Let it go or not?

B

buylowsellhigh_IHB

New member
I have a friend who is currently underwater on an investment property in the riverside area. This property was mainly purchased to diversify an investment portfolio. With a 33% down payment, the idea is to have rent income offset the payments, with a goal of selling 5-8 years later. This investment property also happens to the be only property owned, as they are renters themselves.



Unfortunately, with the housing kaboom, the home's value plummeted ~50% and they're almost $100k under water.



Additionally- the tenants are 2 months delinquent on rent. The reason these tenants haven't been asked to move yet, is that the rent market out in Riverside looks bleek, I don't know how much rent can be collected should they find new tenants, and if tenants can even be found. To add insult to injury - They applied for a reduction in property value, so the property tax is less. The county granted a 5% decrease, when its obvious the home dropped 50% in value.



Big question here - should they just "walk away" from this property if lets say, co-signers for future credit will not be a problem? It seems, that if 19 out of 20 people walk away from their properties in the area, why not my friends too?
 
Before you read anything I write, please understand the following: I AM NOT A LAWYER. YOU SHOULD NOT CONFUSE WHAT I TELL YOU AS FACT -- THE INFORMATION PROVIDED MAY BE WRONG. IT IS SOLELY FOR INFORMATION PURPOSES -- IT IS NOT LEGAL ADVICE AND SHOULD NOT BE CONFUSED AS LEGAL ADVISE. YOU SHOULD CONSULT AN ATTORNEY FOR LEGAL ADVICE -- ONLY AN ATTORNEY CAN ENSURE THE FULL AND PROPER UNDERSTANDING OF YOUR RIGHTS. I DISCLAIM ALL RESPONSIBILITY FOR THE INFORMATION GIVEN BELOW. IF YOU DO NOT UNDERSTAND OR AGREE TO THIS, PLEASE DO NOT READ THE REST OF MY POST.



A lender has options when it comes to foreclosure. It is akin to a chess game. Based on what is written in the note and mortgage, a lender may choose from 2 kinds of foreclosure. One is judicial foreclosure, which has been rare during the boom years. The other is non-judicial foreclosure. Non-judicial foreclosure is allowed where there is a "power of sale clause" and allows a lender to foreclosure non-judicially so long as he follows the procedure. Non-judicial foreclosure is more popular because judicial foreclosure is a pain, since it has to go through court and takes longer than nonjudicial. Based on the statute Cal Code Civ Pro 580d which was enacted in the 40's, and you can see for yourself is wordy, a lender who nonjudicially forecloses cannot seek a deficiency. BUT KEEP IN MIND, this does not stop a sold out junior, so if there are 2 mortgages, and the 1st forecloses nonjudicially, the 2nd can still sue you to get what you owe, even what you walk away...(BUT THERE ARE EXCEPTIONS-- SEE BELOW)



<blockquote>

580d. Rendition of deficiency judgment after foreclosure under power of sale forbidden; Exceptions



No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.



This section does not apply to any deed of trust, mortgage or other lien given to secure the payment of bonds or other evidences of indebtedness authorized or permitted to be issued by the Commissioner of Corporations, or which is made by a public utility subject to the Public Utilities Act (Part 1 (commencing with Section 201) of Division 1 of the Public Utilities Code).</blockquote>


So now you are thinking, if someone is broke as a joke, who would go after a deficiency? Well, they can renew the judgment forever every ten years, so once your back, the sold out junior will probably be back after you. The 580d law was made because during the depression lenders would foreclose then go after the borrower by garnishing wages and other oppressive means, and so the economy was further degraded, and to basically start fresh this law allowed a parity of remedies for lenders, who would basically bid super low prices at an auction then seek a massive deficiency. The reason this problem didnt exist in terms of judicial foreclosure is that the borrower could redeem for a certain time AFTER the sale. If you are being foreclosed on non-judicially, you cannot redeem the property after the sale. You have up to 5 days before the auction to redeem.



The junior after a nonjudicial foreclosure cannot come after you if another law apples: 580b.



<blockquote>580b. Conditions under which deficiency judgment forbidden



No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, <strong>or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.</strong>



Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein.</blockquote>


So basically, if you read that, it doesnt seem to apply to HELOCS since not purchase money. And if it is an investment, or not occupied, is seems not to apply. BUT AGAIN I AM NOT CERTAIN ABOUT ANYTHING I AM WRITING.



You can see how complex this can get. This is why you should get a lawyer who is familiar with this stuff. There are so many issues like what about the 80-20 loans... etc. Well, I could be wrong, and this might not be the right case law, but there is a case of Simon v. Superior Court 4 Cal.App.4th 63 (1992) -- bank gives two separate, sequential loans -- first loan = $1,575,000 secured by a first on personal residence. second loan = $375,000 secured on the same property. bank nonjudicially forecloses on its first bidding less than the amount due -- then sues for $375,000 on the second. Court barred recovery on the second, concluding it was akin to a deficiency barred by 580d.



The other option is judicial foreclosure. (Yah, up until now we were only talking about nonjudicial) Since 580d only applies to nonjudicial foreclosure, it seems that a lender can get a deficiency if 580b is not met. And if there is more than one lender things can get more complex. Every little detail can make everything more complex. THEREFORE, you should get a lawyer and ask the right questions. Tell him everything, everything, and get advise. If you do not like the advise or think it is wrong, get a second opinion. It is up to you to be diligent, we live in a free country.



I wish the best for your friend. Godspeed.
 
[quote author="buylowsellhigh" date=1237046217]I have a friend who is currently underwater on an investment property in the riverside area. This property was mainly purchased to diversify an investment portfolio. With a 33% down payment, the idea is to have rent income offset the payments, with a goal of selling 5-8 years later. This investment property also happens to the be only property owned, as they are renters themselves.



Unfortunately, with the housing kaboom, the home's value plummeted ~50% and they're almost $100k under water.



Additionally- the tenants are 2 months delinquent on rent. The reason these tenants haven't been asked to move yet, is that the rent market out in Riverside looks bleek, I don't know how much rent can be collected should they find new tenants, and if tenants can even be found. To add insult to injury - They applied for a reduction in property value, so the property tax is less. The county granted a 5% decrease, when its obvious the home dropped 50% in value.



Big question here - should they just "walk away" from this property if lets say, co-signers for future credit will not be a problem? It seems, that if 19 out of 20 people walk away from their properties in the area, why not my friends too?</blockquote>
As long as they won't need to use their credit for an significant purchases in the next 3-4 years, I say the best course of action financially speaking is to spend the keys back to the lender. It will be many, many years before your friend recovers their capital. Sometimes it's better to quit while you are behind instead of bleeding slowly.
 
it also may depend on whether the bank thinks that they are owner-occupiers, or investors.



if investors, it may inspire the bank to be less forgiving, and come after them.
 
[quote author="freedomCM" date=1237101224]it also may depend on whether the bank thinks that they are owner-occupiers, or investors.



if investors, it may inspire the bank to be less forgiving, and come after them.</blockquote>
If that is the case, that friend needs to consider filing for BK.
 
Yeah... its a sticky situation... very very sticky... I've always thought of what might happen to people who let their homes go, when the economy rebounds... The bank can file a lawsuit to claim $$ back. Even if you don't have $$ to pay back, they can garnish wages and watch checks come in for years to come. I just wonder why the banks don't do that now. Thats what I would do if i were a bank...
 
[quote author="buylowsellhigh" date=1237130825]Yeah... its a sticky situation... very very sticky... I've always thought of what might happen to people who let their homes go, when the economy rebounds... The bank can file a lawsuit to claim $$ back. Even if you don't have $$ to pay back, they can garnish wages and watch checks come in for years to come. I just wonder why the banks don't do that now. Thats what I would do if i were a bank...</blockquote>
Well, if someone if gonna get their home foreclosed on they might as well file for Chapter 7 and protect themselves from what you described (it's not like their credit it get that much worse after the BK). Why aren't banks going after people who still owe them money after the foreclosure? A friend of mine filed for BK when they were young and stupid and within about 4 years their FICO scores were back in the mid-700s (they had perfect credit after the filing for BK).



To answer your question....easy, you can't squeeze blood out of a rock (cost vs. benefit don't make sense for them to do it).
 
Heh... most of the second lien holders (WAMU and Countrywide) are long gone. So how does that apply?



Thanks LoudRoar, your non-legal advice seems spot on, but if the second lien holder no longer exists... then what happens? Will they go after them with vengeance or will they say "f*&k it, we bought this debt for pennies on the dollar, it isn't worth it"?
 
Even though WAMU and other banks are out, those assets are still assets, regardless of how worthless they seem now. You can buy second mortgages for near 7 cents on the dollar, based on random stories i have heard. For example, the Indymac assets are being auctioned in a week or so, so someone will buy the loans (must meet the requirements to purchase these loans -- essentially must be a bank) and then exercise the rights it gives them.



If you really think that a mortgage holder is just gonna forget about it, you are thinking wishfully. They will do everything within their power as soon as they should/could because otherwise, why would they pay anything at all for a worthless and useless asset? Value is assigned by a willing and capable buyer, this should never be forgotten. These things still have value because they give the holder certain rights.
 
[quote author="LoudRoar" date=1237168703]Even though WAMU and other banks are out, those assets are still assets, regardless of how worthless they seem now. You can buy second mortgages for near 7 cents on the dollar, based on random stories i have heard. For example, the Indymac assets are being auctioned in a week or so, so someone will buy the loans (must meet the requirements to purchase these loans -- essentially must be a bank) and then exercise the rights it gives them.



If you really think that a mortgage holder is just gonna forget about it, you are thinking wishfully. They will do everything within their power as soon as they should/could because otherwise, why would they pay anything at all for a worthless and useless asset? Value is assigned by a willing and capable buyer, this should never be forgotten. These things still have value because they give the holder certain rights.</blockquote>


Seven cents on the dollar wouldn't be bad for a portfolio including performing and defaulted. If it was a portfolio of loans where the first had already foreclosed, those wouldn't be worth much.



There are several major banks with immense heloc and second mortgage portfolios retained on their books. I'm talking amounts in excess of their market cap.
 
[quote author="MalibuRenter" date=1237184218][quote author="LoudRoar" date=1237168703]Even though WAMU and other banks are out, those assets are still assets, regardless of how worthless they seem now. You can buy second mortgages for near 7 cents on the dollar, based on random stories i have heard. For example, the Indymac assets are being auctioned in a week or so, so someone will buy the loans (must meet the requirements to purchase these loans -- essentially must be a bank) and then exercise the rights it gives them.



If you really think that a mortgage holder is just gonna forget about it, you are thinking wishfully. They will do everything within their power as soon as they should/could because otherwise, why would they pay anything at all for a worthless and useless asset? Value is assigned by a willing and capable buyer, this should never be forgotten. These things still have value because they give the holder certain rights.</blockquote>


Seven cents on the dollar wouldn't be bad for a portfolio including performing and defaulted. If it was a portfolio of loans where the first had already foreclosed, those wouldn't be worth much.



There are several major banks with immense heloc and second mortgage portfolios retained on their books. I'm talking amounts in excess of their market cap.</blockquote>
I'll go out on a limb and guess that they include Chase, BofA, Wells, and Citi. Hence, Dr. Doom's assertion that most banks in the US are insolvent is correct.
 
I can' t believe how many of the posters think it's perfectly acceptable to just walk away from an obligation. Why can't they just go move into the house? Too long of a commute? Sorry, not reason enough to just default. And it seems that the less consequences there are for defaulting, the more it is encouraged here. If you are in financial trouble, we have things like bankruptcy, but to encourage someone to just walk away even if they can afford to keep their contract simply because it's underwater is not right. We are supposed to learn from our mistakes and part of that is the consequences. If we make bad choices, we are responsible for them.

why you shouldn't just walk away from your mortgage
 
[quote author="usctrojanman29" date=1237100103]As long as they won't need to use their credit for an significant purchases in the next 3-4 years, I say the best course of action financially speaking is to spend the keys back to the lender. It will be many, many years before your friend recovers their capital. Sometimes it's better to quit while you are behind instead of bleeding slowly.</blockquote>


Both the "jinglemail" and bankruptcy options are some of the most damaging to people's long-term finances of the ones available, and I would be very, very careful about advising someone to follow either of those courses.



[quote author="no_vaseline" date=1237325654]Just because it is the morally wrong thing to do doesn't mean it isn't the prudent thing to do.</blockquote>


Also consider, that just because something is the easiest thing to do doesn't mean it is the most sagacious choice, either...



stepping_up's link is valuable in that it educates and explains briefly some of the avenues available. With that said, I don't find it immoral for someone to choose to do what they feel is the best to provide for their family rather than honor a commitment that they've made to a financial institution. I just hope they are making an educated decision and know that they have several options.
 
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