Expert: Dick Dennis - 4/22/2008

Question
QUESTION: I lost my job and have a first mortgage worth 40,000 and a second worth 15000. I have been paying on my second but cant afford to pay on my first. The bank knows this and I have had my house for sale now for 6 months, if it doesnt sell by June I am doing a deed in leui of forclosure! What happens with my second mortgage if I continue to make my payments on it! What options do I have?

ANSWER: That's a complete waste of money, Bradley. What is going to happen is that the second mortgage will find out that you're not making the first payment and then THEY (the second) will foreclose. So, you can see why the payments you're making to the second is a waste. They will foreclose as if you haven't made any payments to them, too. On top of that, the second will foreclose a little bit faster because they have their principal at stake. Because if the first would foreclose, the second gets wiped out . . . unless the second shows up at the foreclosure auction to bid. Of course, the second will want to protect their position . . . unless there isn't any equity in your house to cover the second.

For example, if your house was worth only $40,000, the second may not even show up at the foreclosure auction, knowing that if they foreclose and take over the house, they would not be able sell it for more than what they paid for the first. They can wipe out their second position in their books. But in any case, the money you are sending to the second is a waste if you do not pay on the first.

As far as giving the first a deed in lieu you first have to make sure you are informing them that you are doing that. Otherwise, if they choose not to accept it, that is a waste as well.

Where is the property located, what kind is it, size, etc.? I might have another idea for you. Contact me at my email address below. I do wish you well.

Dick Dennis       dixiedee13@aol.com

---------- FOLLOW-UP ----------

QUESTION: The house was appraised at 55,000! The first mortgage and I made an agreement that I dont have to pay for six months while my house is up for sale. The second mortgage place knows that my house is for sale and that with the current market Im not going to get what it was appraised for! They are trying to switch it to a personal loan right now but my payments will double because its set at 15 years right now and the most they can go on a personal loan is 6 years possibly 7. I can only afford to pay the 200 dollars a month that im paying now and not anymore. If Im willing to pay them that money surely they wont say no we dont want your money and we are going to eat your 15000 dollars will they? I would think they would work with me so that they get their money! The house is located in Ipava, Illinois. It is a 2 story, 3 bedroom, 2 bathroom home, with full unfinished basement, it is around 1500 square feet not including the basement. It has brand new carpet and new tile in kitchen and bathrooms, and one of the bathrooms is brand new. It has a big yard and a 1 and a half car garage that is 5 years old. It has a new huge deck as well! There are several new windows and new paint as well. The siding and roof are in great shape! The siding is light green though! My banker told me when I bought the house for 40,000 that it was worth at least 50,000. Also did I mention that I had no clue when I took this loan out that it was considered a 2 mortgage! I thought it was a homeimprovement loan/ personal loan, there was never any mention of it being a 2nd mortgage. What should I do? Please help my wife is super upset! My credit is good at 675 and I dont want to hurt it!

ANSWER: I will address each point as you presented them, Brad. In order for them to fit you into the monthly payments they offered you, they had to make it a first and a second, paid separately. Since you basically had a 100% obligation, you would have had to pay additionally adding the taxes and insurance onto your monthly payment if it was one mortgage only. I am sure you have heard of PITI (Principal, Interest, taxes & insurance). They would have to add an additional monthly fee added to a slightly higher interest rate. Based on what you have told me, they should not have made the loans to you and you should have continued to rent.

The reason why the second is trying to switch the loan to a personal loan is because they don't want to lose their money, which they know darn well is going to happen. So if they get you on a personal, if you don't pay it, they can sue you personally. You would have to file bankruptcy to erase it. If that loan is left on the property, then they cannot get at you personally. The property stands for the loan. Period. Further if you stop paying them, too, and they start the foreclosure, you will have a one-year RIGHT OF RECISSION in Illiois. That means you can live in the house for up to a year AFTER the foreclosure at no cost, no payments . . . unless you do want to make everything right, and you indeed are able to, at that time. The interest will accumulate over that time and will be added to you loan balance, not to mention the attorney fees and other fees. By the way, when they allowed you to live in the house with no mortgage payments, they merely added those six months of accumulated interest to the back of your loan. One way or another you would have had to pay it. So do not let them switch the second to a personal loan. You lose, if you do.

As you can see, the lenders were covering their butts. They were not being so benevolent to you.

With you not making the payments on the first, and if you stop paying on the second, too, your FICO score will drop. You can't help it. But what you should do is to save up as much money you can to pay both mortgages off . . . but don't waste your money on the second as you have been doing.

Believe me, THEY are in a worst position than you. If they wind up repossessing the property they will lose money, lots more than you. So, here is what you should try to do:

If you have a friend or relative who has some money or can get a loan, say, $35,000. You then offer that to your mortgagors, say, $30,000 to the first and $5,000 to the second. You have them over a barrel. You are in the catbird seat. If they don't accept it, they lose. They may offer to negotiate. But you can then pay less on your monthly payments with your friend or relative.

Or, you can find an investor who will do all this for you. He will expect to make a profit somewhere in there, but in the end you will get to keep the house. Or you can just walk away from the property and let the lenders have it and start all over again. No big deal. Lots of people have done that.

I have given you some pretty good ideas here, Brad. So, it is up to you to carry the ball from here.

Dick Dennis        dixiedee13@aol.com

---------- FOLLOW-UP ----------

QUESTION: Okay first thanks for your advise but I am not understanding some things. I have not lived in the house for over a year now and I have had it for sale privatley for 6 months and with a realator for six months! Next my first mortgage was through a small town bank(500 people in the town) for 40,000 dollars for the house. The home improvement loan I took out was 6 months later through citifinancial in Macomb(population 20,000)for 15000 so I could add a bathroom on the house, and carpet and tile! The first bank is working with me and want me to sell my house but if it doesnt sell they would be willing to do a deed in lieu of forclosure. They said if I sign my house over to them they would be able to sell it, even if it has a second mortgage! The second mortgage is saying that they cant do that! I dont know who to trust! Now if I walk away from both houses then the 2 mortgages fight over the house? Or what happens if I sign it over to the first mortgage and they sell the house, what happens to the second mortgage, can I sign my house over to both mortgages? I dont have anyone that will loan the money to me and I dont want to go through forclosure, I just want to give the house back or sell it. I can continue to pay the second mortgage or personal loan whatever it is! IF I get a personal loan from the second mortgage but can only pay 200 a month not the 275 that they want what happens. Lets say I pay them 200 each month even though Im supposed to pay them 275?

Answer
If the first mortgage is willing to accept the deed in lieu, Brad, then you probably should do it. But be aware that you may be subject to a Internal Revenue tax assessment for the amount of the loan that you basically gave back. So, you would have a $40,000 IRS assessment with a minimum of 15% (that is what your tax bracket would be) which is $6,000. However, you should talk to a CPA or other tax expert to make sure. I wouldn't trust asking IRS, their people are not trustworthy I have found.

You didn't tell me you were not living in the house. So, that means you bought it to fixup and resell, which is not happening. I still say you should not pay the second anymore. Let them foreclose on it or you could give THEM a deed in liew . . . if they are willing to accept. Then it'll be their responsibility to pay the first. I wouldn't give the second 20 cents, much less $200 or $275.

In the state of Illinois, the mortgagor (that's you) actually can stay in the house for a year past the foreclosure date. It will help you if you go to the local library and become familiar with the foreclosure process in Illinois.

I guarantee you that you are not the only one to lose a house through a deed in lieu and you won't be the last. Nor would you be the last to lose it to foreclosure. You take care.

Dick Dennis

I think you should continue to try and sell the property and tell both lenders you intentions: that you will continue to try and sell it and if you are not successful you will give a deed in lieu to whichever one wants to property. But DO NOT PAY THE SECOND another dime. I am trying to save you money. And don't forget to talk to a tax expert.