, beggars cannot really be choosers. It's the frying pan versus fire...

[AZChick]

I recommend contacting a lawyer and asking their advise BEFORE signing anything, you'd better read that paperwork back and forth to make sure they are not going to slip anything in there, you need to be really sure that this "lein" will be considered non-recourse and not treated like a second. Also with the way our Gov. Brewer is changing MFDRA laws left and right, I'd not take any chances with how things will be like 6 months to even two years from now.. Good luck to you no matter what you choose, we are all trying to avoid potential landmines....

[orcina_orca]

Good idea. Why didn't I think of this before? I'll try and see if I can get a real estate attorney to look this over.
But a second lien can also be stripped through a bankruptcy, right? I'll try and find their exact wording in case someone can help me on this forum too...

[AZChick]

Woops.... Correction.... Gov. Brewer is not changing MFDRA, she is changing AZ anti-def laws....I don't think this has any effect on MFDRA YET....