Recourse Mortgage - California investment property foreclosure

[sanjoseca]

Hi Everyone,

I am new to this website. I have been reading a lot on this and other websites I have found a lot of useful information. However, I still have many doubts.

Back in 2001 I purchased a rental property in San Jose, CA. It was 100% financed with 2 loans from 2 different banks. Since then I have refinanced both my primary residence and the rental property a few time. At some point (late 2007) I consolidated the 2nd mortgage of my rental with my residence loan while refinancing the primary residence. Then (early 2008) I refinanced the investment property and pulled cash out. That was the peak value period for both properties and since then (in the last 2 years) they have both dropped in value to about 50% of the values at loan closing.

Both the loans are with Wells Fargo, and I was told that the loan on the rental is owned by Freddy Mac, while the primary residence is with Fanny Mae. I realize that due to refinancing with cash out my both loans now are recourse ones.

The rental has had negative cash flow since the very beginning. I kept losing money in hope the property value would increase in near future and that would allow me to sell it and recover what I had already lost. Currently on both properties I owe about 150% of the respective market values.

My tenants have just given me notice. The property condition has deteriorated and I know that in order to rent it out again even at a similar rate I would have to invest again in remodeling / repairs etc. and I do not have any more funds left to do that.


I feel compelled to walk out on the rental property. However I am concerned about possible consequences - financial, legal, tax etc. Therefore I have a few questions:

1. Can the bank go after my primary home, cars, etc., even though I have never been late on any payments yet, and still can afford to pay mortgage on primary home, my credit cards, car?

2. Based on what I have been reading, there is some help and protection in Law for those who have only residential property and non-recourse loan. What about rental and recourse loan?

3. I understand that bank will want me to pay deficiency balance but is there any hope that bank will forgive my debt? Or at least some % of my debt?

4. What is the chance that bank will sell my debt to a debt collector. Can a debt collector go after my primary home?

5. What is the chance that I will have a judicial foreclosure?

6. I was thinking about short sale or loan modification but my only hardship is loss of the rent (not yet, next month).


I have stopped worrying about my credit score (right now - perfect). I just want to take this burden off my shoulders and keep my primary home and have minimum or no penalties.


Thank you for any piece of advice.

[Maurice Bedard]

Hello and welcome to LoanSafe!!
Let me see if I can help guide you a bit here and maybe some other investors can also share with you some of their advice also.

1. Can the bank go after my primary home, cars, etc., even though I have never been late on any payments yet, and still can afford to pay mortgage on primary home, my credit cards, car?

They can sue you for a deficiency judgment and win a judgment where they may place lien on your primary home. They cannot take it, but if you ever try and sell or refinance, they would have to be paid. This may or may not happen.

2. Based on what I have been reading, there is some help and protection in Law for those who have only residential property and non-recourse loan. What about rental and recourse loan?

Your only true protection on these type of loans is bankruptcy protection if you qualify.

3. I understand that bank will want me to pay deficiency balance but is there any hope that bank will forgive my debt? Or at least some % of my debt?

Possibly through a short sale or deed in lieu, but highly unlikely. If they did, everyone would walk away. As they say, this is business and banks are in the business of making money, not helping struggling borrowers save face. Sad, but true.

4. What is the chance that bank will sell my debt to a debt collector. Can a debt collector go after my primary home?

They may sell the 2nd to a collection agency and keep the first. The collections agency cannot take your primary home, but they can win a judgment.

5. What is the chance that I will have a judicial foreclosure?

6. I was thinking about short sale or loan modification but my only hardship is loss of the rent (not yet, next month).

Maybe you can go down the road of cleaning it up, being late and hoping you work out a loan mod and rent it with a positive cash flow or short sale.

I have stopped worrying about my credit score (right now - perfect). I just want to take this burden off my shoulders and keep my primary home and have minimum or no penalties.

Smart, but you will have some collateral damage here. Maybe a lawyer or walk away service can help make this as least painful as possible for you.

[sanjoseca]

Hi Moe,

Thank you for your prompt response and all the comments. I wonder if there are more people here in a similar situation, and also, what the statistics are in such cases.

One more question: do you think I would be better off moving to the rental and foreclosing on my current primary residence (a recourse loan here as well...)?

Somehow I have this feeling that one will never know for sure what will occur until they actually go through a foreclosure...

Regards,

Adam

[Maurice Bedard]

My pleasure Adam.

Yes, it is aking to a crap shoot, you do not know what for sure will happen until it happens. But, for the most part, you have the laws and see what they can do based on those. You are all pioneers treading through much unchartered waters.

I do not think that it is really a great idea on moving in and walking on your primary. Unless you like it more They both seem like hot foreclosure potatoes.

There are A LOT of people like you Adam. I ma sure you will get some others commenting soon or please feel free to join other discussions with homeowners here.

I wish you the best bro!!

[sanjoseca]

Moe,

Thank you again. Actually, I can afford paying one mortage without any problems. I just thought about moving because it seems the Law is more protective for people foreclosing on their primary residences, although I have just realized that perhaps if I moved then my current home would no longer be considered primary residence... and btw I prefere to stay here because this place is much nicer.

Thanks again for your help,
Adam

[Daisy Cutter]

Hey Adam, I am near San Jose also. Before you jump to conclusions have you looked at your current loan and what the payments would be if you modified it to 2% mortgage? Rents are high in San Jose, always have been, always will be. Most investment properties are hanging around 6% interest and up. Banks can make mortgage mods on investment properties, it used to be almost impossible but is becoming more possible now. There is a Wells seminar in Oakland on the 26th and it might be worth your while to discuss a mortgage mod there for all of your properties.

For example, I have a rental with a 350K mortgage. There is a $1K difference per month in the rate I currently pay for that mortgage vs that same mortgage at 2%. Right now with escrows and what I am collecting in rent I am negative about $400/mo on that house, if I can get a mortgage mod to even a few points lower I become cash flow positive and would prefer to keep the house. It is worth thinking about.

[sanjoseca]

Thank you. Can you provide any details on the seminar?

[julieCEO]

Well you should calculate your interest rate first according to your loan. The you can consider what you have to invest.

[michelle kaber]

HI SAN JOSE, i'M GETTING A MOD ON MY INVESTEMENT PROPERTY, SPS, BUT YOU USUALLY MUST HAVE A HARDSHIP TO QUALIFY FOR ANY MOD. ARE YOU NOT MAKING LESS MONEY THAN BEFORE? OTHERWISE, IT PROBABLY BE DIFFICULT.

I WOULD CALL WELLS FARGO AND TELL THEM YOU WANT TO KEEP BUT NEED PAYMENT LOWER....GOOD LUCK...

[sanjoseca]

With my job I actually earn more money than in the past but not enough to be able to afford paying the the mortgage I have on rental property if I do not have a rent check. I don't have any savings and I live from paycheck to paycheck but if I found a tenant who would cover at least 80% of mortgage then I would be fine, but I am skeptic if I can find a tenant like that now, considering the condition of the property. The house is old and requires some repairs which would be pain in my behind, but I would be still willing to do it if I can find a tenant who will pay a reasonable rent. I still have to pay HOA out of my pocket that is almost $300, and since the beginning I have had negative cash flow - about $1000 out of my pocket every month. I feel like I am in a really bad dream. I earn good money from my job but I have to throw $1000 each month into this black whole which leaves me without any savings and piece of mind.
My only formal hardship is that next month I am going to lose the rent if I do not find new tenants soon. I cannot afford to pay the whole mortgage on my rental property for more that one month. I do not believe that the bank will consider losing $1000 each month a hardship. Am I right?

[Daisy Cutter]

Heres the link for the seminar in Oakland. You can make an appt with a loss mitigation specialist there, and I think lots of people will get temp mods on the spot (but not if you are an investment property).
https://www.wfhmconsumerevents.com/a...election1.aspx

I guess if I were in your situation I would try to determine just how underwater I was. You say you have an HOA, is it a condo- if so those are probably not worth keeping. But the fact that your loans are recourse, which means you aren't going to get away scot free plus the specific desirability of the house itself needs to be taken into acct before you make a decision. San Jose is NOT las vegas. In 5+ years you could have a decent ROI if you can get your mortgage modded.

If I were you I would stop paying the mortgage and take the credit hit, while pressing wells for a mortgage mod. At the same time advertise on CL for a rent for work arrangement where people could live for free for a spacific period of time if they do some work. Something like this,
http://sfbay.craigslist.org/pen/sha/1675694115.html
licensed contractor looking for rental with private garage
There are an amazing number of ads on CL for people formerly in the construction industry looking for free or super cheap rent. Of course its a crap shoot I know.

[sanjoseca]

Thank you. Just curious, in case of a rent for work arrangement how can the owner enforce it? I mean what if the guy lives there and does not do any work? Thanks again!

[michelle kaber]

good advise, daisy...I had to stop paying to get modified trial but you MUST have a hardship. Can you not work so hard? Unfortunately, working hard is not rewarded but penalized. do you work for yourself? with you making good income, it will be hard to get any help.

I would try just talking with the lender and tell them you are planning on defaulting unless you get immediate help...

[sanjoseca]

I don't work for myself and I won't ask my boss to lower my paycheck . Right now, I am trying to find a tenant and convince the bank to modify my loan... As of today I am not behind on my mortage but if I don't find a tenant in May (I can cover only one month mortage), I will be behind in June.

[michelle kaber]

good luck sanjose and keep us posted.

[HopingtoFind]

sanjoseca... Another alternative that I haven't seen mentioned as an option for you situation is Short Sale.

Short sale looks much better on your credit then foreclosure and you have a way to negotiate deficiency with your lender.

[sanjoseca]

I am leaning towards foreclosure of my rental property but I do not know the following:

1. Can the bank put a lien on my primary residence for the deficiency?

2. Can I still negotiate the deficiency amount?

3. Can they sell the deficiency amount as debt to a debt collector?

4. Can they go after my assets such as primary home, car(s) or my paycheck?


Also:

1. I have to return the deposit to my tenants but I am not quite sure what (expenses) I can deduct from my check back to them.

2. Since my Loan-to-Value is at about 150% at the moment, I wonder if it would be possible to refinance to a low interest rate (say 2 to 3 %). I know it sounds crazy but I just wonder if a tiny bit of the good old predatory lending spirit is still around.

Thanks a lot for any piece of advice!

[HopingtoFind]

Please clarify the following: How many loans are currently secured by your rental? If you have only one loan you don't have to worry about deficiency in CA.

As far as tenant deposit, you can only subtract damages and cleaning. They pretty much have to return your rental to you in the condition they received it less wear and tear. If there is any damage or cleaning you can subtract from their deposit. Also, make sure that you provide accounting of deposit withing 21 days of their moving out, if you don't, you might have to return their whole deposit.

Also, as far as refinancing, you cannot refinance a property that is underwater. Right now lenders want at least 20% equity especially if it a rental in order to refi.

[sanjoseca]

[QUOTE=HopingtoFind;236401]Please clarify the following: How many loans are currently secured by your rental? If you have only one loan you don't have to worry about deficiency in CA.

I don't know if you read my previous posts. The thing is that even though it is one loan only, I am pretty sure I have a recourse loan because in the last refinancing 2 years ago I took cash out. At that point the Loan-to-Value was still below 80%, but the property value has dropped by almost 50% since then and now the Loan-to-Value is at about 150%.

I heard the One Action Rule applied to non-recourse loans on primary homes but not in cases like my rental. Am I wrong?

[HopingtoFind]

[QUOTE=sanjoseca;236528]

Please clarify the following: How many loans are currently secured by your rental? If you have only one loan you don't have to worry about deficiency in CA.

I don't know if you read my previous posts. The thing is that even though it is one loan only, I am pretty sure I have a recourse loan because in the last refinancing 2 years ago I took cash out. At that point the Loan-to-Value was still below 80%, but the property value has dropped by almost 50% since then and now the Loan-to-Value is at about 150%.

I heard the One Action Rule applied to non-recourse loans on primary homes but not in cases like my rental. Am I wrong?

If you only have one loan on your rental you're safe from deficiency in CA.
One Action rule applies to rentals and/or primary homes. Doesn't matter that your loan is recourse, one action rule means they can either foreclose or pursue deficiency but not both.

[sanjoseca]

I know that California lenders rarely elect judicial foreclosures but still there is a possibility. I am affraid that bank won't let the money go that easy. My rental property is worth much less than I owe.

I wonder how many investors were sued by banks for deficiency? Is there a way to check how many people have been sued by banks?

[HopingtoFind]

I know that California lenders rarely elect judicial foreclosures but still there is a possibility. I am affraid that bank won't let the money go that easy. My rental property is worth much less than I owe.

I wonder how many investors were sued by banks for deficiency? Is there a way to check how many people have been sued by banks?

If you want to control the situation then the only way to do it is through a Short Sale.

[robbo]

Adam, If short sale is an option here's what I've learned in CA. Beware a short sale in CA unless you have an attorney to protect you rights.

I'm currently dealing with a short sale/foreclosure decision on my CA rental. My loan was first only with no refinance. NOD was received in Nov 09. I've been pursuing a short sale since October 09 and now have the approval letter with bank reserving right to pursue deficiency. Now I don't know what will happen in the future with lenders trying to pursue but I will not take the chance and proceed with this language. 3 attorneys say clearly if I don't do short sale since the bank has already done NOD and made it clear they will pursue a trustees sale that assures me of a non judicial foreclosure and I cannot be pursued further due to one action rule. ( 3 laws I read of CCP 580b, 580d and 726) So I will inform my realtor tomorrow that either language is changed or I will not approve the short sale. I have read posts by others who have gotten language changed so if it can be done I'll go for it. I realize there are few with deficiency language changed but I won't be one of the few who don't get the language changed proceed anyways and end up in credit hell for the rest of my life when the worst that can happen is I receive a lower credit score.

[sanjoseca]

Thank you All for the feedback. I have some more questions:

1. I understand the law is more forgiving to people walking away from their primary residences. Therefore, will it help if I stop making payments on my primary while making payments on my rental, and have the residence foreclosed upon, and then just move to my rental?

2. I am not sure what the One Action Rule means (I have a recourse loan due to cash out upon refinancing). I am perplexed after reading a lot of posts. My understanding is that if they do not do judicial foreclosure they can only take the property and they they have to cancell the debt, or if they go to court then they can go after the deficiency amount, correct?

3. I have accumulated about $ 50 thousand of the outstanding loss on my rental since it has always had negative cash flow and I could not write off all of my losses on an annual basis when doing the tax return. If I am served an 1099 as result of debt cancellation will I be able to apply that loss against the "income"?

4. I have come across the "Power of Sale" term while reading some postings but I am not sure where to look for it in my closing paperwork. Should I look for the exact "Power of Sale" text or should I look for a specific language?

In a week I will lose my rent income. For 9 years I have maintained this investment with negative cash flow hoping that the market would turn around and I would be able to sell it and recover all my losses. I am sick and tired because there are always problems with the property, its condition and various things breaking down, and I have had enough worrying about it and also I do not have any more money to put into that bottomless pit. I do not care about my credit score anymore and I would be happy to have it foreclosed upon and just leave all the trouble and worries behind, if I can only make it without dire consequences in therms of paying the defficiency or enormous taxes. Unfortunately a lot of the info here is contradictory or ambiguous and I am totally confused.

[HopingtoFind]

Thank you All for the feedback. I have some more questions:

1. I understand the law is more forgiving to people walking away from their primary residences. Therefore, will it help if I stop making payments on my primary while making payments on my rental, and have the residence foreclosed upon, and then just move to my rental?

It has to do with the type of loan you have. If your loan is recourse then it doesn't matter if it is primary or investment. See my explanation on One Action rule.

2. I am not sure what the One Action Rule means (I have a recourse loan due to cash out upon refinancing). I am perplexed after reading a lot of posts. My understanding is that if they do not do judicial foreclosure they can only take the property and they they have to cancell the debt, or if they go to court then they can go after the deficiency amount, correct?

You answered your own question, looks like you do understand what One Action rule means.

3. I have accumulated about $ 50 thousand of the outstanding loss on my rental since it has always had negative cash flow and I could not write off all of my losses on an annual basis when doing the tax return. If I am served an 1099 as result of debt cancellation will I be able to apply that loss against the "income"?

Question for a CPA.

4. I have come across the "Power of Sale" term while reading some postings but I am not sure where to look for it in my closing paperwork. Should I look for the exact "Power of Sale" text or should I look for a specific language?

"Power of Sale" means that Trustee assigned to your loan can sell the property at foreclosure auction. All CA mortgages have "power of sale".

In a week I will lose my rent income. For 9 years I have maintained this investment with negative cash flow hoping that the market would turn around and I would be able to sell it and recover all my losses. I am sick and tired because there are always problems with the property, its condition and various things breaking down, and I have had enough worrying about it and also I do not have any more money to put into that bottomless pit. I do not care about my credit score anymore and I would be happy to have it foreclosed upon and just leave all the trouble and worries behind, if I can only make it without dire consequences in therms of paying the defficiency or enormous taxes. Unfortunately a lot of the info here is contradictory or ambiguous and I am totally confused.

I guess as someone I know said recently there are no guarantees in life, just death and taxes. I believe there is a lot of good information on this forum you just have to make a decision that you can be most comfortable with. But there is NOT going to be a perfect solution to your situation.