The new law – And should we walk now.

[geovil7]

I’ve been reading here for a long time – I’m sure something similar has come up before but I’d love to hear this forums opinions on this predicament.

We bought our 2+1 in a decent part of LA County in 2007 for $510k with 10% down, an 80% ten year IO option on the first, and an amortized 2nd (10%) with a balloon payment due in 2017. We were prepared for a few rough years if market continued to settle but not the crash that came.

Despite being underwater, we can essentially afford our house, but for several reasons, including need to move for work, growing family, etc, we have to figure out how to leave and move on.

We’ve never had a late and our credit is 800+.

With the new law, we’re told that we’re going to be dinged with a 1099 for a short sale or foreclosure after 12/31/12, so if we’re going to walk, we have to stop paying or organize a short sale soon.

Our estimated current value is $350k. But our neighbors 3+2 (comparable upgrades) just sold (on the market for a week) for approximately $440k.

And our bank refuses to alter our first mortgage for more than 105% despite the HARP regulations.

So we have 3 real options:

Walk (either a foreclosure or short sale) prior to the deadline.

Move and rent out the 2+1. We’d take an estimated $800 loss every month (if we can’t negotiate a more favorable loan) and we’d earn some of that back in taxes with such a loss.

Slap on a 3rd bedroom and bathroom for $50k, recover some equity in the property, considering the 3+2 comps in our neighborhood, and rent the 3+2 out, moving us up to a $400 monthly loss. Also, we could either spend the $50k ourselves but stretch our cash situation OR finance it thru a relative for relatively little $180/month.

Obviously the third option is a lot of trouble. So is renting the 2nd (and not as efficient as the more aggressive 3rd option). Or we can walk and essentially write off our $51k down payment and the $20k in improvements we’ve put into the property.

We’re not really the type to walk, but it has to be considered.

Would love everyone’s thoughts on this, and how the new law should affect our decision.

[sdrealtor]

Here is an idea. Stop paying the 2nd and keep current on the first. After 6months or so it should end up with a collection agency. Negotiate with them and you should have no problem settling for 5 to 10k. Then you only owe 400k. How would that change your decision?

[briansd1]

Good idea, sdrealtor. Makes sense to me.

geovil7, yes, you have to consider all the practical options, including walking.

geovil7 is clearly not hurting financially…. but being underwater makes him feel that he’s being screwed somehow and want to get out of the situation.

A lot of psychology at play here…. so that’s why I continue to believe that underwater houses will have to resolved before the market gets back to “normal.”

Government intervention will smoothen and elongate the process, but negative equity is causing people to fall out of love with their houses.

[briansd1]

[quote=geovil7] Slap on a 3rd bedroom and bathroom for $50k, recover some equity in the property, considering the 3+2 comps in our neighborhood, [/quote]

Can you really add a bed and bath for that cheap, with permits, plans, construction and all?

Just curious if you got quotes already.

[geovil7]

Thanks SDR. That is something we hadn’t considered. Both our 1st and 2nd are now being administered by same bank we bought from (although they sold them to Fannie) and are from initial purchase. I wonder if that would affect how they would handle such a negotiation?

Any further ideas would be greatly appreciated. Thank you!

[paramount]

Walk now while you still can. Seriously.

Well, I take that back.

1st ask for a principal reduction, which you will probably not get. By doing that 1st you can at least say you tried.

When that fails as it likely will, then walk.

With a clear conscience knowing that you tried to do the sensible thing, but your efforts were in vain.

According to Nicole Foss, credit won’t be around much longer anyway, so don’t worry to much about your credit score.

Do what makes business sense for you and your family.

[Coronita]

#2 and #3 are both bad ideas.

#2 is bad… Why would you want to pay $800/month for someone else to live there, and for a property that is that underwater and would take forever (if ever) to re-appreciate back to your purchase price? Lose/lose scenario.

#3 the worst decision. Because not only would you be paying $400/month for someone else to live there, you’re also going to spend $50k(which i think it would cost a lot more), for someone to live there.

[Coronita]

[quote=briansd1]Good idea, sdrealtor. Makes sense to me.

geovil7, yes, you have to consider all the practical options, including walking.

geovil7 is clearly not hurting financially…. but being underwater makes him feel that he’s being screwed somehow and want to get out of the situation.

A lot of psychology at play here…. so that’s why I continue to believe that underwater houses will have to resolved before the market gets back to “normal.”

Government intervention will smoothen and elongate the process, but negative equity is causing people to fall out of love with their houses.[/quote]

Read the part about job in different area, bigger family, 80% I/O and 10% balloon payment in 2017….Unless he can make the balloon payment on 5 years, he certainly most likely is not going to be able to refinance when time comes. And hopefully in 5 years we still have low interest, otherwise his monthly is go up now too..So what might be affordable now might not be moving forward.

[Kingside]

[quote=geovil7]
With the new law, we’re told that we’re going to be dinged with a 1099 for a short sale or foreclosure after 12/31/12, so if we’re going to walk, we have to stop paying or organize a short sale soon.

[/quote]

There is a lot of misinformation out there about the 2007 Mortgage Forgiveness Debt Relief Act that is scheduled to expire at the end of this year. Some folks assume that they have to act to get relief before the act expires when they really don’t need to, and some folks assume they will get relief under the act when they won’t qualify. Certain parts of the real estate industry assume it applies to everyone when it does not.

For instance, cancellation of true non-recourse debt may be exempt from taxation without having to resort to the act at all. Cash out refinances where the cash was used for purposes other than improvement of the property may be a situation where little help will be provided by the act.

Start by reviewing IRS publication 4681:

http://www.irs.gov/pub/irs-pdf/p4681.pdf

and consult a knowledgeable tax professional. Don’t rely on what someone tells you about the act if they are not a tax professional.

[sdrealtor]

Since you have a conventional Fannie Mae 1st you may be able to refi that with the HARP program that is rolling out. If you can you would have to look at what that did to your payment. The you could look into stripping your second out. You need to investigate all options and do want to check with a tax/legal advisor as advised by Kingside.

[sdrealtor]

Start reading

https://www.efanniemae.com/sf/mha/mharefi/pdf/refinancefaqs.pdf

[GH]

The credit industry has us all running around holding our basket of credit score eggs. One trip or slip…

There is obviously a LOT of thinking that needs to go into a decision like this, but if you are likely to default in the near term or intermediate term obviously you do not want to end up being 1099’d.

That said there are a LOT of circumstances such as being insolvent which may make the issue moot.

Sounds like you REALLY need to dig in and get all the information.

[no_such_reality]

I like SDR’s idea. It wreck your credit but you likely need to play hardball. The suggestion to read on harp is also good.

One point of clarification, Are the loans purchase money loans or refi?

If purchase money, if you can qualify another option is to buy the new place an then walk. Verify your tax consequences.

That’s provided you can sell and cover the loss.

But I wouldn’t wreck myself paying a DOA loan

[Author]

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