Finally accepting reality in WA

[Bummed in WA]

Still a little in shock that it is come to this but my wife and I have decided after some much needed counseling from my dad that it's time to walk away from our Home in Puyallup. I thought I would share a little bit about my situation and our thinking to see if anyone can offer any guidance.

I've been like a sponge the last three days on this site and think I have a basic understanding of the process and what to expect. I can't say that it makes it any easier and my wife and I are having to get past the feelings of being a failure and make it into simply a financial decision that has to be made without emotions. We have accepted there will be some consequences of our actions but feel like we have no other options.

Here's our situation:

Bought a home in Puyallup in 2008 for $350,000 and ended up financing $327,000. We have a single mortgage through CitiMortgage that we just found out is carried by Fannie Mae. The home is currently estimated at $226,000 according to Zillow and we still owe just over $321,000. We moved to California in May of 2011 for a job relocation and decided that we needed to try and rent the home since it was too far under to sell and Citi offered nothing unless we were behind. We ended up renting to our niece and nephew but they couldn't pay enough to cover our mortgage payment so we make up $600 a month between their rent and our monthly mortgage payment.

We realized last night that it will take many, many years to make up the $105,000 we are under assuming it stops declining in value (wishful thinking) and all we would gain is lots of years making a payment to just break even (if we are lucky)

So as far as the walking away part, we are scared. I've seen the many posts by TomEason (Thanks Tom!) about the unlikely case that a mortgage company will pursue a judgement for the difference in Washington state but we are frightened that we will somehow become the first to say we were the exception to the normal process. Izzle's posts of the process has been very helpful too (thanks Izzle!).

Here is our plan.

We just found out last week that our landlord (we are renting in CA) is coming home from a military assignment and we will need to be out of the house by the end of June. Our thinking is that we will stop making payments on the mortgage on June 1st. Our rationale is that our credit report hopefully won't reflect any issues with our credit while we are applying for a new rental and won't show up on our credit until we are in a two year lease. Based on the timeline I've seen for WA, we are hoping the process will be over in June/July of 2013 so our niece and nephew can move out after the kids get out of school. We are planning on only charging them enough to cover homeowner's insurance since we want them to be able to save money too (and they are close family who are struggling too).

A couple of questions I have.

1) Does us being in California have any affect on this process? We don't want our niece and nephew to get dragged into anything or have to deal with collectors or law enforcement banging on the door wanting payment.

2) Does the house need to be occupied during the whole process? I'm pretty sure my niece and nephew will try to stay as long as they can so they can build up a savings but if they happened to move out early, would I need to make sure it stayed occupied (versus having some friends keep the property looking nice)?

3) My wife and I are going to have a large income reported for last years taxes (probably around $190K) but the sad reality is we don't see hardly any of that money after child support and debt for legal expenses. Is this going to be incentive for the mortgage company to try and get a judgement? I've heard that they can garnish up to 25% of your salary. In our case we would have no other option but a complete bankruptcy.

We did a refi in 2010 (We really let Citi ****er us in to this one but that's a tale for another blog...) so they have our 2009 tax information (quite a bit lower income) and they have our paycheck stubs from that year. We are planning on stopping all communication with them and actually found it ironic that they just sent out a form asking us to verify our contact information and give them email addresses and alternate phone numbers.

Sorry this is so long but hopefully some of you have insights to help us through this traumatic time for us.

[Bummed in WA]

Just realized I put an awful lot of information in that post. I can't figure out how to edit it so if I moderator thinks there's too much info, can you please edit out some of the figures. Thanks. I'm pretty new at forums.

[thomaspaine]

Loansafe is very helpful but does not replace an hour or so consult with an Attorney. You mention your note is backed by Fannie - so it should be a standard note for WA.


1. Foreclosure follows the process of the state in which the property is located. Not where the owner is located.

2. The method of foreclosure is what matters in WA state. A lender will, in nearly all cases, elect to use a non-judicial foreclosure. This will prevent the lender who forecloses form seeking a deficiency on the note they foreclosed. Since you do not have any subordinate loans it is pretty clear cut. The non-judicial foreclosure statues can be found by googling RCW 61.24. The lender can elect to use a Judicial foreclosure on a residential loan (identical to a mortgage)- but this is very rare.

Here is some info for you from the NW Justice Project

LawHelp Legal Information search results for Housing > Foreclosure

3. Your credit report does not report income - only liabilities. They amount of information that the lender can have about your income is under your control. Alot of things can change in two years. They cannot access your 2010/2011 tax info unless you gave them authorization to do so. In a refi you normally grant access to the previous two years, but not the upcoming years.

4. Occupancy or lack of occupancy only matters if the lender where to pursue a judicial foreclosure process. You can find information under RCW 61.12.

5. Once you stop paying the following things will happen. 1. Phone Calls 2. Standard Mail 3. Certified Mail. 4. Home checks - yes they will send people out to the house. They will leave door hangers, the will try to contact them. You are not obligated to speak to them.

If your mother paid on her house for 28 years, and then was suddenly unable to pay - the lender would not have any issue throwing her out. That is a financial decision for them.

The non-judicial foreclose process is a result of lenders asking state legislatures to make it easier, faster, and more cost-effective for them to foreclose. In a non-judicial foreclosure it is up to the home owner to bring suit to prevent the action - and this requires money that most people in foreclosure do not have. The lender wanted it this way as to provide them economic benefit (did not have to pay court fees and additional attorney fees).

Many western states agreed to this, but they also did put one constraint on the lender. When using a non-judicial method there is no, or limited right to a deficiency. I have no doubt that lobbyists are trying to change this.....

While the price declines may have slowed or nearly stopped I think housing will be moving sideways for many years. College graduates now have more student loan debt than credit card debt in the US. The net effect of this debt will be felt in the hosing market by reducing the number of first time home buyers. On the flip side the baby boomers are getting to a point in which they will either need to plan for or actually leave the homes they have been in for many years. This will put price pressure on homes from the other side.

In my opinion it is a financial decision. The right solution is different for all (Stick it out, Short Sale/ DIL, Foreclosure) but it is your decision. In making that decision one needs to consider the financial impact and legal impact.

[katwalker]

Good luck with your decisions Bummed, thanks for sharing.

[gjoru]

Welcome aboard Bummed... there's quite a few of is WA state that are walking for many reasons. Most if not many has to do with our properties being underwater and as for myself and Octanefam who also resides in Puyallup. You can follow many threads in this forum but most recent are in the Feb/Mar walkers (I have my own thread at "It's time to move on... ). Good luck and best wishes.

[Setmefree]

Bummed, I went through the same angst as you did. I am 'struggling' but I also know that compared to millions of others, I am actually doing ok. This was the biggest hurdle for me. Then I started doing some math and realized that I had blown more then a years worth of collage tuition, in making up the difference between the rent money and mortgage. That is what helped me realize that I have to do what is best for my family.

Also Thomas said, the bank is not emotional about managing their investment, and you should have to be either. I think it is great that you plan to help your family out with cheap housing in the meantime.

[Bummed in WA]

Thanks everyone for the posts so far especially thanks to you ThomasPaine. I've seen a lot of your posts on here and they've been very helpful.

Just got done doing my 2011 taxes yesterday and needed help from an accountant because of the housing mess and moving to CA. When we were done I was totally depressed over the whole situation. I can't remember a time when I've felt so hopeless. I know it will slowly get better but it's hard to see past the fog I feel like we're in now.

I talked to the accountant about the fact that we might lose the home to foreclosure next year and she said that unless the debt relief act gets extended, we're looking at an increase of around $35,000 in taxes assuming the price of the home doesn't drop substantially lower (not holding my breath). She said the same thing that I've seen in other posts where the lender can't come after us if they choose the non-judicial path (which they will likely choose) but that doesn't mean we won't have to claim the forgiven debt as income if the debt relief act expires.

It's so disheartening to wonder how we got here. I almost wish we had just lived a lavish lifestyle on credit cards and bad financial choices but sadly a majority of our income has and is being paid to lawyers (I could post for hours on this but I'll spare you all), child support, and high tax bills because of our tax bracket. I almost think it would be easier to handle this situation if I could look at myself in the mirror and know that this was just us being idiots. It's so hard to have people look at our situation on paper and say we are rich but then we look at our monthly balance and wonder how we're going to make ends meet this month.

Sorry for the rant.

We've decided that we aren't going to stop paying our mortgage until we can be sure that the debt relief act gets extended since we're pretty sure the foreclosure wouldn't be done by the end of 2012. We can't afford the $35,000 tax hit but don't qualify for bankruptcy either. I read that the President budgeted for an extension until 2015 but that's assuming it gets approved. Hoping it does.

I guess in the whole scheme of things it doesn't matter since the earth is supposed to blow up in December according to the Mayans and their calendar anyway. There you go, problem solved. Thanks for letting me vent.

[Setmefree]

What about a short sale? If you could complete the deal before the end of the year, you should be eligible for the tax relief. I know in some areas the success of a short sale is incredibly low, but you never know.

[BustedBrokeBeaten]

When the non-judicial option for foreclosure is used (and it's used in 99.9% in Washington), there is no debt to forgive so there is no tax implication. Because Washington is a non-recourse state, when they foreclose on the home, all they can do is take the house. They cannot come after us for the deficiency and there is no forgiveness of debt, thus no tax implications.

I think because you talked to a CA attorney you were given the wrong information. If you have a power of sale clause in your mortgage documents, the bank has to abide by what's documented in the power of sale. The banks can go judicial in Washington, but because there is a one-year right of redemption, banks don't use this method because there is a chance the home owner will use the right of redemption, thus the bank has spent an enormous amount of money going through the court system to foreclose only to have the home owner pay up and keep the house in the long run. It's much faster and more reliable for them to use the non-judicial option. Banks make money during foreclosure, so they don't take these financial risks.

I was worried about all of these same things that you are concerned about, but reading other Washington stories helped me look at this process in the way the banks look at it. You only have one mortgage, so I would stop paying if I were you. You have to be comfortable with your decision, though. I just wanted to share the information I've gathered over the last several months of being a member of LoanSafe. I think we all fear that we will be the first "example" and the bank will use a judicial route, but it's just not the case.

Good luck with whatever you decide. BBB

[gjoru]

Bummed in WA... as BustedBrokeBeaten noted there is no tax implications on foreclosed property in WA state as it's a non-judicial. Here's an excerpt from the IRS code... .

2. Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
• Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
• Non-recourse loans:A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.

3. I lost my home through foreclosure. Are there tax consequences?
There are two possible consequences you must consider:

• Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
• A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)

[KentWalk]

I agree with Busted and gjoru! I am not worried about the Debt Relief Act at all ! I spoke to an attorney in Renton, WA and he confirmed that the deadline has no impact to WA Non-Recourse Loans, as stated above. I suggest starting your walk immediately. The only regret I have heard on these boards is that people wish they had started sooner.

Good luck!
KentWalk
Stopped Paying 9/1/11

[Bummed in WA]

Thanks so much everyone. I feel like I'm on an information roller coaster not to mention the emotional one. I definitely feel like the information I've gotten here has been the most reliable. I found the power of sale clause in our deed of trust so I feel good about that being done.

Our main reason for waiting until June is because we need to find a rental home in the next two months and we are trying to stay within my daughter's school district. I want to make sure our credit report has no flaws on it when we fill out our application. I know it's probably not necessary since it can sometimes take a while to report to the credit agencies but we don't want to risk it. We are going to try and get a two year lease so we'll at least have some stability while we're going through the chaos with our WA home.

[KentWalk]

Thanks so much everyone. I feel like I'm on an information roller coaster not to mention the emotional one. I definitely feel like the information I've gotten here has been the most reliable. I found the power of sale clause in our deed of trust so I feel good about that being done.

Our main reason for waiting until June is because we need to find a rental home in the next two months and we are trying to stay within my daughter's school district. I want to make sure our credit report has no flaws on it when we fill out our application. I know it's probably not necessary since it can sometimes take a while to report to the credit agencies but we don't want to risk it. We are going to try and get a two year lease so we'll at least have some stability while we're going through the chaos with our WA home.

Bummed- do you realize that by moving out before you even start the foreclosure process, you are giving up a years worth of free "rent"?
For me, im saving $2k/ month or $24k this year by not moving out until I have to. Well enough for me to "sit tight" and wait. You may want to double think moving out so quickly. From what i have seen on these boards, its not that difficult to find a rental. Cash speaks.

KentWalk

[Bummed in WA]

Thanks KentWalk and believe me if we were still in Washington we would definitely be taking advantage of free rent and dragging the process out as long as possible. We had to relocate to CA last year for a job so we aren't in the area any more. We have relatives living in the house right now and their financial situation is much worse than ours so we are going to have them pay enough rent to cover HOA dues and homeowners insurance. We think it will be a win-win because we are currently having to make up $600 a month to pay the mortgage since rents have fallen so low in our area. Plus, this will help them get back on their feet.

[KentWalk]

Bummed- Thanks for the follow up. I understand your strategy now. I had read your originating post a few days ago, but I had forgotten the situation you were in. Sounds like the only benefit you will receive from going through FC is that you will get to help family members. Best of luck to you.

KentWalk

[outdrdude]

Is there anyone still looming out there? It's an old thread with good information but I'm wondering if anyone has actually gone through having to deal with the IRS? Did you actually not have to pay any tax after foreclosure in WA? I hear conflicting stories constantly but can't find any posts to confirm that they filed and didn't have a tax hit.

[Cat Damiano]

Is there anyone still looming out there? It's an old thread with good information but I'm wondering if anyone has actually gone through having to deal with the IRS? Did you actually not have to pay any tax after foreclosure in WA? I hear conflicting stories constantly but can't find any posts to confirm that they filed and didn't have a tax hit.

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