Idea for getting out of upside down mortgage! (loan, non-recourse, foreclosure)

[tiresidedown]

Here's my idea - what do you think:

Here's the scenario: You have a home & mortgage, the mortgage is higher than the value of the house. The mortgage is secured by the house - i.e., if you stop paying, the bank takes the house. Normal stuff.

However now, having the house as collateral isn't so hot because the house is worth less than the loan. Let's say for ease of calculations ( I KNOW it's not realistic) that you have a house that's currently worth 100k and the loan is 200k. The bank has 100k out there floating, more or less unsecured because even if they take the house, they only have something worth 100k.

Why not convert the 200k mortgage into a 100k mortgage (ignore the 80% 'rule') and a 100k unsecured personal note. The 100k is basically unsecured ANYWAY, and the borrower (and bank) can refi the first 100k. If the first 100k is cheaper (lower rate), the borrower has better odds of making the payments and the bank is safer....

AND...

put a clause in the personal note that provides for a refi when the home value goes up, so that the bank has as much of the note secured by a house as possible, and they don't end up with unsecured notes when the home values rise.

What do you think? Can this work?

[deuterdu]

I think that is a great idea....however most of the banks and lenders make their money by selling these loans on the secondary market. The banks and lenders will not be able to sell it so they won't allow it. A portfolio lender could do it since they don't sell the loan but probably won't. This would look like bad debt in their books and would hurt their "numbers" or "good book of business".

Many banks are doing what is called a "loan modification" in which the bank agrees to modify the terms of your loan to a level that is sustainable and affordable to the homeowner and reduces the losses incurred by the bank due to foreclosure. Now let's be realistic, if the homeowner tries to do this themselves, most of the time the bank will offer the minimum amount of relief so they can squeeze the homeowner out of as much money as possible before foreclosing. When a loan mod is done the bank needs to see bank statements and require a hardship letter explaining why you can't pay. If helping you is cheaper than the foreclosure then they will usually help. If it is vice versa they will let it foreclose.

If you hire an attorney that specializes in loan modifications then the attorney looks for violations made by the bank/lender in your loan file like missing documents that are required by federal and state agencies. Whenever they find a "violation" there are usually heavy penalties assessed to the lender/bank. So let's say the attorney finds 3 violations that could potentially result in 100,000 in fines. They then contact the bank, provide them with your hardship letter, bank statements and a list of violations found in the file. Amazing how the response is usually faster and the loan modification terms are usually much better (like a low rate and deferred payments for several months. Sometimes they are able to get principal reductions (rare) and the terms are often permanent like a 30 year fixed instead of a 5 year.)

Drawback is that you will pay a few thousand dollars for the attorney's services. Dealing with the lender is free (so it seems until you keep making mortgage payments that are higher because you did not get an attorney involved) In the end this is a perfect example that you get what you pay for!

[kimrocktherealtor]

My question is in regards to the last post.. If your last loan was a refi in the last 3 years, what exactly are you saying? Thats the situation I am currently in, upside down in a mortgage and needing to move for work so I'll need to sell the house before I can move to a new one. The refi was done a year ago.. So what are my options? I don't want to do a short sale due to credit issues, but don't want to bring 30k to the table to sell the house either.

[Once an optimist]

So, what is the real answer. I have not seen in any of the postings anything but wishful thinking! There has to be a way and an answer somewhere, but where?? I think it is very sad that there are so many that are being given the opportunity to make the deal of a lifetime, but what about us who have been diligent about making that god forsaken payment? I just don't get it!

[chet everett]

Is that the reality is that nothing much works with the way the system is setup to unravel underwater mortgages in a non-destructive way...

Unsecured loans have no secondary market, not government backstop, no real recourse. Lenders like the fact that there is significant liquidity in the secondary market for mortgages. That liquidity exists because the ALL the acronym companies and the Federal Reserve itself are / were actively participating in the secondary market. Recourse exists in most states, lenders can come after borrowers who have faked it. Even in states that are non-recourse the lender can foreclose, take title to the property and have a 'real' asset that they resale immediately to recoup some of what they are owed or hang on to in the hope that prices recover. That is much more acceptable that having billions in charge offs for non-performing unsecured debt...


There are academic types, and even some banking executives that have proposed "shared appreciation agreements" that would allow a mortage to be reset to current values and if the home owner sells for a profit in a set time period the lender gets back a portion of the proceeds. Tax rules would need to be worked out so that this gain is not taxed away. Further consumer watch dogs fear that the settlement process would need some certification to make sure no funny business happens. Bottom line is big changes stir big fears...

You best way of thinking about these things is based on your situation -- if you are a regular guy just making the payments that you know you are supposed to and you don't have any true hardship in doing so then you will just make yourself crazy thinking about folks that have " gotten away with" anything less.

If you have some hardship then you need to present your situation to the lenders in the light of fitting under a precedent they have established. Thus is not right vs wrong, it " you did for them now do it for me"...

Depending on your long term goals and present needs there are a range of optionsi that lenders have allowed. From loan mods to short sales to everything there is no lack of creativity, there is lack of uniformity and the madness this creates does destroy credibility. The smarter banks are already trying to acknowledge that and behave like they realize there job is not to make the Congress look any less stupid than they already are...

[mortimer]

Originally Posted by chet everett

... if the home owner sells for a profit in a set time period
the lender gets back a portion of the proceeds. Tax rules
would need to be worked out so that this gain is not taxed away.

I'm not clear on what you said here.

The gain on the sale of a personal residence is not taxable unless it exceeds
$250k/$500k. Since we are talking about underwater houses who's value has
declined, in order to have the house appreciate in value - just to the amount
of the original mortgage - would only involve a break-even situation.

Even if we were talking about a real, taxable gain, any
amount "given back" to the bank would not be included in the
taxable gain and would be an increase in basis.

Am I missing something else?

Originally Posted by chet everett

... job is not to make the Congress look
any less stupid than they already are...

Heh.

[Wilson513]

The solution on these upside down mortgages is always the same. If you want to ditch the deficiency, then you must impose some pain and then offer some salve. Let the house go into foreclosure. Fight about everythin: service of process, parties necessary for adjudication, joinder of claims, counterclaims, federal and state consumer finance compliance, etc, etc. etc.

Then, when things get bogged down, bring forward your bona fide purchaser and hold the sale hostage for waiver of the deficiency. If the bank wants the $100k cold cash they have to waive the deficiency. Or, you make a token payment on it to show good faith at the closing. I guaranty they don't want another house back at this point.

If the goal is to stay in the house as long as possible, repeat above (except for the purchaser) and when things get heated up, file a Chapter 13. Then when you don't comply with the 13, it gets dismissed and you start over.

Repeat if and as often as local application of Civil Rule 11 and the bankruptcy chapter 13 trustee will tolerate.