What should I do?

[JohninAZ]

I purchased my home in nov of 05 for 340k in Arizona. Both the loans are from countrywide. THe first is $272k (30year fixed at 6% principle +balance) , and the second is $68K variable HELOC. I recently checked the estimated value of my house on Zillow.com at $250k, so basically almost 100k under water. My fiance recently lost her job so I cannot afford to pay the mortgage by myself. I have never been late on the payment and with savings, i can probably pay the next couple months. I already wrote a letter asking CW for a short sale about two months ago and still haven't heard back. Should I save my savings and just walk away? or continue making payments as long as I can until they approve a short sale? Or do i need to be delinquent for them to even look at my request? Any advice is greatly appreciated!

[The Professor]

Is your lot larger than 2.5 acres?

Daniel

[JohninAZ]

No, my home is 1994sqft with a lot size of about 6990sqft

[The Professor]

No sense reinventing the wheel, so I lifted the following quote from a website and I think it answers your question, not so much on what to do, but the fact that walking may be a real choice given the probable non-recourse nature of your loans. I'd caution you to have your purchase and loan documentation reviewed by a lawyer knowledgeable in real estate law and debt collection practices before selecting which course of action to take.

Daniel

-----------------(Quoted Text)--------------------------

Arizona's laws that prohibit deficiencies are found in Arizona Revised Statutes Sections 33-814.G and 33-729.A. These types of laws are also called "anti-deficiency legislation."
ARS § 33-729.A states, ". . . if a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.
ARS § 33-814.G states, "If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee's power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses."

Although the two statutes are fairly easy to read, applying them to a specific situation is not so easy unless you are an Arizona real estate attorney. Whether a lender can seek a deficiency depends not just on ARS § 33-814.G and ARS § 33-729.A, but also applying the statutes to the answers to the following questions:

1. Is the loan secured by a lien on Arizona residential property?
2. Is the loan secured by a deed of trust?
3. Is the loan secured by a mortgage?
4. Was the loan secured by the deed of trust or the mortgage acquired to purchase the property?
5. Was the loan secured by the deed of trust or the mortgage used to payoff another loan acquired to purchase the property?
6. Is the home on 2.5 acres or less?
7. Is the property limited to and used as either a single one-family or single two-family dwelling?
8. Is the lender foreclosing by selling the property under the trustee's sale powers of a deed of trust?
9. Is the lender foreclosing by filing a lawsuit in Superior Court to foreclose the lien judicially rather than foreclosing by having a trustee's sale?
10. Did the borrower (or somebody occupying the property with the borrower's consent like a tenant) commit waste? Waste occurs when the value of the real property is reduced because of acts or omissions of the borrower or the borrower's tenants or their invitees. For example, if you intentionally burn down your home and it reduces the value of the property by $150,000, Arizona's anti-deficiency laws will not prevent the lender for suing you for the $150,000 of waste.

[JohninAZ]

Regardless of the statements in the loan docs, doesn't the mortgage forgiveness act apply in arizona because it is a non recourse state?

[The Professor]

From a practical standpoint I don't think it really matters about debt foregiveness since the home, and not you, is liable for the subject debt. So in essence, since if we assume your loan is non-recourse under Arizona law, how can you receive imputed income for debt foregiveness when you were never liable?

Daniel

[JohninAZ]

I also forgot to mention that I have a second property under my name. I cosigned it for my brother and he put down 10% and is paying the mortgage on time, therefore not hurting my credit. THe loan was for 240k, now the house appraises for aroudn 230k on Zillow. However, the loan term was an ARM at 5% which is set to reset in 2012. My question is if i foreclosed or short sale my primary home mentioned in the first post, will I be able to refinance my brother's home that's under my name/credit when/before it resets? He never had good credit and still doesn't, so I'm just helping him out.

Also, i did not see anything regarding CW sueing me for defiency in my loan doc

[dealingwithHomeEq]

My question is if i foreclosed or short sale my primary home mentioned in the first post, will I be able to refinance my brother's home that's under my name/credit when/before it resets?

Your brother is upside down in his house today, so unless you had stellar credit and a lot of money down, you probably wouldn't even be able to help him refinance it now. 2012 is a long way off. Anyone who believes that he knows what the lending standards will be at that time would by kidding himself. These banks don't even know what they will be doing next month. Secretary Paulson doesn't even know what he will be doing next week.

Take solace in the fact that--for once in a very long time--the worker ants actually have the banks at a disadvantage (they can walk in Arizona and the banks can't really do much except take the houses back).

I'm convinced that Arizona is the place to be if you are upside down in your home--even better than California.

Check out my attachment in post #3 Proper way to walk away

[dealingwithHomeEq]

Professor Shays:

You said:

So in essence, since if we assume your loan is non-recourse under Arizona law, how can you receive imputed income for debt foregiveness when you were never liable?

This raises a novel argument and I have never looked at it this way. Do you know if anyone has raised this with the IRS yet? Has the IRS issued any opinions on this?

[The Professor]

It is a great argument to make relative to the facts of this case where the purchase price ($340K) is the same as the total amount of the loans ($272K and $68K). It certainly is supported by common sense. The problem is that tax laws are often of the form over substance variety and common sense is often not applicable.

Daniel

[dealingwithHomeEq]

It would be a great argument to win for many people in Arizona who refinanced and sucked out cash (or took out a HELOC) and are now upside down in their homes. As I understand it, the federal Mortgage Forgiveness Debt Relief Act of 2007 only applies to the principal balance that was refinanced--not the additional money you sucked out when you refinanced. Most people I know in Arizona were motivated to refinance, not because they were going to get a better rate, but because there was a big chunk of free cash waiting for them after they closed.

In Arizona, it looks as if the anti-deficiency judgment statutes cover any part of the mortgage, whether it be refinanced for the principal balance, refinanced for the principal balance plus sucking additional cash out, or even a second mortgage (HELOC).

I guess you could make the argument--at least in Arizona--that because you were never personally liable for any of the mortgage due to the state's anti-deficiency judgment statutes (as you say, only the home itself is really liable for the subject debt), then any forgiven debt could not be imputed as personal income. But the flip side is that you probably are personally liable--they just can't come after you for a deficiency after they do a trustee sale.

I don't see the tax court buying it, but it is an interesting argument.