Finally walking away from loan mod

[ldelrosa]

Hi, I've been posting in another thread for Loan Mod. Now we're graduating to foreclosure since my husband's sickness is getting worse and I wont be able to pay for 2 homes as single earner (besides the fact that we are almost $300k underwater)
We tried so hard to modify our 2 loans since 08/2008. We havent paid since 05/08 and now have the notice of sale for 2/09 posted on our door. At the same time we received an a mod offer @1.5% int fixed on our first. We also received a settlement offer of $16k for the $96K on the 2nd. What to do?
Details:
Purchased: 2004, Location: CA, $480k
$330k 1st Loan gmac/$96K 2nd Loan nat'l city, down $50k
Purchase Loans -Yes
Similar houses are now selling for $200k.
Questions:
(Please - I will also be looking for a real estate/debt collection lawyer next week but will appreciate any response from anyone who has had any experience with this, I've consulted 3 lawyers who gave us different answers. One said he does not know real estate law, another charged $7k before answering any questions and 3rd took our $3k for bankruptcy but ended up advising that we could not file for bk since our other home has equity- hence losing $3k for nothing).
I read a lot of the postings here but have some questions on non-recourse loans etc when we do foreclose.
Is our 2nd loan non-recourse (since we borrowed at time of purchased and lived in the house for less than 2 years?) Will our 2nd have the right to charge off and sue us and should we settle for $16k for $96k or is it too much? Our 2nd calls us everyday to collect and even though we have settlement in process for January, they demand min monthly payment otherwise they said they will charge off the loan. Should I pay the minimum or save the money for next month?
If I accept the loan mod offer (1st), settle on 2nd and live for 4 more months (to complete 2 years residence), we would qualify for tax relief (we've est. to be $70-$150K). Is this questionable by IRS since our other house is nearer our work? Our college son and daughter live in our other house but our foreclosure house is our principal residence now. Our bk lawyer said this is ok though but i am not so sure.
Thank you so much for any help you can extend - I'll update you as well as to what happens afterwards...

[The Professor]

Sorry you have had different advice relative to the non-recourse of your debt. The key determining factors relative to non-recourse are outlined in California Code of Civil Procedure Section 580b. It is not a particularly difficult law to read and understand. The first paragraph of that Section is key to your situation and states:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

The above paragraph identifies two situations where the borrower's debt is non-recourse. The first is any situation where the purchase money loan is what is commonly known as a "seller carryback loan." Irrespective of the nature of the real property, the loan is non-recourse. The second situation is where the real property is a dwelling that is no more than a fourplex, where at least one of the units is occupied by the purchaser and the loan's proceeds are used to purchase the property (purchase money).

It is this second situation that appears to fit your circumstances. Since the proceeds of your loan were utilized to purchase the home that at the time the loans were made you intended to occupy, my sense is that the nature of those loans is non-recourse.

Take care,

Daniel

[ldelrosa]

Thank you Prof, English is my 2nd language even though I've read 580b multiple times to me this seems to take care of just the 1st mortgage. Does this mean though that they can still sue me for 2nd heloc loan when it gets foreclosed or charge me off to collections if i do not settle before sale date of 2/09?

[The Professor]

It doesn't make any difference whether it is a first loan or a second loan. The key is that the dollars that were borrowed were used to buy the home. That is what makes it purchase money.

Daniel

[mirkus35]

did I read that correctly above...a 1.5% fixed loan for your first?

[ldelrosa]

For 5 years only, then arm every 6 months up to 10.75%. Either that or 5% fixed for 30 years. Even if we take the 1.5% for 5 years, i still could not pay as a sole earner.

[ldelrosa]

I just consulted with the real estate lawyer which validated Prof's answers:
- both 1st and 2nd are non-recourse, therefore no deficiency on both
- 2nd can charge off to collections but since it is non-recourse purchase money loan, we do not need to settle with 2nd, just need to write them a letter not to collect and cite California Code of Civil Procedure Section 580b.
- we will qualify for tax relief (Mortgage forgiveness act of 2007) if we continue to stay for a cumulative of 2 years.This is a major concern for us as accountant estimated our tax between $70-150k
Thank you so much for all your help. I hope i can repay by giving advice when everything is done and cleaned/cleared up...

[The Professor]

Nice to get an occasional validation and thanks for the information on the two (2) year requirement relative to the qualifying tax relief. The problem with tax laws is they often don't make sense, and it is where the form of the transaction controls rather than its substance. My guess is the two (2) year requirement is inline with the capital gains treatment for personal residences that require that you live in the home for two (2) of the past five (5) years.

Take care,

Daniel

[ldelrosa]

Yes thanks, Loansafe is a blessing to all of us in distress and your help Prof, along with this board is very much appreciated more than you'll ever know. I have another appointment with tax/accountant to validate the 2 years cumulative (to qualify for debt relief since we've lived there for 1 yr (2008) and 8 months (2005) out of the 4 years we've owned it. Will update later what i find out.

[The Professor]

Not that I'm anything close to an expert when it comes to tax law, but be sure to bring up the issue of "recapture of depreciation" to your tax advisor. My guess knowing what little I know about tax law is if you have taken a "depreciation" deduction on the home during the period of time it was income property, you may well have to recapture that depreciation deduction.

Take care,

Daniel

[ldelrosa]

OK, I will ask that question although I'm pretty sure you're correct as I also read it. Just to clarify, in-between the 4 yrs (where we occupied for 20 months) the house was vacant and we paid for utilities. Now we also want to to find out (from the lawyer) what constitutes a primary residence (as we recently moved out of the house). Will claiming it as primary residence (in irs tax), paying all utilitilities,moving back the furniture and living there on the weekends satisfy the primary residence rule (until it gets foreclosed)? We have another house where our grown son and daughter lives for college and where we've moved back and its closer to our jobs. If anyone has ideas, please let us know.

[ldelrosa]

I have another question for anyone who has undergone foreclosure. Our previous balance with 1st lender was $333k. The trustee sale notice indicates that our balance (including lawyer fees) has jumped to $350k.
If current selling price for similar properties is below $200k, will the bank the house below $350k or not?
If no one buys the house during the auction, will we be able to buy it from the bank again at the prevailing price?
If another buyer buys for 200k, can we redeem the house within 1 year for 200k?
We really love the house but were unable to negotiate a principal reduction... So if anyone has any ideas, would appreciate very much your thoughts...

[The Professor]

I'll take a stab at answering your questions.

If current selling price for similar properties is below $200k, will the bank the house below $350k or not?

I think you are asking if the bank will make an opening bid below the $350K figure in the notice of sale. If they know what they are doing they will and continue to bid it up to a point that exceeds their appraised value (assuming they have done a recent appraisal). Problem is lenders are not behaving in what I'll characterize as a smart manner so I wouldn't be at all surprised to see them bid the full $350K.

If no one buys the house during the auction, will we be able to buy it from the bank again at the prevailing price?

If you had "cash" they might be willing to sell it to you at the current market value. Problem for you is that if you go into title, the foreclosed out second would immediately attach. You of course wouldn't like that.

If another buyer buys for 200k, can we redeem the house within 1 year for 200k?

No. In California if a lender uses a non-judicial foreclosure under California Civil Code Section 2924b, there is no post-foreclosure right of redemption.

Daniel

[ldelrosa]

Thank you so much Prof I didnt know that the 2nd could merge again.
So I assume that we will not be allowed to bid during the auction. For the sake of argument, lets suppose we miraculously produced the total cash and managed to settle with our 2nd lender prior to auction date, I would assume that the 2nd will no longer reattach...
I looked up recent sales in our area and similar properties are now selling between 150k-200k. I will try one last time to contact our 1st lender to see if I can ask them to reduce the principal and interest before the trustee sale next month.