Foreclosure on Previous Primary Home

[outsicktoday]

Here's the situation.

Bought a home in CA for 272,000 and financed 217,000 brand new in 2005 fixed for five option ARM, lived in as primary residence. Put 20% down on home so no PMI or Second. Goodbye $60,000. Home appreciates to $380,000 in the blink of an eye.

Refinanced to change term of loan only to 10 years Option Arm in 2008 (when market was crashing, no cash pulled out only finance fees, loan goes up to 227,000 but I think I have 10 years so who cares the market isn't that bad yet, house still appraises for $299,000) continued to live in residence as primary. Crash continues, home drops and Countrywide flops and Becomes BOFA. BOFA does nothing to help the situation, refuses all efforts at any type of modification. I see myself living in a home for 10 years and then losing it, so.....

Purchased a new home (#2) in 2010 (from BOFA, same lender that would do nothing on home #1) in CA and rented out first home. Continued to pay mortgages on both. Still hopeful that the now rental home will appreciate and that I can sell it at some point at even.

BUT Renters flaked last month in July 2011, trashed most of the house, homes drop again so much that I can't really get enough to cover the mortgage, and new renter is shaky at best but all I can get, and home is $100,000 upside down and still dropping.

So it looks like foreclosure is on the horizon soon for home #1 that I purchased in 2005.

I do not think that there is any recourse on the loan, and the amount is fairly low, so my guess is that BOFA will foreclose in a non-judicial manner, meaning that they use their one action and that's that.

I have not missed any payments yet, but am planning to miss this month and pocket the rental income for as long as I can. I will at least get something back of my losses. The home will not appreciate to the even level for a decade.

My plan is

1- to stop paying and pocket the rent and put it in an account in case I need it later or decide to pay the bank one lump sum in a few months. My renter is a crook anyway and probably will not pay that long. She has multiple judgments of default but gave me a roll of 20's for rent so I said "shucks, ok". All I can get. I will evict her if she makes me, but so long as she shows rolls of 20's I know nothing.

2- to talk nicely with BOFA when they call but not tell them much of anything, no financial info for sure. Maybe request a modification and then lose the paperwork since I'll never get it because I have two dimes to rub together.

3- to try and not drink too much (these are in no particular order)

4- to not sign anything unless an attorney looks at it

5- to forget the idea of a short sale

6- offer a deed in lieu towards the end of the process

7- sit in my current home with a 30 year fixed and make the payments while my credit gets better

8- hopefully complete the foreclosure prior to the end of 2012 and then claim the home as a primary residence on my taxes to not pay anything if BOFA sends me a 1099.

9- I'm not really considering BK because I don't owe on anything else.

10- My wife is on the current home, but not the rental one. So I will hope that no divorce plans are hatched.

Suggestions?

Legally, I think my only issue might be if the bank decides to pursue a Judicial foreclosure which is unlikely. The amount is small and I'm not exactly loaded. Tax issues could come up later with the 1099 but that's what accountants are for.

In reality, I won't be pocketing very much. But I will save it in case I have to pay some taxes or if the foreclosure goes past the end of 2012. This is BOFA we're talking about and the loan is a Countrywide one they acquired. So who knows if they can even find the note.

At this point, keeping the house makes no sense. Trying to maintain it after renters move in and put holes in walls, let grass burn up, break things, flake out etc. The decision is to not continue to pour money into a failed investment.

Hopefully this isn't a forum of "the holy ones" who will rip me for playing by the rules of capitalism.

If you're going to post about how I have an obligation to pay the banks and all that other boy scout crap then save it. I'll ignore and read something from someone that has some brains in their head and a sense of reality.

[outsicktoday]

I'm new to this site and from what I've read my loan on the rental house is still purchase money because I refinanced but did not pull out any money, no HELOC or anything like that.

Also the people on this site seem very cool and I'm hoping for some help. Other sites I've been on the real estate gang gets rolling with the moral police trip. I've tried to work things out with the lender over a period of years before I decided to buy another home and then rent the first and hope for the best.

Right now we're probably in technical recession #2 (as if #1 ever ended) and I don't want to hold the rental house until everything gets broken or stolen.

[Cat Damiano]

Hi outsicktoday,


Welcome to the forum and thank you for joining.........


It sounds as though you have a game plan in place, I am going to diffuse this statement that you made below with one link, (just the header alone will let you know that we definitely do not give advice from a higher moral ground on this forum and also we won't judge decisions made by our members), you should totally have fun with it and play the game

"Hopefully this isn't a forum of "the holy ones" who will rip me for playing by the rules of capitalism.

If you're going to post about how I have an obligation to pay the banks and all that other boy scout crap then save it. I'll ignore and read something from someone that has some brains in their head and a sense of reality."


Here is the Link:

http://www.loansafe.org/forum/chase-...heel-game.html

[jayguy0710]

I'm new to this site and from what I've read my loan on the rental house is still purchase money because I refinanced but did not pull out any money, no HELOC or anything like that.

Based on the "general" rule here in California, because you have refinanced the loan, it is now recourse. Some may contend that no-cash-out refi's do not effect the purchase money/non-recourse status, and while that may end up being true, IMHO it is going to take case law to determine that for sure. From my readings here, Arizona members have (successfully?) contended that a refi with no cash out is still a purchase money loan, but here in California I'm not so sure.

That said, the one action rule, as you already pointed out, will help you here regardless of whether or not the loan is recourse or non-recourse. If it is determined to be recourse, as you again already pointed out, that just gives lender the option of judicially FCing which they will not do.

In reality, the only thing that the recourse/non-recourse should effect in your situation is the taxes. If the borrower is not liable for the debt (read: non-recourse) then there is no cancellation of debt income (CODI). Because there is no CODI on a non-recourse loan, the expiration of the MFDRA on 12/31/12 is of no concern to those who have non-recourse loans here in California. If it is determined that you have a recourse loan (and in my opinion based on the laws right now, you do, but I'm not an attorney) then you "are responsible for the debt" (read: recourse) and then could potentially have CODI. You can exclude some/all of CODI using the MFDRA if the FC takes place before 12/31/12, if after, there are other ways to exclude CODI but they will not be as beneficial to you as the MFDRA.

My "qualifications" in case you're curious is that I'm a CPA going through my own strategic default here in California. Oh and it's worth noting that you may be renting that place out for a long, long time. I too have a CW turned BofA 1st loan and I've gone 16 months with no payment, and still no NOD has been filed, so I've got a long way to go!

Good luck to you . . .

[outsicktoday]

I too have a CW turned BofA 1st loan and I've gone 16 months with no payment, and still no NOD has been filed, so I've got a long way to go!

Good luck to you . . .[/QUOTE]


Good stuff. 16 months without a NOD is nuts!!! That was one of my main concerns, that the foreclosure would take longer than 12/31/12 to complete. I can't see that deadline not being extended but that may be political more than anything else. From this point on many manipulations will take place to try and sway voters and attempt to keep people paying for worthless property.

Just wanted to run it by some people with some experience that won't feed me a bunch of BS. Much appreciated.

I posted to Trulia.com and got attacked by real estate professions who advised em to keep holding on and rah rah rah garbage. What a propaganda site that is.

[jayguy0710]

Good stuff. 16 months without a NOD is nuts!!! That was one of my main concerns, that the foreclosure would take longer than 12/31/12 to complete. I can't see that deadline not being extended but that may be political more than anything else. From this point on many manipulations will take place to try and sway voters and attempt to keep people paying for worthless property.

I know, very crazy but I am sure happy about it. What is especially odd is that I haven't tried to extend the process until very recently (HAMPster Wheel stuff) - so for about 13 or 14 of those months, that was alllll just BofA's delay - nothing I did to delay things.

re: the MFDRA, I have a feeling you're right - it would be a bad political move to let the MFDRA expire, although a lot of times unpopular tax law passes without too much of a gripe. Everyone hates taxes, and hates to think about taxes, so I'm not so sure there would be a public outcry if it does NOT get extended. Anything is possible I guess, but I wouldn't bet on it being around.

That said, it may not matter because even if you started the process today it might not be done before 12/31/12 anyways! Enjoy that rental income for hopefully a year and a half if not more ...

[outsicktoday]

Great link. on the Hampster Wheel Game. Sounds like fun to send incomplete docs, take my time, etc.

I saw someplace the great advice to ask for all questions from the bank in writing.

My renter is a piece of work too. About 5 evictions in the last 5 years, judgments from rent-a-center, etc. Paying all cash with a roll of 20's was just classic.

Tonight she moved in more furniture from another rent a center type place and I think she used a fake name for that.

So those that play get played, I already have an eviction service on standby should need arise. Of course I'll pay for the service with her money that I won't be sending to the bank.

[Cat Damiano]

Great link. on the Hampster Wheel Game. Sounds like fun to send incomplete docs, take my time, etc.

I saw someplace the great advice to ask for all questions from the bank in writing.

My renter is a piece of work too. About 5 evictions in the last 5 years, judgments from rent-a-center, etc. Paying all cash with a roll of 20's was just classic.

Tonight she moved in more furniture from another rent a center type place and I think she used a fake name for that.

So those that play get played, I already have an eviction service on standby should need arise. Of course I'll pay for the service with her money that I won't be sending to the bank.

Well hopefully the roll of 20's keeps on coming while you are playing the game so that you can save that money.

Good Luck!!

[outsicktoday]

This has been nuts, my renters were renting the home out to other renters and of course not telling me. They went and advertised the home on Craigslist for 1000 a month and actually gave the keys and the garage opener to the new tenants. I only found out when a real estate agent called me to ask why the house was so cheap. She found a previous ad when I was trying to sell it and called us. Get this, the local PD stated that they can't do anything because it's a CIVIL matter not a criminal one. Of course my renter took off with the 1000 cash and I could either keep the new tenant or evict. We negotiated 1300 a month. They are supposed to pay on the 5th and that cash won't go to the bank either. The first tenant left after I placed a 3 day notice on the door thankfully so I would not have to formally evict, and I now have a new lease with the new tenant.

BOFA started calling my work so I called them and told them I would try to pay by the 15th, of course I won't. This is now the second month of rental income that I am going to pocket. The bank gave me the number for the imminent default department as well as HUD, stating that both might have programs that might help me to modify.

Do I have to tell the new tenant when the foreclosure process begins, or just let them find out when the notice of trustee sale hits the door? I heard someplace that I have to inform the tenants 90 days ahead of time, but what "time"? Something about intent to let it foreclose. But intent has to be proven. I may well decide to not let it foreclose (even though I will) right now I am trying to get a modification from my lender officially.

[Buy, Rent, Sell]

Based on the "general" rule here in California, because you have refinanced the loan, it is now recourse. Some may contend that no-cash-out refi's do not effect the purchase money/non-recourse status, and while that may end up being true, IMHO it is going to take case law to determine that for sure. From my readings here, Arizona members have (successfully?) contended that a refi with no cash out is still a purchase money loan, but here in California I'm not so sure.

That said, the one action rule, as you already pointed out, will help you here regardless of whether or not the loan is recourse or non-recourse. If it is determined to be recourse, as you again already pointed out, that just gives lender the option of judicially FCing which they will not do.

In reality, the only thing that the recourse/non-recourse should effect in your situation is the taxes. If the borrower is not liable for the debt (read: non-recourse) then there is no cancellation of debt income (CODI). Because there is no CODI on a non-recourse loan, the expiration of the MFDRA on 12/31/12 is of no concern to those who have non-recourse loans here in California. If it is determined that you have a recourse loan (and in my opinion based on the laws right now, you do, but I'm not an attorney) then you "are responsible for the debt" (read: recourse) and then could potentially have CODI. You can exclude some/all of CODI using the MFDRA if the FC takes place before 12/31/12, if after, there are other ways to exclude CODI but they will not be as beneficial to you as the MFDRA.

My "qualifications" in case you're curious is that I'm a CPA going through my own strategic default here in California. Oh and it's worth noting that you may be renting that place out for a long, long time. I too have a CW turned BofA 1st loan and I've gone 16 months with no payment, and still no NOD has been filed, so I've got a long way to go!

Good luck to you . . .

Jayguy- I would like to downsize my life and am preapproved to buy another home. Once I move over I would like to short sale my current property. I realize if I can''t short sale I will go into foreclosure. Either way will I qualify for the MFDRA considering this is no longer my principle residence? I have lived in the home since I purchased it 5 years ago. I have a 1st & a 2nd. Does MFDRA wipe the entire debt due and tax liabilities?

[jayguy0710]

Jayguy- I would like to downsize my life and am preapproved to buy another home. Once I move over I would like to short sale my current property. I realize if I can''t short sale I will go into foreclosure. Either way will I qualify for the MFDRA considering this is no longer my principle residence? I have lived in the home since I purchased it 5 years ago. I have a 1st & a 2nd. Does MFDRA wipe the entire debt due and tax liabilities?

B,R,S:

Congrats on being preapproved for another home, that's great. Refresh my memory though, are both your 1st loan and 2nd loan recourse (refi'd?) or non-recourse? If recourse, the MFDRA will apply to your primary residence as defined in the tax statute, and the tax statute defines this as a home you lived in as your primary residence for two out of the past five years. So unless you move out and it takes more than three years to FC (which it's a safe bet that it will NOT take three years) then you can consider your "old" house as your primary residence for tax purposes. Therefore, you could apply the MFDRA to any CODI from your "old" house foreclosing, subject to the other rules as specified in the MFDRA. Whether or not you can exclude all or just a portion of the CODI depends on what you used the cash-out refi proceeds for (if you did a cash-out refi). Any proceeds from the cash-out refi that were for home improvements you can exclude under the MFDRA, but any cash-out proceeds for cars, vacations, school, etc. are not eligible for exclusion under the MFDRA. I'm simplifying things here a bit, but you can post additional details for me to review if you want. Again all this is contingent upon the "old" home FCing before 12/31/12, which is no sure bet right now. It's still possible, don't get be wrong, and maybe even more likely than not that it will FC before 12/31/12 - but not a sure thing.

If non-recourse, per my comments above: nothing to worry about re: taxes.

[shayl475]

Just wanted to add that we have been through this and even though we did a cash out refinance, we ended up not owing any taxes because the bank bid the full amount of our loan at auction and this amount was listed as the FMV on our 1099a.

[jayguy0710]

Just wanted to add that we have been through this and even though we did a cash out refinance, we ended up not owing any taxes because the bank bid the full amount of our loan at auction and this amount was listed as the FMV on our 1099a.

Great observation, shayl475. In reality, I highly doubt that the FMV as listed on the 1099A was the true and accurate FMV (although I don't know how far underwater you were) - but for IRS purposes, they are relying on the fact that the lender is preparing the 1099A/1099C's correctly - after all, they are required to. In those situations, where the 1099A/1099C shows a FMV higher than the "actual" FMV - run with it, because you (the taxpayer) are acting in good faith when preparing your tax returns using the 1099A/1099C's that are given to you.

The worst case scenario that I absolutely do not see happening would be that the IRS contends the the FMV as listed on the 1099A/1099C is incorrect (too low) and therefore, you the taxpayer should have reported CODI of $X. In my opinion, they could do this, but they would have to fight this battle with the bank - which also in my opinion they will not do. All this applies only in in recourse situations.

[Buy, Rent, Sell]

B,R,S:

Congrats on being preapproved for another home, that's great. Refresh my memory though, are both your 1st loan and 2nd loan recourse (refi'd?) or non-recourse? If recourse, the MFDRA will apply to your primary residence as defined in the tax statute, and the tax statute defines this as a home you lived in as your primary residence for two out of the past five years. So unless you move out and it takes more than three years to FC (which it's a safe bet that it will NOT take three years) then you can consider your "old" house as your primary residence for tax purposes. Therefore, you could apply the MFDRA to any CODI from your "old" house foreclosing, subject to the other rules as specified in the MFDRA. Whether or not you can exclude all or just a portion of the CODI depends on what you used the cash-out refi proceeds for (if you did a cash-out refi). Any proceeds from the cash-out refi that were for home improvements you can exclude under the MFDRA, but any cash-out proceeds for cars, vacations, school, etc. are not eligible for exclusion under the MFDRA. I'm simplifying things here a bit, but you can post additional details for me to review if you want. Again all this is contingent upon the "old" home FCing before 12/31/12, which is no sure bet right now. It's still possible, don't get be wrong, and maybe even more likely than not that it will FC before 12/31/12 - but not a sure thing.

If non-recourse, per my comments above: nothing to worry about re: taxes.

Thanks Jayguy, you rock. I refi'd to get the 1st & 2nd so I guess they are both recourse. I only cashed out $16K though and all of it went back into the house. We've pretty much remodeled everything. So with that said will the MFDRA protect me and release me of all deficiencies and tax implications for both loans? In other words, can I just get AWAY from it free and clear? Another question...I happen to own a condo that is also underwater and I pay $700/month out of pocket for. Since this is not my principal residence (I havent lived in it for the past 8 years) I assume the MFDRA won't apply. And I'm assuming a short sale won't be approved so I'll end up in foreclosure and I'll have a tax implication of the difference? In this case we could keep the condo because $700/month isn't too bad vs. the tax implication of $200K in CODI. I did reach out to my own CPA but he's slow to respond and perhaps I'm asking questions that's he's unfamiliar with. We just want to make sure we're doing the right thing and don't get any deeper into a mess. Any help is appreciated Jayguy!

[jayguy0710]

Thanks Jayguy, you rock. I refi'd to get the 1st & 2nd so I guess they are both recourse. I only cashed out $16K though and all of it went back into the house. We've pretty much remodeled everything. So with that said will the MFDRA protect me and release me of all deficiencies and tax implications for both loans? In other words, can I just get AWAY from it free and clear? Another question...I happen to own a condo that is also underwater and I pay $700/month out of pocket for. Since this is not my principal residence (I havent lived in it for the past 8 years) I assume the MFDRA won't apply. And I'm assuming a short sale won't be approved so I'll end up in foreclosure and I'll have a tax implication of the difference? In this case we could keep the condo because $700/month isn't too bad vs. the tax implication of $200K in CODI. I did reach out to my own CPA but he's slow to respond and perhaps I'm asking questions that's he's unfamiliar with. We just want to make sure we're doing the right thing and don't get any deeper into a mess. Any help is appreciated Jayguy!

Hmm, I'm glad to hear you reached out to your own CPA, because your situation is more complicated than most. I'll take a shot at answering based on what you've shared:

(you are in California right? I didn't see that but I assume you are)

- Since you have two loans, for deficiency judgment purposes you may or may not have an issue. The 1st will eventually FC leaving the 2nd loan as a sold-out junior loan. Technically, they can come after you but this is still does NOT happen to the overwhelming majority of situations. But it could happen, and there are plenty of threads here that discuss that in more/better detail than I can. You can settle the 2nd loan if you'd like, but many others just cease all contact with the 2nd with the hopes that they go away. Onto the tax discussion:

- The MFDRA that expires 12/31/12 should enable you to exclude all of the CODI upon FC of your primary residence. If the home does not FC until 2013, and the MFDRA does not get extended, you will not be able to exclude any CODI using the primary residence exclusion rules. If you haven't started the process, but have made the decision to walk, I'd start it soon for this reason.

- Regarding your rental, there is a provision in Internal Revenue Code Section 108(a)(2)(B) I believe that may help you. It's basically similar to the primary residence exclusion rules but applies to rental properties. You can in certain cases exclude a portion or all of the cancellation of debt income but must reduce the basis of your property by the amount of debt cancelled. This is somewhat of a complex analysis that would be better to talk to your CPA about, but just know that you may be able to exclude some of all of the CODI in exchange for not taking any or as much of a capital loss on the sale of the rental property.

A basic example: You buy a rental property for $500K, mortgage of $500K. Years later, you stop paying and the bank forecloses on the property, at which time the value is $300K, mortgage is $450K, so CODI of $150K. The basis in the property before disposal is $475K. CODI is $150K, but you should be able to exclude that and instead reduce the basis in your property to $325K. When the home FCs it's a deemed sale of the property, the proceeds are $300K, the FMV, and your basis is $25K - you'd recognize a $25K loss on the sale of the property.

Quite frankly, I haven't done a lot of these calculations for my clients (yet, I suspect I will see more in the coming years) so I'd run all that by your CPA, being sure to fill in your numbers of course.