Need Help - 1st $620K and 2nd Heloc $120K

[southriding]

Ist loan 620000 (Interest + Principle) UBS
2nd 120000 - Wells Fargo Heloc
Home Assesement - 600000
State - VA

I am planing to stop my both(1st and 2nd loan) payments from March ownword.

Not real hardship now but will have later because the things are really tight. our income went up 20% since the loan origination in 2005 and the loan installement went up by 25 % with increased tax and interest.

We also have investment property in partnership worth 100000 K our portion.

My question is specially towards wells Fargo since they have zero equity on their loan. If we stop making payments what will be the mgnitude of their deficiency recovery?

Thanks in advance!

[The Professor]

Please provide answers to the following questions:

1. In what state is the property located and is it your primary residence?
2. For each loan on the property, was the loan created at the time you purchased the property and if so, were the entire loan proceeds used to buy the home?
3. What is your estimate of the fair market value of the property?

Daniel

[southriding]

Thanks for the response. Here is the details:-
1. In what state is the property located and is it your primary residence?
It is located in VA an its my primary residence.
2. For each loan on the property, was the loan created at the time you purchased the property and if so, were the entire loan proceeds used to buy the home?
1st trust was refinance. I had refinance after the two month of purchasing the property. The second trust (Heloc) was opened later.
3. What is your estimate of the fair market value of the property?
The fair estimate is arround 580K to 600 K.

[The Professor]

Virginia is one of the many states where lenders can (and will) get a deficiency judgment after foreclosure. In all likelihood, the HELOC loan will be your real problem. It will become unsecured as the result of the foreclosure of the first loan. I would encourage you to talk to a lawyer familiar with real estate law and debt collection practices to craft a plan.

Daniel

[Arizona Jim]

Here's a thought: If the $740K is anywhere near what the house could command in today's market (WITH the proviso of seller financing), you may consider asking the lender(s) to allow you to incorporate the existing financing into a contract for deed. The buyer would have to come up with say $100K down to be applied to the loan balance. If the lender(s) refuse to cooperate, then you can remind them of their legal duty to mitigate their claim for damages if the house goes into foreclosure and there is a deficiency. (They also have a duty to allow YOU to mitigate their claim). Here in AZ, the only way that one can sell their "jumbo" house is to accomodate the buyer's lack of available mortgage money. The seller who can deal with this "deal-breaking issue" has a distinct competitive advantage. If they refuse to budge, you may have a good affirmative defense in a lawsuit. You've done your best.

Professor, has this idea yet been brought up on this forum?

[southriding]

Thanks for the info Professor.

Since Heloc will be under water and lenders can (and will) get a deficiency judgment. Can they detach my second property that is in partnership and is fully paid? or what can be the magnitute of this judgement?

[The Professor]

southriding:

An indirect answer is yes the lender can attach once they obtain a judgment as the result of instituting a collection action through the court. The second loan becomes unsecured in these situations once the first loan has foreclosed. This action of loss of their security is a default under the loan. They can proceed to get a judgment and "execute" on your interest in the partnership (which is personal property). Once they have gained ownership of your partnership interest (or some portion of it), they could effectuate a dissolution of the partnership meaning partnership business would be wound down (including the potential sale of the partnership real property).

Sorry to be so blunt, but you need to know the potential downside.

Oh and on Arizona Jim's suggestion, it brought up reminders of the '70s and the Wellenkamp vs. Bank of America case (worth googling if interested). Gone fortunately are those days of creative financing. Jim, it isn't going to work. Who would want to be a contract buyer on a hopelessly encumbered piece of property?

Daniel

[Arizona Jim]

Thanks, Professor for taking the time to address my particular situation.

In my particular situation, the existing loan balances would be less than what the property would sell for. (I have "perceived" equity - whereas in most cases the property is upside down.) Potential buyers would be looking for this type of creative financing given the absence of jumbos. Lender, seller, and buyer would benefit is as much as I would still be subordinate.

One other item: I would require the buyer to forfeit his 180-day right of redemption. Further insight from you on this? Thanks, in advance.

[The Professor]

Contracts for deed (aka conditional sales contracts), have a whole host of potential problems associated with them, both from the sellers and buyers perspective. Unlike a tenant, you don't have the summary process associated with filing an unlawful detainer if they stop making payments. You must resort to a quiet title action. And having raised the right of redemption, it may well be against public policy to include such a waiver if that right exists because every contract would contain such a waiver effectively making that right useless.

From a contract buyer's perspective, what happens down the road if they fully pay and you can't clear title to the property? Then they have a problem.

As you can tell, I'm no fan when it comes to creative financing. Just too many potential problems for either party.

Daniel

[Arizona Jim]

A title company servicing arm would serve as as escrow agent. The problems associated with the seller's failure to keep up with the underlying loan would be avoided. I would scrutinize the buyer's credit a little closer. Anyone willing to gamble $100,000. would be about all that I could find or expect to find in this economic climate. The lender might require that I suppliment with a paydown of my own - in which case I would also have a significant stake to protect. Does this temper your thinking any? Thanks, again.

[The Professor]

Nope. Too many nightmares relating to the '70s. A title company cannot protect against unforeseen circumstances. They simply act as a stakeholder.

Daniel

[The Professor]

Oh and a quick example. Something called an IRS lien against the seller...

Daniel

[Arizona Jim]

It might well be that the lender must just have to allow a full assumption wherein I would still likely be held liable in the event of a default. My paydown would be required to ensure my continued involvement. Still, a significant improvement over the current situation that I find myself in. The HELOC is due and payable. Hopefully, the lender would waive this requirement. (It doesn't want another nightmare next door to the one it has already.) Thanks, again. I have been deceiving myself in thinking that I have a unique way to market this house.