Foreclosure

Question:  I am married live in New York we own 2 houses. I live in one house and my wife lives in the other house (long story). We bought house #1 for $600,000 5 years ago. We have $350,000 left on mortgage one and $175,000 on a home equity line of credit. The house today is worth around $350,000, we have two different mortgage companies on this house. American Home Mortgage owns the primary mortgage $350,000 and Chase Bank owns the home equity line of credit $175,000. I have a couple of questions;
1. What happens to the HELOC and first mortgage if we go into foreclosure?
2. Do I have to pay back my HELOC if my house is foreclosed on?
3. Can either bank come after my other residence or garnish my wages or sue me?
4. We are currently up to date with both mortgages, but we are paying the mortgage with our creidt card. what would I do to get out of this situation? Foreclose, talk to both banks, short sale, etc.

Answer:  – These are some great questions… And most in this situation would even consider a strategic default because you are so upside down. Let me share with you a few ideas.

1. If your home goes through the foreclosure process, the winning bidder will end up with the home. In many cases when there are no bids, the mortgage company in first position that initiates the foreclosure will take back the property and try to sell it on their own. The 2nd mortgage, in this case your HELOC, will be wiped out if they don’t protect their position by bidding on the property.

2. If the 2nd lien holder or heloc gets wiped out, they still have options which a lot of homeowners don’t understand. Their options are to do nothing, write the whole thing off by sending you a 1099, or they can sue you for the difference, which is called a deficiency judgment and require you to pay back the amount that was lost. A deficiency judgment was something that very rarely happened to homeowners, but more and more I am seeing it’s a more common procedure with banks and I’m guessing it’s because of the volume of foreclosures that are happening right now.

3. If the 2nd decides to file a judgment against you, you will either have to pay the loan in full, work out a payment plan, a settlement or file bankruptcy. And yes, if you do nothing they can garnish your wages so they will get paid. They can’t force you to sell your other properties or assets, but the judgment requires you to pay them back which means you’ve got to come up with the money somehow. So no, they can’t come after your other asset directly, unless they were also pledged as collateral for the loan, however in many cases you will be forced to sell assets to pay off the judgment. This is why most homeowners simply file bk.

4. There are ways to avoid the judgment. One would be to do a short sale that would satisfy the loan. The short sale process has been taking a very long time lately, but is a better option than doing nothing. Benefits would be that you walk away without a foreclosure on your record and the mortgage(s) being satisfied so worst case you get a 1099 for the difference. But even this can be negated with the current laws in place. The only problem with a short sale is that you have to move out. Sometimes this might be a good thing if you are over-extended as it is.

Another option is a loan modification, although these can be very frustrating and very rarely do they ever go through. You can call you lender, let them know your hardship and ability to pay to see if they will lower your payments. This is usually a temporary solution. In your specific case where you have negative equity, a note settlement would be a great option.

A note settlement is when you settle or eliminate the 2nd mortgage completely. By eliminating your 2nd mortgage or heloc, you’ll at least get rid of the negative equity and have a better chance of selling it or keeping it. This option allows you to stay in your home and it doesn’t affect your credit because you are paying the bank off in full. No judgments, no 1099, no more 2nd mortgage because you paid it off. It will cost you anywhere from 10% to 15% of the original note amount in order to pay if off so in this case $20K – $30K. Even if you don’t have the money saved up to pay this amount, there are note investor networks that will pay it off and basically become the 2nd lien holder and you would make payments to them. I guarantee the payment on a 30K note would be a lot less than the payments on a $175K note.

Here is more information on homeowner options as well. Good Luck, I hope this has helped.