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Getting Out From An "Underwater Loan Or Loans Without A Strategic Default

By ohomen171 follow ohomen171   2012 May 27, 2:49am 33,962 views   19 comments   watch   nsfw   quote   share    


Many of you are living in houses that once were worth a lot of money and made you look rich. Now the source of your wealth has dropped as much as 50%.

Some of you have already executed "a strategic default" or simply walked away from an underwater mortgage. Some of you have become squatters sitting in the house waiting for the day somewhere in the distant future when some bored sheriff's deputy will knock on the door and tell you that you have a few days to vacate the house. Many of you are still paying on the underwater mortgage and praying for a return to a good real estate market. (Although you know down deep in your heart that is not going to happen.)

Today I am going to share with you the moves Elena and I made to cure underwater mortgage situations without walking away from our home or rental property. I am going to discuss moves that will affect your credit in a negative way or send you to bankruptcy court.

Those of you in the following occupational categories cannot take advantage of this advice as follows:

1) US government and US military people with high-level security clearances.
2) Employees of civilian contractors with high-level security clearances doing work for the US government.
3) Law enforcement officers working for any level of government.
4) Any employee of a financial institution.
5) Some employees of state or local governments in sensitive positions. (If in doubt is this area please get legal advice.)

To those of you in the categories above, please continue to read only out of academic curiosity.

For those not in the categories above let us get to work.

Many people got into their houses without a down payment. A second mortgage was obtained to make the purchase of the property. In the alternative one paid some down payment and also took out a second mortgage to buy the house. There were also some of you who put big second mortgages on your house, using it as an ATM machine and the market went crazy and we all thought that we were rich.

Now the lien is still on house but there is little or no actual equity to keep the second lien as a secured debt. In this case you are left with a large debt that is a credit card debt. If you default on this debt, the bank cannot foreclose your house because they no longer have a security interest. The bank will harass you with all sorts of phone calls and letters. Eventually some bored process server will appear at the door and serve you with a lawsuit.

If you do not know your legal rights or you are broke and cannot afford lawyers, the bank will get a deficiency judgment against you. Soon your wages will be garnished and you will be humiliated in front of your work mates and family.

If you understand your legal rights or can afford lawyers, you will file a defense to the lawsuit. The lender is in for a legal battle that will last 3-5 years with huge legal costs. The lender wants to avoid this at all costs and would eventually "settle the suit" outside of court for far less than the amount owed.

Since you know this you do not have to wait for a lawsuit. You could go right into a Chapter 13 bankruptcy filing. Once the court determines that the second lien no longer has any equity to support it. The lien will be stripped from the property. The debt will become an unsecured debt. Based on your income and remaining assets you might get the whole debt erased or a good part of it. Please consult a bankruptcy attorney like The Comfort Law Firm to get guidance here.

There are negative consequences of a bankruptcy filing. If you do not want to go bankrupt there is another way to deal with the second lien. You default and let collection action begin. Once you are past due a few months, you can hire a professional loan negotiator to approach the bank. I recommend Mr. Alan Sherman of the Comfort Law Firm. This negotiator will go to the bank. He will point out that he can put you into bankruptcy and the bank could end up with nothing. In the alternative he can offer to settle the debt for 10% to 15% of the face value.

In our case we had a $152,000 second lien with Wells Fargo Bank. My Sherman settled the debt for $20,000. We did not have to go bankrupt over it. You have the potential to do the same.

There is also a situation where there is a controversy over the value of the house and the second lien might have some equity left. Your negotiator will need to hire a very professional real estate agent to make a study of houses sold in the local market and those sold in short sales and foreclosure. This study will find the true value of your house.

Once we solve the second lien some of you will still have a first lien that is underwater. There was a big push on years ago to allow bankruptcy judges to modify first liens. The big banks literally bought off the US Senate and stopped this. First liens are exempt from any legal intervention. A professional loan negotiator can't help you here.

But there is a way. If one is the owner of a rental property or properties, you can file a Chapter 13 petition. The court will entertain professional appraisals on the true values of the properties. The bankruptcy court will have the power to reduce the debts to what the properties are worth now. The only catch here is that the courts treat rental properties like car loans. You will need the cash flow to pay off the property or properties in sixty months.

You could get help on your personal residence first lien by moving out and leasing the house. This has to be bonafide in every way. Any false statement or misrepresentation could land you with a felony conviction and a trip to Federal prison.

Under this strategy you wait 6 months after the move out. Then you file for Chapter 13 bankruptcy with the legitimate claim that the house is a rental property. You can rest assure that the bank is going to object and raise hell. You also will need to keep it rented out for the life of the bankruptcy proceedings. You would have a high monthly payment.

I have a rental property and went into Chapter 13 bankruptcy. I bought the property for $415,000 and got its value reduced to $265,000. The judge agreed with it. I had to withdraw from the Chapter 13 when the property value dropped to $160,000 and we were facing a $100,000 loss.

#housing

1   ohomen171   ignore (0)   2012 May 27, 3:49am     ↓ dislike (0)   quote   flag        

Yes you must complete Chapter 13 to get the lien strip.

Yes one has to show a financial hardship to declare bankruptcy. Please consult a bankruptcy lawyer.

In bankruptcy you get a real low interest loan. With drops in property values it's possible, in some cases, to pay off the loan in 60 months.

2   jrodman   ignore (0)   2012 May 28, 7:34pm     ↓ dislike (0)   quote   flag        

I have a comment on settling the 2nd lien via a negotiator or yourself for that matter.

You should mention that "negotiators" charge a rate of 10% fee and that you are going to get a 1099 from the bank at the end owning your marginal tax rate on the forgiven principal to the fed and state irs. On your 152,000, then you would owe an additional $15,200 to the negotiator which brings the total to 35,200. Now add the tax liability to this amount which for someone in your income bracket at the minimum would be around 37% (28 fed + 9% state) I'm guessing. So, $152,000 - $35,200 is 116,800. Your tax bill on this amount using the 37% tax is 43,216. Now 35,200 + 43216 = $78416 total out of pocket cost to "settle" the 2nd lien with the lender. This amount to about 52% of the original 152k.

Saying you settled for 20k on the 152k loan is misleading. There really isn't a scenario where you come out ahead by settling the debt vs bankruptcy (7 or 13) that I can think of.

The better financial solution is to "strategic default" and let the bank foreclose on the principal and the rental houses while not paying the mortgage and collecting the rent and keeping them off the books in gold or silver coins for example. Then after the 2 years it takes to foreclose, wait 6 months so the rental income is not calculated then file chapter 7 bankruptcy and be done. Maximize your financial leverage just as the banks are doing and use it for your benefit.

Add up 1 to 2 years of rental income without paying the mortgage and also saving your mortgage payment while the banks foreclose.

I have an almost identical situation as you describe with 4 rentals and a primary residence and can tell you I am a happy camper today. It was sheer torture playing the loan mod game and trying to negotiate with the banks. Save your self the pain and optimize your financial situation as Brent White, the Arizona econ professor has said because the criminal banks certainly are.

Also, get to the right bankruptcy attorney. You can file a chapter 7 with
about $185k yearly income if you plan correctly.

Been there, done that.

3   ohomen171   ignore (0)   2012 May 28, 10:39pm     ↓ dislike (0)   quote   flag        

You make some interesting points here. Let us address the comments on the second lien first. With respect to tax liability, if you are in bankruptcy this voids this liability. There is also another scenario quite similar where you can void the second lien tax liability. I have already done this with a $109,000 tax liability with the IRS and they approved it.

Some years ago Gretchen Morgenstern in an article in the New York Times pointed out that if you can produce for an IRS a true and accurate list of your assets and liabilities and you have a negative net worth this will also void the tax liability. I did this with the credit card debt using www.zillow.com to prove the current worth of the houses and printing out debt websites to prove debts. I recommend that you get an accountant to help you with this.

With respect to using Chapter 13 with a non-owner occupied house let me give you my personal situation. I have not made a house payment, HOA, or property tax payment for three years. At the moment I am in no danger of foreclosure. I have a wonderful tenant in the property. I will go back into Chapter 13 on the property in December. All of the past debts will be wiped out and I will be paying what the townhouse is really worth. In my mind this beats a strategic default where I have to write off 6 years of money and time invested in the project. Please look at this option for you.

Some people cannot declare bankruptcy for personal considerations like affecting a professional license or a security clearance.

With 4 rentals you probably have lost 50% of the value of the properties. The Chapter 13 would allow you to pay them off in 60 months, if you have the cash flow to do it. For example on my rental unit I would be paying the trustee just over $2,000 per month. Of course the banks will raise hell and challenge values. You will sit 12-18 months in court before your plan is approved. Please talk to a couple of bankruptcy lawyers before doing a strategic default on your life savings.

4   bob2356   ignore (4)   2012 May 29, 5:12am     ↓ dislike (0)   quote   flag        

With all due respect I haven't seen the word equity in this post anywhere, just second lien's. Where did all the second lien cash go? Rentals???? Why would the value matter at all, you should have cash flow. How can there be a "loss" if you aren't selling it? Where in the world did a cash positive rental go from 415k to 160k? How the hell can you have enough debt on a credit card to have to go to the IRS to void the tax liability? A TAX LIABILITY on a SECOND lien for 109k, wtf, that's so surreal it's from the twilight zone. Anyone playing in that league should have enough resources to not be taking multiple cracks at chapter 13.

You guys don't sure don't sound like people who were getting into their dream home before they were priced out forever, then the market crashed. Sound more like going all in playing housing holdem. So if the market hadn't crashed and your housing empires doubled in value several times were you planning to share your profits with everyone else, or is is sharing just the losses?

5   bullhead 56   ignore (0)   2012 Aug 7, 4:56am     ↓ dislike (0)   quote   flag        

I am in a situation and do not know what to do. I have a 1st of 281,000 and a 2nd of 191,000. My house is worth $350,000. My second has a balloon payment due in 4years. My husband and I are thinking of stop paying on the 2nd and hopefully they will come to us with a settlement. Are we foolish to think this? We are both realtors and our income is way down from years past. The 2nd is with Popular Mortgage. We got the loan from E-trade. Does anyone have any suggestions? we are current on both loans and have no lates. We know that we will not be able to refiance in 4 years we show very little income..any help or suggestions would be appreciated.

6   bullhead   ignore (0)   2012 Aug 7, 2:41pm     ↓ dislike (0)   quote   flag        

I am in a situation and do not know what to do. I have a 1st of 281,000 and a 2nd of 191,000. My house is worth $350,000. My second has a balloon payment due in 4years. My husband and I are thinking of stop paying on the 2nd and hopefully they will come to us with a settlement. Are we foolish to think this? We are both realtors and our income is way down from years past. The 2nd is with Popular Mortgage. We got the loan from E-trade. Does anyone have any suggestions? we are current on both loans and have no lates. We know that we will not be able to refiance in 4 years we show very little income..any help or suggestions would be appreciated.

7   pink   ignore (0)   2012 Sep 7, 9:27am     ↓ dislike (0)   quote   flag        

I have a stressful situation. I filed chapter 13 after my husband left reducing my house income from 2 to 1. i surrendered $450,000. house because his income mainly paid that. i moved to my previous house which i had been renting out. i also have another rental. i am barely making it. my income has lessoned and i pay everything for our two children. he left for a younger woman and their new child. i am two past my chapter with less than 2 years to go. can i walk away from the other rental. the tenants are not paying enough to cover, the maintenance is never ending. taxes and other issues make it no longera good investment. the neighborhood is valued at half of what i owe on the mortgage.

8   E-man   ignore (0)   2012 Sep 7, 1:27pm     ↓ dislike (0)   quote   flag        

pink says

can i walk away from the other rental. the tenants are not paying enough to cover, the maintenance is never ending. taxes and other issues make it no longera good investment. the neighborhood is valued at half of what i owe on the mortgage.

Why are you still hanging onto these rentals? Of course you can walk. Whose permission are you asking for? Do what is best for your family and your kids.

Good luck.

9   E-man   ignore (0)   2012 Sep 7, 1:44pm     ↓ dislike (0)   quote   flag        

bob2356 says

With all due respect I haven't seen the word equity in this post anywhere, just second lien's. Where did all the second lien cash go? Rentals???? Why would the value matter at all, you should have cash flow. How can there be a "loss" if you aren't selling it? Where in the world did a cash positive rental go from 415k to 160k? How the hell can you have enough debt on a credit card to have to go to the IRS to void the tax liability? A TAX LIABILITY on a SECOND lien for 109k, wtf, that's so surreal it's from the twilight zone. Anyone playing in that league should have enough resources to not be taking multiple cracks at chapter 13.

Bob, I couldn't stop laughing reading your post. My guess is they used an 80/15 or 80/10 to acquire their current house. The timing was bad because they bought their house at or near the top.

With respect to a $415k property dropped to $160k, I bet you he bought a condo for $415k at the top of the market. These condos were selling for $150k to $160k last year. This year, they're selling for $180k to $200k. PK and I picked up a couple of these.

bob2356 says

You guys don't sure don't sound like people who were getting into their dream home before they were priced out forever, then the market crashed. Sound more like going all in playing housing holdem. So if the market hadn't crashed and your housing empires doubled in value several times were you planning to share your profits with everyone else, or is is sharing just the losses?

LOL! Too funny. I'm a little surprise that ohomen made these kinds of mistake. Given his age, I would think that he saw several RE cycles already and should have seen this coming from miles away. Interesting.

10   rental in Michigan   ignore (0)   2012 Oct 2, 5:51am     ↓ dislike (0)   quote   flag        

Hello;
I appreciate the help if you can help me
I've a rental property with a business partner and we have so many issues dealing with each other, so I’ve decided to sale the property because the property value went from $73K to $25K so we still owe $58K, however my business partner wont sale nor want to do anything with the property fixing, cleaning,etc .., so I take care of everything.
I’ve asked few lawyers to go Ch 13 I do have my own home where I don’t owe anything on it, however I don’t really make much a year so paying out of pocket where there is no tenant $400 a month still kills me, so am not sure what to do? if my business partner won’t sale can I go Ch 13 or stop payment on the house and go foreclose and really I don’t want to hurt my business partner credit am an honest a good person. And on the top of that the house is not renting is there a solution to this?
And my business partner makes double what I make a year. So not sure what would happen if I go Ch13 or foreclose I really need to know what my options are?

thank you
help

11   ohomen171   ignore (0)   2012 Oct 2, 6:34am     ↓ dislike (0)   quote   flag        

A Chapter 13 would allow you to reduce the debt on the rental property to what it is worth today. You would then have 5 years to pay off that debt. The complication is that you own your house free and clear, If your state does not have a homestead law protecting your personal residence the bankruptcy trustee would be tempted to tell you to sell your personal home and give that money to creditors. Please consult a lawyer on this point.

12   Sydney   ignore (0)   2013 Jan 1, 11:02am     ↓ dislike (0)   quote   flag        

I have a question that I would appreciate
a response to. I have a friend that owns
a resort that had 29 units. The bank that
holds the mortgage made him sell off
7 of his units as condos to pay down some
of the debt. Now first of all why would a bank
want to put themselves in this position
because what if my friend goes broke?
What if he has to file BK? Now the bank
will get the resort but will have to buy out
the 7 condo owners out for what they paid
in 2008 for the condos. They new the resort
was appraised for $1million and the debt
liability left was $1.7. Why would a bank
risk putting themselves in a position like
this and I'm wondering if it's even legal
to do what they did to my friend. Now he
can't grow or make any changes to his
resort because the owners have % rights
& ownership in all the common areas. Any
thoughts or comments would be nice.
Thanks and happy new year. Jeff

13   ohomen171   ignore (0)   2013 Jan 1, 9:08pm     ↓ dislike (0)   quote   flag        

Jeff thank you so much for asking for my help here. I have done company bail outs on three continents. I have never seen a bank act in such a bizarre manner. Normally the bank would take over or foreclose the property and get a new developer to straighten things out. The owner has an interesting tactical possibility. He can declare bankruptcy using a Chapter 13 or Chapter 11. He can then get the current value of his holdings (most likely less than what the bank is owed) and have five years to pay the bank off in full. He needs to talk to a bankruptcy lawyer. If he is in the Bay area, I recommend Mike Comfort of the Comfort Law Firm at 650-288-0071 or guy360@aol.com.

14   dukele   ignore (0)   2013 Jan 12, 1:39am     ↓ dislike (0)   quote   flag        

Hi this may sound silly but I dont know what to do. My husband and I were niave. We bought at the tippy top, 315,000. Now our house is appraised 220,000, and we still owe 290,000. I quit my job to take care of our son after daycare was breaking us. Because I quit, I cannot declare hardship. What are my options? Husband's income is dependent on security clearance as a federal police officer. Any advice? At this point we just want out. We are in suburbs of Baltimore. Foreclosed house to the right of us, HUD bought house to the left. Value of house to the right is 100,000. Value of house to the left is 190,000. We own no other properties. We refied in 2010 for 5%, leaving us with a 2,000/month payment. We cannot afford the payment, and just wish to get out, maybe rent for the rest of our lives.

15   ohomen171   ignore (0)   2013 Jan 12, 2:08am     ↓ dislike (0)   quote   flag        

I feel great empathy for you. The big challenge here is that security clearance. In any other case I would advise you to move out to a rental unit, declare the property you are in a rental property and declare bankruptcy iusing Chapter 13 bankruptcy. If you did that, your husband would lose his clearance and his job. Even a short sale would have an adverse affect on your credit. If your husband is at retirement age, I would recommend that he retire and then you have many other options to dela with the property. As things stand you are stuck there. But the market is improving so there is some hope.

16   erin   ignore (0)   2013 Feb 18, 4:15am     ↓ dislike (0)   quote   flag        

Hi
Thanks for all the insite, I have a situation that is a bit different, 3 years ago we rented our house and relocated to find jobs. Within 6 months the renters caused 20k worth of damage and we paid them to leave, for almost 3 year the house has been vacant and we have not paid the mortgage. we have sent request after request for a dead in lue but with no response, for the loan is 650,000 and the house is worth 350,000. We have tried to sell it with no avail. How long can the mortgage company continue to hold us hostage?

17   mooboo33   ignore (0)   2015 Sep 22, 6:04pm     ↓ dislike (0)   quote   flag        

I have a major concern and wondering if there is any help at all for the corruptness that occurred back when we purchased this house. My husband is a veteran and we were first time home buyers. We were looking into getting a veterans loan and brought this up to, I guess, a broker at the time. He told us an 80/20 loan would be much better then a veterans loan and we could avoid PMI insurance. Not having much knowledge about anything, we believed the guy at our current bank we went to. A few years down the line, I found out info about our loan that I did not know. First, I accidentally found out it was a balloon loan, that we will owe $37,500 in 2022. Second, if we would have went with veterans loan, we not only would have avoided the $5500 in closing costs, but would have avoided PMI anyway. So here we are, continuing to be stuck paying a 2nd lien at 8.5% interest that has gone down $1000 in 8 years, and being underwater so we can't refinance the house and nobody will touch this second loan. We already went through the Harp 2.0 program with the first mortgage which saved us $250/month and lowered our interest on that loan to 4.5%. we are very stuck and the fact that my husband is a veteran and we were swayed into doing this, being taken advantage of just so this guy could make a commission is a killer for us. Is there any way we can get out of this??? We are very stuck and very upset. Help, if any, would be greatly appreciated...................

18   Strategist   ignore (2)   2015 Sep 22, 6:23pm     ↓ dislike (0)   quote   flag        

You could negotiate with the second. If you are underwater, their might give you a break, because if you default they get nada.
I would not entirely blame the loan officer at the bank. You too have to shoulder some responsibility, as you did not investigate your loan options carefully.
I have made my share of very foolish mistakes. Learning the hard way can be expensive.

19   P N Dr Lo R   ignore (0)   2015 Sep 28, 9:38am     ↓ dislike (0)   quote   flag        

E-man says

LOL! Too funny. I'm a little surprise that ohomen made these kinds of mistake. Given his age, I would think that he saw several RE cycles already and should have seen this coming from miles away. Interesting.

Reading all these comments reminds me of Ross Perot's observation about the chicanary of the 80's leveraged buy-outs. To paraphrase it something like this: "these people aren't doing anything productive or creating wealth, they're just pushing numbers around hoping not to be the last fool when everything crashes." With just these few examples multiplied into the millions, it's no wonder our economy is in such bad shape.


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