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Recourse Mortgage - California investment property foreclosure

Discussion in 'Investment Property Loans' started by sanjoseca, Apr 10, 2010.

  1. sanjoseca

    sanjoseca LoanSafe Member

    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.
  2. Moe

    Moe Call 1-800-779-4547 Staff Member Loan Safe Mortgage

    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.

    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.

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

    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.


    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?
    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.

    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.
  3. sanjoseca

    sanjoseca LoanSafe Member

    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
  4. Moe

    Moe Call 1-800-779-4547 Staff Member Loan Safe Mortgage

    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!!
  5. sanjoseca

    sanjoseca LoanSafe Member

    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
  6. Daisy Cutter

    Daisy Cutter LoanSafe Member

    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.
  7. sanjoseca

    sanjoseca LoanSafe Member

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

    julieCEO Guest

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

    michelle kaber LoanSafe Member

    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...
  10. sanjoseca

    sanjoseca LoanSafe Member

    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?
  11. Daisy Cutter

    Daisy Cutter LoanSafe Member

    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/aspx/splash/ltwh_selection1.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.
  12. sanjoseca

    sanjoseca LoanSafe Member

    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!
  13. michelle kaber

    michelle kaber LoanSafe Member

    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...
  14. sanjoseca

    sanjoseca LoanSafe Member

    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.
  15. michelle kaber

    michelle kaber LoanSafe Member

    good luck sanjose and keep us posted.
  16. HopingtoFind

    HopingtoFind LoanSafe Member

    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.
  17. sanjoseca

    sanjoseca LoanSafe Member

    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!
  18. HopingtoFind

    HopingtoFind LoanSafe Member

    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.
  19. sanjoseca

    sanjoseca LoanSafe Member

  20. HopingtoFind

    HopingtoFind LoanSafe Member

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