What happens when you are upside down and your 2nd wont modify but your first well?

[mandylee76]

Our first and our second are with Indy Mac. Our first is 400K, 2nd is 100K and the home is worth about 300K. They modified our first, and we are THRILLED with it. However they are saying that they will not modify our 2nd, because it is a 2nd and a balloon. We want to make the payments on the 1st, but cant make the 2nd as well. So what happens if we stop paying the second?

[LHarveyMadman]

If you don't make payments on the second, they can foreclose on you.

I'm assuming that your first was an ARM that had or was about to reset to a higher rate. I'm guessing that your 2nd has a fixed rate for a period of time before the balloon payment. If there is still some time before the balloon, then maybe the lender doesn't think that it is urgent to modify it. What are the terms of modification of the first, and what are the current terms of your second position balloon loan?

[mandylee76]

The first was a 6.125, IO for 10years, with 8 years remaining. Our 2nd is a 30 due in 15, 13 years before balloon. Again, we owe about 175K more than what you could sell it for. If the 2nd forclosed, they would get NOTHING, as there isnt even enough to pay off the first.

[The Professor]

As *** would tell you, I'm a bit of a realist in responding to situations like yours. I need answers to a couple of questions that will help me to provide you with the realistic assessment I believe you need to hear. Please respond to the questions. I don't often come to this forum so if I don't answer your questions, go over to the forum I frequent (Deed in Lieu -- Walkaway) and leave me a reminder. The questions are as follows:

1. In what state is the property located and is it your primary residence?
2. What is your estimate of the fair market value of the property?
3. Provide information on your loan(s) including loan balances, and the identity of the lender(s). Also identify whether these loans were created at the time you purchased the property or are the result of a subsequent refinance.
4. Do you pay homeowners association dues?

Daniel

[mandylee76]

California, Indy Mac for both 1st & 2nd, primary residence, 100% purchase. No HOAs. Recent comparables are between 315 and 330. We owe 507. 407 on the first and 100K on the 2nd. I appreciate your time!

[The Professor]

Thanks for answering the questions. They were asked in hopes that your situation falls within the factual criteria of anti-deficiency laws that a few states (typically those located in the west) have. Fortunately it appears that your situation meets the factual standards set forth in California Code of Civil Procedure Section 580b. I'm going to assume this Section is applicable for purposes of this discussion but you need to have an attorney skilled in California real estate law and debt collection practices review your purchase and loan documentation to confirm application of this Section to your particular purchase transaction.

Section 580b basically establishes criteria that must be met in order for it to apply. The facts that support its application are the two loans were created at the time you purchased your personal residence, and loan proceeds were used to buy the home. As such the loans are "purchase money" in nature and are defined as "non-recourse." This label effectively means that the sole recourse your two lenders have is to foreclose on the home. This is very good news indeed but doesn't mean that there won't be an impact in the event of foreclosure. Your credit report will reflect the foreclosure and default in your obligation to repay these loans in accordance with your agreement, but the lenders will not be able to successfully sue you personally in an effort to collect unpaid debt.

At this point I'm going to provide a realistic assessment of your situation. Truth is your interest in the house is non-existent, and will remain that way for the foreseeable future. Given that the amount owed exceeds your estimate of the home's value by almost $200K, I see little sense from a business perspective in doing anything other than making no further payments, allowing the holder of the first loan to foreclose, and staying in the home as long as possible while you save the money you would have spent making monthly loan payments so you will be able to move into a rental home once the foreclosure process has run its course.

Continuing to make monthly loan payments (and property tax payments) that exceed the fair rental value of your house is, in my opinion, simply throwing good money after bad. I say that fully recognizing that CNN recently identified 8 of the 10 worst cities in terms of property value declines as being here in California. My expectation is real property values will continue to decline until 2011 (a date I've been forecasting since 2005, based upon past market downturns). Additionally bottoms have been historically flat and typically run for 4-5 years. So chances are we won't see real property values increase until somewhere around 2016. Since foreclosures drop off of your credit report in 7 years, my recommendation is take the smart path based upon the overall circumstances.

Daniel

[mandylee76]

I do completely understand what you are saying about throwing good money after bad. My husband and I love this house, we now have a 10 month old living with us that was born in this house. (All very emotional reasons to stay) However the deal that Indy worked out for us on our first is great, and even with taxes and insurance included we would not be able to rent the same size house for any less. They offered us a 3% P&I for 5 years, then the rate raises at 1% a year,until it reaches 6%. The following year (the 9th year) it raises to 6.25 where it remains for the last 21 years. I am wondering, if we do decide to stay, pay the first on time, what will happen with the 2nd should we not pay it? I have heard of "stripping 2nds" in a BK, although I am not sure if that is an option for us. I do understand that the 2nd will continue to report derogatory on our credit, what other recourse will they have?

Again, I do very much appreciate your help and time. Thank you in advance, and Merry Christmas!

[Moe Bedard]

If you received the modification documents just make sure that you read through them.............there may be a clause about bankruptcy so be sure to check.

[The Professor]

I would encourage you to talk to a bankruptcy lawyer about the possibility of lien stripping through a Chapter 13 filing. But I want to warn you that a bankruptcy will have a worse impact on your credit and is reportable for 10 years (foreclosures are only reportable for 7). I guess my point in all of this is the long term emotional cost of trying to save your ability to occupy a home you have no equitable ownership interest in. The home isn't yours. It is your lenders. You don't own it. It owns you in the form of being a liability.

In learning how to fly, a student pilot quickly learns about stalls. The only way to recover is to take proactive steps. If you don't then the term "buying the farm" becomes your fate (a crash). Here your emotional instincts may be your financial downfall. Weigh carefully the long term impact of what you intend to do.

Daniel

[mandylee76]

Daniel, I appreciate all of the great advice you have given. One of my greatest concerns is that my husband is currently seeking new employment, possibly in law enforcement. A foreclosure on his record may prevent him from getting employment. If we are able to stay in the home for the next few months and make payments on the first while he goes through the background checks, and then foreclose it would place us in a better postition (employment wise). So my question is, what will the second be able to do in the meantime?

[The Professor]

As to the second, they are in a "no win" position presently and so I would expect them to do nothing until the situation with the first loan is resolved, either through a modification, through foreclosure, or in conjunction with a reorganization (Chapter 13).

Take care,

Daniel