SS vs DIL vs FC Comparison

**TomEason** · 09-20-2011, 04:36 PM

Here's my take on the DIL vs SS vs FC

In my opinion, there's no benefit in going through the throes of a short sale unless you're able and willing to stay current on your loans the entire time (up through close of escrow on your SS deal). Other than credit preservation, however, I believe SS is an onerous and futile process. Same with a DIL, which lenders hate to do, and thus have erected many hoops for borrowers to negotiate in order to effect one. If I come across as jaundiced, it's because of reading the posts and experiences of others! Bottom line: If credit preservation is important, do not stop making mortgage payments.

1) DIL - Deed in Lieu of Foreclosure: This is a real ordeal since loan servicers don't like doing them, and hence make borrowers jump through a multitude of hoops to accomplish one. The homeowner is required to provide financials to the lender. And the homeowner can earn no $$ for all the hassle. Usually the lender will require the property be listed for sale for a minimum of 90 days to qualify. In addition, the property normally cannot be encumbered with any other liens, e.g. junior loans, unpaid property tax, judgments, etc.

2) SS - Short Sale: Another solution that is a major pain, but the real estate industry loves and evangelizes them. The loan servicers also revere them because they know the homeowner will maintain the property in viewable condition. Meanwhile the homeowner gets no $$ for all their work and patience. Only reason to do one is credit preservation, and that is possible only if the homeowner has never been late on mortgage payments and can remain current through close of escrow of the SS deal. Another major disadvantage is that the borrower is required to disclose their financials, which is almost never a good idea, and is akin to pre-trial discovery.

3) Foreclosure: This is by far the least hassle. You don't communicate with your lender(s), aren't at their mercy, don't disclose any info to them. It's just easy. However, the downside is the derog credit hit. Recourse status of a 2^nd is immaterial because if the homeowner walks, and the 1st forecloses, the 2nd will be wiped out and become a "sold out junior." If that loan is recourse, they could conceivably sue you. But that’s only very rarely happening. Almost no "sold out junior" lenders in any state sue for money owed on the note, even though they're not legally barred from doing so.

For those residing in a judicial FC state, the possibility the lender might pursue a deficiency is not addressed here due to the legal complexities. Consulting with a RE foreclosure defense lawyer in that state is recommended.

Borrower Credit File/Score Impact

While many believe a SS or DIL may have a lesser impact on the borrower’s credit score, that has not proven to be the case. The following information is quoted from Fair Isaac’s site. FICO was developed by Fair Isaac.

"The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all 'not paid as agreed' accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.

If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score."

And this quote is from an article in First Tuesday http://firsttuesdayjournal.com/

"The destruction of FICO creditworthiness experienced by a homeowner who participates in a short sale is as dramatic as that wreaked by a foreclosure, since homeowners must default before the lender will even consider a short sale. The short sale/foreclosure which is ultimately reported will indicate that the owner did not repay the loan as agreed.

**misscantbewrong** · 09-20-2011, 07:13 PM

Thanks for the giving clarity to these options! I have been following Strategic's thread closely and was left spinning when he changed his strategy.

**freedomwon** · 09-20-2011, 07:22 PM

TOP 10 REASONS NOT TO DO A SHORT SALE

1. You are giving up your rights as a legal owner of the home.

2. You agree in writing to walk away from your home. (This is the banks dream - Easy Money).

3. You will have no future recourse against the bank. (Remember things are constantly changing). If you think there may be even the slightest chance of settlement for all their wrongdoing - kiss that option good-bye.

4. You must provide updated details of your financial condition & be certain the bank will use this information against you if possible. Remember, the bank is not your friend. They will decipher if it is cost affective to sue you for a deficiency judgment after your home is taken.

5. If it is to be sold in the near term, they will want the fastest sale, not necessarily the highest sale.

6. It is not primarily, as you may be told, to determine qualification for a modification, short sale, or DIL.

7. The bank would like to know where your bank accounts are & how much is in them so in the future they can attach them.

8. The bank wants to know where you work, see copies of recent pay stubs, so eventually they may garnish your pay.

9. The bank requires you provide all of the above to even be considered for a Short Sale.

10. All this information WILL BE SHARED with the 2nd lien holder.

**TomEason** · 09-20-2011, 07:23 PM

Originally Posted by misscantbewrong

Thanks for the giving clarity to these options! I have been following Strategic's thread closely and was left spinning when he changed his strategy.

misscantbewrong

Thanks for your gracious remark; I'm glad you see value from the thread.

**norcalstuck** · 09-21-2011, 09:34 AM

Tom and Freedom, thanks for this thread, it validates the strategy I sold to my husband. We started strategy default Sept on first, but due to his fears, I just learned he paid the Heloc this month so we won't start default on that until Oct, sigh......and, I used a no interest tease from my Chase CC to get our eyewear paid for, and Oct we will stop paying on that CC. In my thread I note that our first is Chase, formerly wa,u, our Heloc is Chase and our one big CC debt is Chase. They are so not going to like usWe did analyze doing SS, then DIL, then talked to attorney and or Merrill Lynch advisor and both said walking is better as we can save some money before being tossed out. I may not post many comments, but I watch this web site religiously. Thanks Tom, Fredom as you have both been so helpful.

**Laney1** · 09-21-2011, 12:40 PM

Originally Posted by freedomwon

TOP 10 REASONS NOT TO DO A SHORT SALE

1. You are giving up your rights as a legal owner of the home.

2. You agree in writing to walk away from your home. (This is the banks dream - Easy Money).

3. You will have no future recourse against the bank. (Remember things are constantly changing). If you think there may be even the slightest chance of settlement for all their wrongdoing - kiss that option good-bye.

4. You must provide updated details of your financial condition & be certain the bank will use this information against you if possible. Remember, the bank is not your friend. They will decipher if it is cost affective to sue you for a deficiency judgment after your home is taken.

5. If it is to be sold in the near term, they will want the fastest sale, not necessarily the highest sale.

6. It is not primarily, as you may be told, to determine qualification for a modification, short sale, or DIL.

7. The bank would like to know where your bank accounts are & how much is in them so in the future they can attach them.

8. The bank wants to know where you work, see copies of recent pay stubs, so eventually they may garnish your pay.

9. The bank requires you provide all of the above to even be considered for a Short Sale.

10. All this information WILL BE SHARED with the 2nd lien holder.

I'm trying a Short Sale in California with purchase money 1st & 2nd. I thought all of my research showed that the 1st and 2nd could not come after us for deficiency, sue us or garnish our wages as you mention in 4, 7 & 8. Is that not correct? Now I'm confused? help.....

thanks for any additional insight.

**TomEason** · 09-21-2011, 12:45 PM

Laney1

Thanks for your post.

You're fine so please don't worry. The paragraphs you refer to are applicable to a borrower who has a recourse loan and is therefore at risk of being sued.

**Laney1** · 09-21-2011, 12:54 PM

Originally Posted by TomEason

Laney1

Thanks for your post.

You're fine so please don't worry. The paragraphs you refer to are applicable to a borrower who has a recourse loan and is therefore at risk of being sued.

Whew! thanks for the clarification! I keep thinking i've got things figured out, but I'm never really completely sure... will definitely consult our atty and CPA before we commit to anything!

**pazzazyone** · 09-21-2011, 01:06 PM

Originally Posted by TomEason

3) Foreclosure: This is by far the least hassle. You don't communicate with your lender(s), aren't at their mercy, don't disclose any info to them. It's just easy. However, the downside is the derog credit hit. Recourse status of a 2^nd is immaterial because if the homeowner walks, and the 1st forecloses, the 2nd will be wiped out and become a "sold out junior." If that loan is recourse, they could conceivably sue you. But that’s only very rarely happening. Almost no "sold out junior" lenders in any state sue for money owed on the note, even though they're not legally barred from doing so.

Tom: At the risk of sounding like a complete idiot, I will ask this question anyway. My husband and I are paying on our second mortgage, but I see many posts from people who are walking away from both the 1st and 2nd mortgages. We owe about 32K on the 2nd. The quote I have attached from you makes me wonder if we could walk away from our 2nd also. I will google the term "sold out junior" to see if I can understand what you are saying better, but if you could expand on this, I would really appreciate it.

**TomEason** · 09-21-2011, 01:30 PM

pazzayone

Thanks for your post. You might visit the SOJL thread which is dedicated to the topic. If you're thinking of settling your 2nd, I recommend you read post #1 in that thread. Good luck!

www.loansafe.org/forum/debt-settlement/37996-strategy-settling-your-2nd-62.html

www.loansafe.org/forum/debt-settlement/40758-sold-out-junior-loans-3.html

**pazzazyone** · 09-21-2011, 02:44 PM

Thanks, Tom. When I googled "sold out junior" I found the thread you posted for me to read. It will take me some time to understand all of this. I am at the very least very uninformed and uneducated about all of the terms.

**walker2011** · 09-21-2011, 07:27 PM

Some possible pro-short sale responses:

1. If you are in a non-recourse state, many of the fears regarding financial disclosure vanish.
2. It can be a useful delay tactic if your goal is to stay in your home payment-free for a while.
3. Some government programs pay short sellers a $3,000-$5,000 fee toward relocation expenses.
4. A cooperative (but maybe unethical) real estate broker could split his commission with you.
5. The word "foreclosure" does not appear on your credit history.

**shobam** · 09-22-2011, 09:42 AM

Originally Posted by TomEason

Borrower Credit File/Score Impact

While many believe a SS or DIL may have a lesser impact on the borrower’s credit score, that has not proven to be the case. The following information is quoted from Fair Isaac’s site. FICO was developed by Fair Isaac.

I can tell you first hand that a SS shows just as bad on your CS or CR as a foreclosure in the eyes of all lenders. Know that most / all credit apps are now done by computer. If there is anything even remotely questionable it gets kicked out to be looked at by a human, at that point it most likely with be rejected. Back before I knew anything (pre-loansafe.org) my wife and I thought that we could easily get a loan against out house to pay off a 2nd from a SS on a second home. After all we had about 150K in equity sitting there even in 2010's market. Forget it, they rejected us for the SS calling it a "pre-Foreclosure"

We all know by now that CO's and lates are all a fact of life with a SS and we all know what that does to your CS and CR. But; i will post my story in the coming days regarding what i went through after the SS, I'm a year out now, how it effected me, what i was able to do in terms of credit, jobs and the likes. How I'm dealing with a CO of a 2nd that came with that and a no BS, real life factual synopsis of how you someone might deal with all this stuff.

One hint of things to come. We have all heard stories of collections types and collection agencies and what they can, will, might do. We have all heard what Lawyers types say, you know BK Lawyers, RE Lawyers and the likes. I got a wealth of real life, real time court room information on what banks can and can't do or won't do and all the good stuff, real cases not from a BK lawyer or RE Lawyer but a Paterns and contract Lawyer that I met at a fundraiser and became freinds with.

**bowtechy** · 10-24-2011, 11:35 PM

I don't want to pretend that I'm in a hardship or not able to pay. I'm really looking to make a financial decision about what is best for my life going forward.

I'm getting confused and would love some perspective on my particular situation. I'm getting married soon and hopefully kids not long after that. I live in a small house (1000sqft) that I bought some time ago. One day I will need space. Sure I didn't have foresight... so I want to know what you all would do in my situation.

I was crazy and bought a 1.2M (I know thats a lot!) place that seemed like a good idea in 2007. I am in California and have never refi'd. I put down 5% initially. So I owe about 950k on the 1st and 170k on the 2nd. The house has held its price fairly well, but who knows until you sell it. I think it would sell for 1M +/- 50k. So its not underwater like some of these other properties. I can make my payments. I run a business and pay myself as needed. I don't want to pretend I'm in a hardship but I could make it look like that with my business wages. I have paid interest only since I've owned it. 6% on the first and 8% on the second. Both are 10 years interest only. The 1st goes to a 30year fixed payment after the initial 10yr. The 2nd loan balloons at the end of 10years, so I will owe 170k.

If I foreclose is there any situation (these are 1st time loans) that the second loan will come after me, I just want to be explicit and make sure in California?

I haven't explored refinancing, but I doubt they will let me without coming into it with some money and why would I do that when I'm already under? Everyone agree?

Other problem is if I sell the house, I have a hefty realtor fee to deal with so I end up being financial loser overall.

Options that have come up: 1) I am considering foreclosing... probably getting to live here for 9months without payment (effectively saving me 7k/month in mortgage expense) and I would save the realtor fee. BUT I would take a credit hit.

This seems to be the most extreme, clean and predictable option.... is this true?

I'm not overly concerned about my credit score.

Option 2 that came to mind: I wouldn't mind staying in the house and keeping it, but not sure if I am too financially stable to get a loan mod. I have a good sized savings and decent income. Also I don't necessarily want to let the bank know of my financial health.

Is it a bad idea to share my finances with the bank, in the event I want to foreclose or loan mod or short sell?

I have a few friends who have gotten to buy out there second loan for pennies on the dollar (12k on 160k owed) and refi'd the first at 3% for 30years. I would love this option, but not sure if I should stop making payments to get the banks attention. Should I stop making payments to get some attention, or do I actually try to be make an honest loan mod deal with them?

I would love to refi / loan mod at 1M or less at <5%.

How likely is this? This seems like I'd be getting a good deal to keep my house (which I do love) and I would do it at a bargain "price".

Option 3 : Short sale. Do I stop making payments to get their attention? This option does seem to decrease my credit score scar time. Do I get to live in the house without payment and wait to see if the bank sells the house without me throwing any money in? How long do short sales usually take?

This sounds good, but I'm not so sure... seems like if I got to live here for 3-6 months mortgage free and got rid of the house at the end, I'd be making out ok. This gets me out of the 6% and 8% interest rate too.

This option seems like a blend of foreclosure and credit score scar time... is this accurate?

I wouldn't mind keeping the house for 5 years, but I'm gonna need space for the family at some point. But if I need to take action, I want to get the ball rolling.

Any advice or other info needed from me for anyone to offer me words of wisdom?

I am just tired of being stuck at 100k negative equity at 6% and 8% interest rates that will catch up with me. I know its not as bad as a lot of folks situations out there, but nonetheless, there is savings to be had and something I could probably do about it.

Thanks for your time!

**TomEason** · 10-25-2011, 12:11 AM

bowtechy

Thanks for your post and welcome to Loansafe.

I recommend you immediately stop paying on your 1st and 2nd loans. Since your 2nd loan is underwater, your 2nd lender is morel likely to be amenable to an agreeable settlement.

**bowtechy** · 10-25-2011, 06:11 AM

Thanks Tom for replying...

It looks like you seem prefer the full foreclosure route. If you recommend that I stop paying on both mortgages (both are with BofA) do I also not make my mortgage property tax payment which is due this December? My property tax bill isn't wrapped up into the mortgage like mosts. Secondly, if the 2nd loan is amenable to an agreement, it sounds like you are suggesting a modification? Am I correct?

Are you recommending I skip the short sale objective and focus on the foreclosure route?

And am I a completely safe about BofA not being able to come after my assets since I am in CA and never have refi'd?

Is there any risk of trying to do the loan mod and exposing my finances to the banks?

Thanks so much!

**TomEason** · 10-25-2011, 08:04 AM

Hi bowtechy

Thanks for your update. My last post unfortunately was unclear; I unfortunately got interrupted and distracted, and left it unfinished in mid thought, LOL.

I recommend you take your time in deciding whether you want to keep the home. Since you're current on your loans you have the time to formulate your plans. Whether a loan workout with your lender, or eventually a refinance.

Yes, in order to do a loan workout, your lender will ask you for financial info. You might conceivably be able to circumvent that, but you would likely need to get a lawyer involved, one is adept and experienced at loan restructuring. And that path will obviously cost more, but might be worth it. Finding the right lawyer is a non-trivial exercise. However, you're close to the best ones since you're located in SoCal, the locus of the FC defense industry.

Unfortunately, due to the fact that you aren't a hardship case, government programs aren't available to you.

You're correct that both of your loans are non-recourse.

If you should decide to dispose of the house, I recommend the FC route, for reasons stated in post #1. To start that process, simply stop paying both loans and property tax. You needn't ever communicate with the lender, and I recommend you don't. That is, unless you play the HAMPster Wheel Game, and communicate with the purpose of obfuscating.

Good luck!

**bowtechy** · 10-25-2011, 09:02 AM

I guess, I would love to keep the house at a new rate and even better, reduced principal rate. I just don't know if it is possible? I don't mind playing the Hampster game, it actually sounds kind of fun.

Am I on a timeline to try to foreclose by end of 2012?

So if both loans are non-recourse, there really is no hurt in them knowing my finances, as they ultimately can't do much aside from trying to pressure me right? It seems that they won't be inclined to really find that I'm in distress... so when you say "workout something with my lender" is that something I should try prior to stopping payment... is that just a refi or an actual loan mod?

Did recommend an attorney purely for the fact that I would prefer to keep my financials secret? I was originally wanting to hide my finances so that they don't get tempted to come after me? But in non-recourse, that point is moot right? Second issue with financial reveal, is that it might dissuade them to throw me a bone for "loan working out"?

Are you in this business, or just have an interest? Can I call you at your business if so to enlist your advice?

Thanks again!

**TomEason** · 10-25-2011, 09:23 AM

bowtechy

Thanks for your update. Yes, the HAMPster Wheel Game is fun. If you ultimately decide to FC, I would recommend you play.

You're correct in your statement that financial foreclosure can't hurt you as far as being sued by your lenders. However, by disclosing, you might be classified as a "strategic" defaulter. I don't know if and how that will be done on non-GSE loans, but the major CRAs have been in active discussions with their customers, the lenders, on how to develop algorithms that will help identify those borrowers and flag them as probable strategic walkers.

A "loan workout" can include any number of solutions that will help both the borrower and lender. Loan workouts have long been commonly done on commercial loans. And yes, the success of a loan workout could be dependent on the borrower's financials. As in any negotiation, it's not smart to impart information unnecessarily to one's adversary.

Personally, I am an interested contributor and don't do this as a business. But thanks for inquiring!

**bowtechy** · 10-25-2011, 10:24 AM

Isnt' there another worry about the loan being above 800k and being liable for taxation as a result? I think I'm over the CA limit on these debt forgiveness things.... but I think I'm ok for federal IRS right?

Also, if the 1st loan eats up the house and the 2nd isnt satisfied at all, they could still come after me legally correct?

(geesh)

I guess I am worried that I will walk, find out the second loan still wants their money... and if I disclose my assets they will know I have it to get... then I will also be taxed in CA for the "gain" of the 1st loan foreclosing....? In the end, I could be not very net positive and with bad credit. Maybe this whole thing is a bad idea for me, particularly because my house is only 10% under and I'm in a Jumbo loan range?

**TomEason** · 10-25-2011, 11:04 AM

Originally Posted by bowtechy

Isnt' there another worry about the loan being above 800k and being liable for taxation as a result? I think I'm over the CA limit on these debt forgiveness things.... but I think I'm ok for federal IRS right?

Also, if the 1st loan eats up the house and the 2nd isnt satisfied at all, they could still come after me legally correct?

(geesh)

I guess I am worried that I will walk, find out the second loan still wants their money... and if I disclose my assets they will know I have it to get... then I will also be taxed in CA for the "gain" of the 1st loan foreclosing....? In the end, I could be not very net positive and with bad credit. Maybe this whole thing is a bad idea for me, particularly because my house is only 10% under and I'm in a Jumbo loan range?

bowtechy

Thanks for your post. Since both your loans are purchase money and hence non-recourse, your 2nd lender is legally barred from suing you under CAL CCP Section 508(b).

I recommend you consult with your own tax person for answers about any potential tax liability, both IRS and CA state. I'm not a tax savant and take little interest in the topic (except for my own taxes, of course, LOL). And, if the Home Mortgage Debt Forgivness Act gets extended (which is likely), then you can escape COD income.

Although the ramifications of a FC aren't as bad as you portray, there may be some downsides. If you can afford to stay, you have time to consult other professionals, and to continue analyzing your options.

Good luck.

**bowtechy** · 10-25-2011, 01:18 PM

An attorney friend (non-real estate) insists that if my 1st loan is foreclosed on and they sell the house at 900k to satisfy their 960k loan. They are still out 60k and my second loan got nothing, so I still "owe" 170k. Since the second loan got nothing, my friend is saying their "1" action is to chase me down for it. He could be wrong as he's not a real estate guy, but he says thats what he believes.

Lastly, do I stop paying my property tax due this December too?

**TomEason** · 10-25-2011, 01:24 PM

bowtechy

Thanks for your post. Your attorney friend is wrong. Your 2nd is purchase money and non-recourse under the statute I cited. The "one action" rule, CCP Section 726, doesn't apply here.

Why not just read the applicable statute for yourself?

If you intend to walk, or are leaning that way, I recommend you not pay any more property tax installments.

**Strategic_Default** · 10-25-2011, 01:49 PM

My understanding is that since your loans were purchase money and are non-recourse, there is no "forgiven debt" if you foreclose and therefore no tax liability. As a result, the above 800k isn't relevant.

I am, however, not a CPA and I suggest you talk to one to fully understand your tax implications.

I have missed 12 payments and I am currently pursuing a SS. The only reason I am doing this as opposed to a FC is because my wife wants to tell friends and familiy that we are doing a SS (she is worried about the stigma of a FC) and current guidelines will allow us to buy a house quicker if we do a SS. Of course, it wasn't until we missed 11 payments (and saved all those payments) that we started looking at a SS.

With a SS we did have to provide financials. I don't see this as a risk because our loans like yours are non-recourse. We also had to come up with a hardship. That was easy because my wife just had a baby and hasn't gone back to work yet. So right now we are a 1 income family.

Personally, I would dump the house if I were you. But I live in NorCal and paying 7k a month for a 1000 square foot house is crazy to me.

**Strategic_Default** · 10-25-2011, 01:51 PM

Originally Posted by bowtechy

An attorney friend (non-real estate) insists that if my 1st loan is foreclosed on and they sell the house at 900k to satisfy their 960k loan. They are still out 60k and my second loan got nothing, so I still "owe" 170k. Since the second loan got nothing, my friend is saying their "1" action is to chase me down for it. He could be wrong as he's not a real estate guy, but he says thats what he believes.

Lastly, do I stop paying my property tax due this December too?

Tomeason is correct. I actually paid for a lawyer Q&A session and acording to my lawyer, 580(b) is quite clear. In California, purchase money loans are non-recourse. If you never refinanced, the 2nd cannot come after you.

**bowtechy** · 10-27-2011, 08:06 AM

I met with a real estate attorney yesterday... the bias that may exist is that he specializes short sales and runs a real estate company doing it.

His advice is that I'm a prime candidate for a short sale and should take that route. He says foreclosure is always a possibility and the bank may call my bluff to see if I would actually go through with that, but he really thinks they will go the short sale route ultimately and with my location, I could be out of the house fairly quickly.

He did offer one other bit of info I hadn't read much about, which is a Short Pay. It's a blend of a loan mod and Short Sale on your credit hit. You basically stop making payments and wipe out one of your loans (the 2nd) for pennies on the dollar and move on with your life. He also added that Loan Mods are super tough to get and that a person of sound finances will have a hard time convincing lenders that's the only option. The main reason he seemed to not like the mod option, was that it puts you into a recourse loan that ties you down for good. This seemed to be his main issue.

As this is a financial decision for me, I guess I need to add the "option" of short pay to my mix.

In the end I would summarize the situation as follows:

My second mortgage is what is underwater, not the first so maybe a short pay is where its at if I am willing to stay in the house and carry a now $1M loan (as opposed to $1.15M) at 6%. The house might be worth $1M presently.

If I short sale, I could be out of here in 6-12 months+ with a ~3 year credit mark.
If I foreclose, I could be in it for 9-18 months+ with a 5-7 year credit hit.

SS takes more effort to show the home and takes effort and foreclosure is just so clean, so the free months of rent and credit score really needs to be worth it to casually accept that route.

So its a blend of free rent and credit problems and smoothness of transaction.

This adviser seems to think the market is stuck where its at for at least 3 years, but he wouldn't be surprised to see it stay flat for 10 years he said. Grim view.

He certainly seemed to eager to help with my short sale, he's been doing this for 23 years and it sounds like he's gotten everyone out, one way or another.

If you have thoughts, please share. I will document what I learn and do to share my "walk".

**TomEason** · 10-27-2011, 05:52 PM

bowtechy

Thanks for sharing that lawyer's opinion. You're already aware of my opinion on the subject.

As you know, that lawyer is trying to steer business his way by raising certain negatives that are intended to alarm you. Many lawyers do this as a way of acquiring new clients from their prospects (suspects).

However, I'd like to point out some statements that are incorrect. Here they are:

1) Although the SOJL is legally barred from a deficiency judgment pursuant to Cal CCP Section 580(b), they could conceivably sue anyway. In our country any person or entity can sue another for any reason. If sued, the defendant is advised to answer the complaint. Then the defendant would file a notice to dismiss, citing the statute, and also seek court sanctions on the plaintiff for filing a frivolous lawsuit, thereby wasting the court's time and the defendant's time. In the process, not only would the SOJL lose the case but would end up spending $$ on lawyers fees and on court costs.

2) A loan mod does not turn a purchase money loan into a recourse loan. It's a modification, not a new loan, as would be the case in a refinanced loan.

3) I agree that, should you decide to keep the house, settling your 2nd is the way to go - a no brainer.

4) Your statements about credit damage are wrong. Any derog can remain on the consumer's credit file for up to 7.5 years. SSs and FCs do the same damage, unless the seller can remain current on payments through the close of the SS deal.

Thanks again for sharing.

**Strategic_Default** · 10-28-2011, 10:21 AM

Bowtechy - I would like to confirm TomEason's opinion. Please know that this advice is coming from someone currently pursuing a SS. But you need to know the facts and your lawyer isn't providing them.

It sounds to me like your lawyer is trying to make money by getting you to short sell your house with him. What would his commission be? 3%? Pretty big incentive to push you in that direction.

I met with a lawyer prior to missing any payments. I paid $300 for a question and answer session and he had no hopes of any extra money so he had no incentive to mislead like your lawyer. He confirmed that in CA "purchase money loans" are 100% non-recourse. If you foreclose the 1st will get nothing and the 2nd will get nothing. Meanwhile, you will be able to live in the house rent free for much longer than if you just start working on a SS.

The short-pay options seems crazy to me as you take the credit hit by missing payments but then you still have to negotiate settlement? He doesn't seem to realize you have a non-recourse 2nd mortgage. If my 2nd mortgage stands in the way of my SS, there will be a foreclosure and they will get nothing (they will get 3k from the 1st if they agree).

As for the credit hit... The impact on your Score is the same for a SS as it is for a Foreclosure. Both will be on your credit report for 7 years. The difference is if you want to purchase a house again. Fannie Mae will make you wait 2-3 years if you have a SS on your report and 5-7 years if you have a FC. Other credit like car loans or credit cards won't care which one you have and will treat them both the same.

I haven't paid in 12 months and only started pursuing a SS last month. My Realtor believes my house will be sold in 2-3 months. I don't know where your lawyer is getting his 6-12 month figure.

The only reasons I am doing a SS is because my wife is worried about the social stigma of a foreclosure and we want to buy a house again soon.

Make sure you fully understand the real differences between a SS and FC. They are few.

**selawa** · 11-03-2011, 05:33 PM

i am in ca, have a jumbo which has been refi-ed so technically is recourse. can they come after me? also, there was a scary mention of algorithms to identify strategic defaulters? well , what if i am identified as one? then what? i have financial assets, but i live on the income. i had a major theft loss so my income is radically reduced. but the bank can see the assets the income derives from and say that i can pay them . i am not going to pay every last dollar to the bank. i feel like i am being trapped into keeping a house i can't afford.

**Strategic_Default** · 11-04-2011, 09:10 PM

If you only have one mortgage, you don't have to worry. Banks can only get a deficiency in CA if they pursue a judicial foreclosure. There are no banks in CA using the judicial process for residential homes. Look into CA Civil Code of Procedures 580 for more information. This is also referred to as the one action rule.

If you have a 2nd mortgage and it was refied as well, that is recourse so you will want to be careful and may want to refer to the thread regarding settling a SOJL (Sold out junior lien)

**EKnight** · 11-09-2011, 12:17 PM

How about WA? I have a second ($90k balance), which is actually current until next month when I will stop paying (I wish I had found this site months ago, when I thought my servicer was actually going to help me with a modification...ugh.) My 1st ($230k) is 27 months ($58k) delinquent and a sale date has been set for February 2012. The house is worth somewhere between $230k and $260k. Zillow gives the higher number.

I am nervous about the second mortgage. From what I read here, foreclosure is clearly the best option overall, but I'm not quite sure what will happen with my 2nd. I would love to be able to escape it as well, but I don't know if that is possible. Should I just stop paying and not contact them?

I found this and I'm not sure what to think of it: Foreclosures: Washington State is a "non-recourse" state (sort of) : Washington Real Estate Law Blog

**TomEason** · 11-09-2011, 12:29 PM

EKnight

Thanks for your post. I recommend you visit the following two threads.

Strategy for Settling Your 2nd Start by reading post #1.

Sold Out Junior Loans

If you need more info on WA mortgage and FC law, I recommend you conduct more research and/or consult with a WA RE professional or lawyer.

**EKnight** · 11-09-2011, 12:42 PM

Thanks much, Tom. I've been looking at those and so far I haven't been able to find what I'm looking for. I just realized that I didn't start with post #1 so I'll dive in again. Part of the problem is state specificity (WA), but I have been working with a non-profit group to help me with that. I just want to be as informed as possible. This forum is supremely helpful, if a little overwhelming at times. Thanks for your efforts and quick responses.

**jayguy0710** · 11-11-2011, 01:36 PM

Tom, a question for you that I just randomly thought about, as it pertains to those of us with multiple loans (80/20 in my case) and deciding whether or not to SS vs FC ...

Because my 2nd loan is charged off, and is purchase money, I will not be having any more communication with them, ever. Eventually, the 1st will FC (no NOD yet!) OR I can pursue a SS - who knows if I will be eligible and can pull one off. But here is my question:

As far as credit reporting goes, if I was somehow about to negotiate a SS, would the 2nd loan's derog on my credit report be changed from "charge off" to "paid in full" or "settled for less than full value" (or whatever the "technical" term may be?)? Perhaps this is something I/a realtor would need to negotiate with the 2nd loan holder? I guess the "worst" case scenario would be that I got the 1st (and 2nd because they would have to release the lien) to accept a SS but the derog from the 2nd charging off still stays on for 7 years or 7.5 years. I know we have all already discussed the fact that one's credit is not necessarily in better shape when SS'ing vs. FC'ing, but if the 2nd derog stays on their for 7+ years, that makes a SS even less appealing, does it not?

Hopefully I'm explaining myself halfway decently here! If you cannot already tell, I'm not very well versed in credit reporting as it relates to troubled mortgages.

**TomEason** · 11-11-2011, 03:25 PM

Hi Jay

You raise a thought provoking question.

While I don't profess to be a credit reporting savant, as far as I know, the report "settled for less than full value" or similar is considered a derog (less than positive or neutral), and can remain on the consumer's credit file for up to 7.5 years, in accordance with the provisions of the FCRA. But I honestly don't know for sure, and I also don't know how creditors view that kind of report as opposed to a "charge off". Very few major lenders participate in "credit bargaining" but it can't hurt to try.

I believe it may behoove you to call each of the three major CRAs and ask them. Surprisingly, the CRAs' reps are usually helpful and quite knowledgeable.

Please let us know what you find out.

**casita** · 12-08-2011, 07:41 AM

SS vs DIL vs FC Comparison was very helpful, i was not aware that FC was actually a "better" way out of our house bc we have decided to walk and let it go. My case was already referred to a law firm that send a letter that said my loan has been refered to them for FC. I have a couple of questions:
1. IS this letter the INtention to foreclose? or am I passed that level?
2. I am in NJ and have not researched the FC route here just yet anyone with info?
Thank you!

**TomEason** · 12-08-2011, 09:16 AM

casita

Thanks for your post. Glad you found the article helpful.

Your state is a judicial FC state; a FC will begin when the borrower is sued by the lender. Hence, the law firm involvement. I think you should consider the fact that your file is with the law firm, that your lender intends to FC.

I recommend you conduct some research on NJ FC law; it's easy to do online. Good luck

**msugirl** · 12-08-2011, 10:53 AM

Hi Tom:
Question for you, I am waiting on approval from Freddie Mac for my short sale and I meet all the guidelines except for the fact that I am not 60 days delinquent. Initially, I thought only Fifth Third would make the decision of short sale and I did not know about Freddie Mac would get involved. This whole process is so frustrating. I tried to do a strategic non payment this month but it back fired and they took payment out of a checking account with no money in it and now I need to pay bank back. Therefore, my mortgage is current and I can't do anything about it.
Do you know if Freddie Mac considers all information or is not being delinquent for 60 days probably going to be an automatic denial for short sale?

**TomEason** · 12-08-2011, 12:46 PM

msugirl

Thanks for your post. Sorry about your predicament. If it were me, I'd bag the SS and I'd immediately open an account at another institution and close your present account.

I cannot advise you on your SS because I've always evangelized against them. Good luck.

**GetMeOut99** · 12-24-2011, 01:58 AM

Hi msugirl,

I had a BOA loan and Fannie Mae was the investor. I was current on payments and my SS was approved. My hardship letter was a work of art and explained why I had to get out of the house and the budget BOA requested included all costs for prepping the house for sale, moving costs, apt deposits and the cash contribution due at closing. They got the message i was done with the house. Closed a couple of days ago and the Ss approval letter waived all deficiency - debt cleared. Had to ask for that though.