I know a lot of people who are underwater on their mortgages right now. And, I’m not talking Henderson, Nevada. I live on the Central Coast here in California. Home of Carmel, Pebble Beach and Carmel Valley. Not low-end real estate. I know a woman who just walked on her $4.5 million second home in Pebble Beach which the bank just now sold for $1.6 million (after 9 months on the market). I know a real estate lawyer (ironically) who walked from his $2.7 million home in Pebble Beach which is now in the hands of his mortgage holder. They both held the same view. They looked at their living situation as they would their business and made a hard business decision. Why would you continue to make $18,000/month mortgage payments on a property that was worth less than half of what you paid? And, has no reasonable chance of returning to that valuation in say, the next ten years.
Most financial advisers have been counseling “strategic default” for the last year or so.
Mitt Romney and Bain Capital do this all the time, and they certainly have no shame. The first thing you have to do is to accept the fact that this is not a morality issue. Yes, you committed to do certain things when you signed that real estate mortgage contract with your lender, and now you are reneging on that agreement. Accept that for what it is, and move on. It does not make you a bad person.
So, I am about to suggest a process that is little known and not well understood that will allow you to stay in your home for at least a whole year, and depending on which State you live in and the depth of difficulty surrounding your particular real estate market, up to two years and beyond. It will also allow you to either pay-off your debt and/or build up a nest egg which might help you buy another property in the future.
Before you do anything, make sure that your state is one in which your mortgage holder does not have recourse to come after you personally for your debt (non-judicial foreclosure states or “one-action” states). That is, make sure you can just walk away from your mortgage. You can do this in California and in 19 other States. If you have a second mortgage, the mortgage holder has no recourse and will simply write it off. That will happen long before your first mortgage holder takes any actual legal action. Yes, that does affect your credit score.
So, after you have verified that your state is a non-judicial foreclosure state, you can begin. The housing crisis has created a huge mess in the mortgage and banking communities. Banks initially had no idea how to handle it, weren’t staffed to do so, engaged in robo-signing of documents required for foreclosure, ceased doing any foreclosures for about 9 months while the Fed looked into their lending and processing practices and have just now begun to come out of it. But it will be a long process and one that can benefit you.
Stop making payments. Start with the loan modification request. Your lender will send you document requests and you should comply, supplying everything they ask for. The first round usually takes 30-45 days. You may find that they send another request for exactly the same documents they originally requested. This is a good sign. This means that they have assigned your case to a document servicing company. I know a guy who worked through the process for 7 months before he was finally denied. He submitted the same documents 7 times at the lender’s request and wrote six letters pointing this out. Each month, he would receive a document request exactly or similar to the prior month. When he was finally denied, he was not given a reason even though on paper, he was qualified under the bank’s own terms.
This is clearly a game played by the banks to “show” that they are in compliance with the Obama Loan Modification program. Your bank has no interest in modifying your loan.
But, I digress. Once your lender has denied your loan modification request, they will set a foreclosure sale date on your property within 30-60 days of the denial. By now, you should have been in your property, rent-free for at least 6 months. Now, it is time to begin the short-sale process. All lenders are required by law to offer you a short-sale option prior to foreclosure. A short-sale is a sale at a price below the amount you owe on your mortgage and must be approved by your mortgage holder with a committed sale date. After your mortgage holder approves the short sale, find a real estate agent who’s experienced with short sales and make sure that he or she submits your short sale paperwork 14 days before the upcoming sale date. Then, after the short sale is submitted, continue to call the lender to confirm that they’re either going to cancel or extend the current sale date. They almost always agree to extend.
Once the sale date is extended, continue to delay the escrow as long as possible with a potential buyer. This buyer can be anyone – your mom, your best friend or another acquaintance who’s willing to help you out. Your buyer should cancel your contract during the period in which they can (depends on the State you are in but usually 14-21 days), then start the process all over again in about 30 days, with a new buyer in order to continue to delay the sale. The size and strength of your lender will determine how easy this process will be – Chase or Bank of America, for example, are so buried in overdue paperwork that delaying the sale for as long as possible will be a breeze.
Eventually, (probably 6-9 months later) the lender will get sick and tired of dealing with you, and they’ll tell you they’re no longer willing to extend the foreclosure sale date (meaning that the property will be heading to auction). Don’t worry – we’re not done!
Once the auction arrangements are made (buying you another 30-45 days) you will need to file a Bankruptcy petition, and this must be done forty-eight hours before the auction sale date. You don’t need to actually go through with the bankruptcy – you only need to file the petition, as this requires the auction trustee (a 3rd party hired to foreclose for the lender) to extend the sale date! Usually, the sale date will be canceled completely or often postponed for at least 90 days – buying you enough time to re-submit a new short sale and virtually guaranteeing that your home’s file gets lost in “lender outer-space” for a long time.
It is important that you file a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, you have a few weeks after filing to provide details on all your assets and liabilities to the trustee. If you fail to do so, the bankruptcy will be canceled, which is ideal, since you only filed the petition to cancel the sale date. This process is completely legal, as anyone can decide to file a bankruptcy and change his or her mind a few weeks later.
So, as you can see, this process can buy you 2 years and maybe even more. Whatever your mortgage payments, if you put that money in the bank each month instead, you should have a pretty good nest-egg before you have to move. This will go a long way toward a down payment, or pre-paid rent on your next place, as your credit will not look so good to your new landlord.
You have rights and you should not be intimidated by the bank and all of the letters and notices you will receive throughout this process. They are intended to scare the crap out of you, and they will. But, just hang in, follow this process and enjoy the 24 months or more of rent-free living while you re-build your war chest and prepare for the next round. Good luck!