AboutDick Dennis Expertise With more than 37 years as a real estate broker, I can solve most any problem presented. If I can`t, I do my research. Problems with mortgages, trust deeds, foreclosures, odd ways of conveying titles. Most any good Realtor can answer questions satisfactorily, but I answer questions that most cannot. Also, ask about my hard-copy newsletter.
Experience Problem solving since 1980
Organizations National Association of Realtors
Publications Publishes The Landed Gentry, guest writer in Who's Who in Creative Real Estate, First Tuesday, Financial Freedom and many newspapers
Expert: Dick Dennis Date: 7/13/2008 Subject: Upside Down Home
Question Hi Dick,
I live in CA. We purchased a home in 2005 for $525,000.00. The original
loans were 100% financing, an 80/20 split. The first mortgage for
$420,000.00 is a 5/1 ARM and will adjust in 2010. The second was originally
a HELOC for $105,000.00. Both loans were from the same company. We
refinanced the second with our credit union to obtain a 15-year fixed in
2006. We did not pull out any additional money, it was simply to get a fixed
rate on the $105,000.00.
Fast forward to 2008 and I lost my job in late March 2008. I still haven't been
able to find work. My husband is still working. However, if I can't find stable
employment, we won't be able to pay our mortgage in the near future.
I have contacted both of our lenders and inquired about the possibility of a
short sale. They gave me the process which I've read and seems to be typical-
submit an offer, hardship letter and bank/tax statements. They'll decide then
(probably 3-4 months after submittal) whether or not to accept.
The biggest issue is what realtors have now told us we'd have to list the
house for to be competitive. One realtor told us $275K - $325K. Another
realtor told us more like $240K- $250K. One realtor straight out told us that
she cannot take the listing. The other is doing research. So, with not being
able to find someone willing to list, it creates a problem. Another issue, even
if it was listed and sold at one of the figures above, is that the sale proceeds
would not even cover the first mortgage.
I'm inclined to work with our 2nd mortgagor because it is our credit union.
However, they can't agree to anything until such a time we have an offer that
both lenders accept. And, if they did agree to work with us, I'm sure they'd
want to convert it to a personal loan which I'm sure we couldn't afford at
personal loan rates and terms. I've read in another similar post from you that
if you can't pay the first, don't bother paying the 2nd. Since we've refinanced
the 2ndary loan, I understand they can sue us in court for the loan amount,
fees, etc. I am aware, per the IRS site, that if the loan was refinanced not to
exceed the original purchase loan amount, it is still covered by the Mortgage
Debt Relief Act through 2009.
Any wisdom for us in this predicament?
Answer Before I say anything else, Christina, I will reproduce an article from my the last issue of my newsletter The Landed Gentry: First of all the new law is not between the borrower and his/her lender. It is between the borrower and the IRS. The lender still does not have to forgive the debt. The Lender may still send the borrower a 1099—under the new law you might not have to pay taxes on it.
This is truly a lifesaver for taxpayers. Normally, forgiveness of debt results in taxable income. That means should a lender allow the borrower’s residence be sold through a “short sale,” whatever amount is foregiven by the lender had to be reported on the borrower’s income tax return as ordinary income.
This act allows taxpayers to exclude qualified mortgage debt forgiven on their principal residence when it comes time to file their tax return.
The bill actually amends the Internal Revenue Code of 1986 in several ways. • Only applies to mortgage debt forgiven January 1, 2007, and before January 1, 2010. • Only applies to the mortgage used to buy the home • Only applies when the home loses value or the owner’s financial condition qualifies • The home must be the principal residence, not a second home or rental property
The most important thing to know is who and what the new law excludes.
• Is the loan on your Primary Residence? The Law excludes investment property.
• Is the loan a Purchase Money Loan? Did you buy the property with this loan? Refinances are not allowed.
• A HELOC or Home Equity Line of Credit doesn’t count unless you can prove that the money used went directly to improvements on the house.
• If you passed the first three items you’ll also need to remember it does not change your state tax obligations.
As you can see, you're going to have trouble qualifying for this with the IRS. You may not even be able to get a short sale out of it because YOU ARE NOT BEHIND IN PAYMENTS. That is a requirement. The lender won't even talk to you about it until you are about 3 months behind. But by that time the lender on the second (remember this disqualifies you for the HR 3648 because it is a refinance unless you can prove you used that money for rebuilding or fixup) gets wind that you are behind on the first TD, they are going to take steps so that they do not lose their money.
Further, here in CA, as you probably know by now, our governor signed a new law into existence which requires the lenders to give an extra 30 days before the file the default and they must consult with you to see who you can be helped.
So, you can see, Christina, your plans are falling apart. Asside from the fact that you bought your house at the very peak of the market in 2005, you have assumed things that are just not going to happen. My guess when the lender talks counseling with you, they are going to encourage you to go find that job, amongst other things. I do wish you well.
