Down to last option before walking away from home. Advice?

5 Replies

Hi all - 

Sorry about the ridiculously long post. 
My close buddy is going through a situation where he's either going to have to walk away from his home, or to pay a $10,000 a month mortgage for a few years to get caught up and keep the home. I told him this would be a great place to get some input, so he emailed me the rundown of his situation below for me to post.

If anyone has a few minutes to make it through this, I'd love to hear some thoughts to relay back to him.


Thanks!

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I bought my home in late 2005 for $890k with $80k down and two loans ($750k 1st and $140k 2nd). I refinanced once to get out of my adjustable rate neg am loan after 3 years and now have a 40-year fixed at 5% on the first.

When the market corrected my home's value dropped as did my income. I depleted my savings trying to make my payments and reached a point where I could no longer afford to keep paying. With my home's value down to $650k at the time I couldn't sell the property and recoup my down payment. I attempted several times to get approved for a loan modification through Countrywide, then Bank of America with no success. stopped making payments in 2011 and haven't made payments since then trying to get a loan mod that offered principle forgiveness. Because of the size of my 1st, I didn't qualify for HAMP or any other programs.

Midway through this process my 2nd loan of $140k was forgiven. So now my total owed on the house is about $744k.

My loan was then sold off to a trust and serviced through a small servicer (defined as servicing less than 100 loans) which gave them an exception from the California homeowners bill of rights. In other words, when I'd submit a loan mod app to them they could deny me and give hardly any information behind why...they could simply just say that my debt-to-income ratio doesn't qualify and not show their calcs. I hired an attorney who was able to submit enough TROs to fight off foreclosure and allow me to stay in the house while I went through this loan mod process.

*Sidenote--around this time my fiance and I had a baby and are living in the home.

In the end I made the decision to file for Chapter 13 bankruptcy and tried to leverage the Mortgage Modification Mediation program to have a 3rd party help negotiate my loan mod request with the loan servicer. During this process I have been making $4,500 good faith payments toward a bankruptcy trust that holds the money in escrow and if we work out a deal that goes toward what I owe. If we don't work out a deal I get that money back. I was somewhat misguided in thinking that if my numbers worked, this program would make them have to work with me. It wasn't until after that I learned that there's nothing that forces them to work with me and if they simply wanted to sell the property there was nothing ultimately stopping them.

So now I have a BK on my record, and my only options are full reinstatement (approx $260k in arrears, which is not an option), deed-in-lieu where I'd get my monthly payments back (approx $45k), OR I can try to pay back the arrears monthly over the next 5 years (4 now since it's been a year since my BK).

My question to this group is this; should I walk from the property and hold only the $110k from not paying my mortgage I have saved + the $45k I'll get back OR should I try to keep the property which is valued at somewhere between $980k-$1.1m, and make payments of approx $10k a month over the next 4 years.

With my income, my fiance's income and 1 roommate we'd bring in,  we can afford the $10k if we tighten our belts a bit, though it's definitely high. The comps show that the home can sell right now for $1-1.1m, however with the timing of the BK right now I wouldn't be allowed to try and sell the home. Just don't have enough runway to do it in the next month when we have our final BK hearing.

So the ultimate question is if it's worth it to pay those high payments for four years, which pay off the arrears as well as some of the principle, and then in 4 years I have the home with about $700k balance on the loan and a home that should be work at minimum $1m (barring any major economic events, which is always a risk). Current home condition is a fixer-upper but with nominal spend on renovations here and there could be modernized. I have family that can help do this work cheap.

If we walked from the home i'd have $150k in my pocket, but we'd be renting in the range of $4k a month.

So take my $150k and go rent, or leverage the Ch 13 to pay off the arrears over 4 years and keep the home which likely will have at least $200-300k in equity after that 4 years, while risking a higher than ideal mortgage payment in a home that needs some work to get up to speed?

Walk away there is nothing worth taking the gamble to hold on to.

Reality is you should not have bought in the first place and now if you hold you are likely only going to lose more. 

You should also give the bank your 150K which if I read correctly is actually their money. Doesn't seem right you should benefit from stiffing them especially since you have lived there for free.

Know when to fold them.

BK or not, you'd do good to not increase your monthly liabilities by $6,000.   it's a pretty easy decision in my opinion:  Bail on the house, put the 150,000 away and rent for awhile while you're repairing your credit-worthiness.  Oh and did I mention not having a 10,000/mo mortgage?

If they foreclose on you, they can still garnish your wages for any money they lost if the property doesn't sell for your outstanding balance, right?

4 years at 10k a month is 120k/yr  so  480 k  for potential  200 - 300 k in equity?   You did not pay the mortgage since 2011  correct so for what you paid so far you have lived in the house for 5-6  years without payments?   You estimate it is worth 1.1 mil  and you owe 744k with a 140 k loan forgiven by the bank  but it sounds like the bankruptcy means you can't  sell it and you can't refinance so it is 10k/mo.  What if it is not worth what you think or the market adjusts down in 4 yrs?  You then are in a bigger hole again.  Not knowing your area makes it hard to understand where the roller coaster of values will go.

Purchase 2005  $890+80 = $970

Value   2007?  $650

Value 2017  1.1  mil

Value 2021?....  who knows?

I am having a hard time finding an upside to keeping the house but I also don't know California real estate.

@Farbod D. Walk away. Keep the $150k and dont give the bank a freaking penny as @Thomas S. suggested. Banks did not care and received bail outs during this mess, banks could give a rats you know what about  a person. Down size your lifestyle and keep saving. In a year you will be buying a home again (unless specific bankruptcy issues not taken care of or?).