Sacto, CA - 2nd Loan = CW, Loan DEFAULT implications?

[John316]

Thanks to the LoanSafe.org community - it's been very insightful! My first POST ...

In 2005 our home was purchased with 100% financing for ~$316k. 1st is $252k IO 6.5% with a 20 year repay starting in 2015 (+$550 P&I) -- INDYMAC. 2nd is $64k with a balloon of $53k in 2020 -- COUNTRYWIDE. Combined, we have a minimum monthly obligation of $2300.

What would happen if we stop paying on the COUNTRYWIDE 2nd ONLY?? Could we still keep the home? Is this considered a PURCHASE MONEY LOAN? If so, this could buy us some time to see how my wife's employment situation unfolds and if any legal settlement on the accident occurs. This won't likely happen until 2010/11 timeframe.

The home is 980 sq. ft. Bathrooms and kitchen problems make the home uncomfortable to live in, questionably safe and adds significant strife to daily living. We don't have the money to resolve the bathroom problems - currently estimated at $6,500.

We are first-time grandparents since Oct. 2007 -- Second one due April 2009! As such, we need to look at all options for big-picture decisions moving forward ... something has to give, been agressively pursuing ALL options to recover from HUGE debt and upside-down home ($316k vs FMV ~$178k) - only $200 / month for food, gas, etc. on a GOOD month. Wife's income at substantial risk & savings depleted due to a non-fault car accident she had.

Thoughts??

Thanks so much for anyone who took the time to read all this and even more so for your thoughtful feedback!

[The Professor]

Welcome to the forum. If you've read some of my previous posts, you know I live in the neighborhood. You my friend are very lucky to live in California. As I mentioned in an earlier post today, the Sacramento real estate market has the distinction of being the 5th worst in the nation. Values around here continue to reach new lows. Given that you purchased the home in 2005 (the market peaked here in August of that year), my guess is based upon your purchase price of $316K, that the home's current value is no more than $220K (70% of the purchase price).

Given the bad news, and the fact that the local economy is going to continue this downward path for a while (especially since State workers are looking at a 10% cut in pay), you need to be questioning whether or not it makes sense to accept an eventual foreclosure of the home and immediately cease making payments.

What you gain by not making payments is the ability to live in the home for a period that won't be shorter than 4 months (the minimum foreclosure period), and could be as long as a year or so, given the glacial speed lenders seem to be dealing with borrower defaults. You could use that period to save up the money you will need for a rental. You may also be able to extract money from your first lender once they have completed the foreclosure under the "keys for cash" scenario that I've discussed a number of times on this forum.

As to your question about your loans being purchase money, look closely at the other postings where I've discussed application of California Code of Civil Procedure Section 580b. Seems to me that it probably applies to you, but as always I recommend that you have your purchase and loan documentation review by an attorney skilled in California real estate law and debt collection practices.

Take care,

Daniel

[John316]

Daniel,

Thanks for your timely updates. I have seen your postings on the CA CCP references. I will look for your "keys for cash" next.

So, if we STOP paying the 2nd ONLY .. what will happen?

I would think CW would either pursue collection OR "charge-off" the balance and put a LIEN on the title. In the future, this would cloud the title and make further disposition more difficult - correct?

Can they take the home or force some sort of sale or involuntary disposition of the property? Please advice ..

Thanks!!

-- George

[The Professor]

Countrywide is in what is probably the worst situation any lender finds itself in. That is owed money without a collection mechanism in place. Their best chance of recovery is that property values increase where their loan becomes secured again (they continue to have a lien on your home but there is no equity currently to recover from in the event they proceed to foreclose). So all they can do is sit and wait.

To me it only makes sense to pay on the first loan only, as you have suggested, if the amount of that payment is less than the fair rental value of your home. The reason I say that is your failure to pay on the second, simply raises its balance and increases the amount of the second's lien on your home. If values go up, and eventually your home is no longer in a negative equity situation, the second's lender will get all their money back including delinquent interest (which will be added to the unpaid principal), late fees, etc.

So don't expect Countrywide to do anything other than assist in the efforts to destroy your credit rating. That is really all they can currently do.

Daniel