Question: We have a mortgage with 20% of the amount in a HELOC with both parts of mortgage through Wells Fargo (May 2007). The house value is continuing to decline below the value of the first mortgage. If we walk away, short sale or go through foreclosure in Oregon…can the bank try to collect on the HELOC? Since we live in Oregon, we’re not sure what the best option is.
Answer: – I’m sorry to hear about your foreclosure in Oregon. I hear this a lot right now as home values in some parts of the country continue to decline. Let me share with you some of the possibilities and consequences you might have as you go through this process. The good news is that you still have a lot of good options since your home hasn’t actually gone through foreclosure yet. Once the home is foreclosed on, there are not a lot of options, so time is key right now.
You have 2 great (better than foreclosure) options right now. One is to do a short sale. It sounds like you are familiar with a short sale because you mentioned it in your question above. This is where you would sell your property to another investor or homeowner for less than what you owe the bank. If the property is upside down like you say, this is one of the only ways to avoid going a foreclosure in Oregon.
Having said that, there are some key pieces to a short sale that will determine consequences later on. One of those being a deficiency judgment which you’ll want to avoid. When an agent or investor does a short sale on your home, you want to make sure that you agree to sell the home for less than what you owe as long as you receive a complete satisfaction or full payoff of the loan. This means that the bank cannot come after you for the deficient amount. All they can do is 1099 you for the difference. Which is fine because if you have a good accountant, they can usually negate the 1099 income.
If you don’t get a complete satisfaction but instead receive a release of lien, now the bank can file a judgment against you and try to collect the difference. I not saying they will, I just saying they have the right to. In most cases they do which in turn forces many people to file bankruptcy. This can usually be avoided by simply getting that satisfaction. If the agent or investor is good, they know that all they have to do in many cases if a bank won’t give a satisfaction, is raise the purchase price a few thousand dollars. It’s totally worth it in the long run. Your credit will be hit hard, not as hard as a foreclosure, but you’ll see the effects for a few years.
Another option besides a short sale would be a settlement. This works extremely well if you have a large 2nd mortgage and are upside down… which in this care you are. However, if you are upside down on the 2nd and on the first, this may not be as attractive. This option is mainly used for those who want to stay in their home and not move out. The process works similar to a short sale, but YOU the homeowner is the one who is paying less than what is owed so you can keep you home. It only works on 2nd mortgages.
For example if you had a 2nd mortgage for $50,000, you might offer the bank $10,000 to completely settle your note… wipe it out forever. If your home is only upside down $40,000, this would be a no-brainer. If you home is upside down by $100,000, you need to determine if it’s worth staying in or starting over. The great part about this strategy though is that your credit is never affected and it’s a complete payoff. You will get a 1099, but it helps to get your home back to having equity again. This strategy really works well with BIG 2nd mortgages. We’ve had success taking $250,000 2nds and settling them for $12,000. So yes, banks do this all the time for a fraction of the note.
If you do nothing, walk away and go through foreclosure in Oregon, you are at the mercy of the bank to either issue you a 1099 or a deficiency judgment on the 2nd. If a judgment is filed, they can collect on the HELOC which is why most file bankruptcy because they can’t pay it. Try to do everything you can before you give up and simply walk away.