Walking Away Q & A

Today's Special Guest Star

Thanks to reader Russ Dogg who gave me a heads up about our guest contributor, this post writes itself. Actually the Q&A was written by Temecula, California real estate agent Kathy Neilsen in her blog Who Knew? (http://kathyneilsen.blogspot.com/). Remember I said there were two kinds of agents, those who bust their butts for you and those who get your listing and forget you exist? Well Kathy is clearly willing to bust her butt judging by the work she is biting off to help you move from your underwater house to a much cheaper version of your underwater house.

Without further ado, here is her Q & A:

Many people are concerned with the ramifications of the foreclosure. Can the foreclosed lender sue for the difference? Can he attach my new home? And what about the IRS? These questions are whirling around in everyone’s head as they consider this method so let me help you with the answers.

1. Can the original lender sue me for the difference between what my home is worth and what I owe in a foreclosure in California?

California is a non deficiency state which means if you are foreclosed on and the mortgage company sells using a trustee sale which is the most common in California, then the lender has no recourse after the sale. But you must have the original loan you bought your home with. This is called the Purchase Money Loan. You can have a first and a second but the second should not be a HELOC as this is considered a line of credit and is viewed differently than a mortgage.

2. Will the IRS tax me on the difference between what the home sells for and what is owed?

If you have lived in your home for two years or more and considered it your primary residence then you have no capital gains responsibility for amounts $250,000 and under for single people and $500,000 and under for married couples. If you have not lived in you home for two years yet, there are other alternatives and a tax professional should be consulted before you begin this process.

3. Can the old lender take any action against my new home?

The answer to this is easy. NO the old lender has no ties to your new home and therefore there are no options for him to regain any money through your new home.

4. How will my credit be affected?

You will have a bunch of late payments and a foreclosure that will take your credit from the 700s to the 400s within a few months but consider this…you have a home and a new mortgage. If you have any credit cards or car payments these regular and on time payments will help you recover your credit score much more quickly. The new mortgage will have the biggest impact on your credit though. By making your new mortgage payments on time you are raising your credit scores monthly and if you don’t plan on using new credit for a few years then your credit score should have little to no affect of your life.

Now this all may sound too good to be true so my best advice for anyone thinking along these lines is research what you want to do. Talk to a tax professional regarding the aftermath of this scenario. There are many websites dealing with the foreclosure issue and the IRS issue, so take you time and thoroughly research your situation. If you decide this is the best course of action for your situation and you live in the inland empire call me and I’ll help you find the right lender and the right home.

xxx

Now LetItSink readers should remember that this Q&A deals specifically with Foreclosures and not necessarily with Walking Away. It is helpful and informative though, because there is so much similarity and overlap.

Thanks to Kathy Neilsen, and I hope to contribute to her blog soon.

Is Playing Musical Houses Illegal?

LetItSink is lucky to have a reader who has done some nice sleuthing. He wrote the following email to the BankRate.com blogger, and received a good response. We will be analyzing these in coming posts.

Dr. Russ writes:

Could I ask a mortgage question about the opportunities to buy at
distressed prices? Ideas rehashed from the CBS news special house of
cards about borowers thinking about walking away from severely
underwater mortgages...

I was fascinated by seeing recent talk by "calculated risk" (is it a
"bubble blog"?) of the game contemplated by people walking away from
mortgages. After walking away from a mortgage your credit is trash, and I
guess most of these unfortunate people move into apts. But I'd like to
ask- what if you move into a less expensive house that you bought
shortly before you stopped paying the mortgage on your expensive
underwater house? Could a national game of Musical houses may be next?

That's where you walk away from one overpriced house after you buy and move into a foreclosed (or REO) property nearby for a lot less $$. Then your neighbor can move into your foreclosed house doing the same thing, and so on.

When the music stops playing everyone who actually wants to live there has moved a short distance into a probably comparable house at a fraction of their former house price / payment.

In the past apparently opportunities arose to do this in 'mill towns' or 'company towns' when a major negative employment event occurred causing housing prices & demand to drop. and occur they did! Within the span of
a few years everyone shuffled into similar houses at a fraction of the
previous price.

If you have a job, plan on staying, and are not generally dependent on credit scores to finance cars, etc. then it may be worth the potentially enormous savings if you have a large non-recourse underwater mortgage. I guess you have to purchase the second home (at like 50% off) with a good down payment (cash) prior to walking from the first. I don't know how this can be pulled off (the details) but it has happened so i'm told. Like a game of musical chairs.

Anybody know if there will be opportunity for home-debtors to do this again in steeply-depressed priced markets? (040% declines) I have excellent credit and a good down payment! But my house has declined in value tremendously due to foreclosures in the neighborhood.

Thanks, Dr. Russ the rocket scientist

Excellent question Dr. Russ. Here is the response that he received from the gentleman at BankRate.com :

The problem with playing musical houses is that it's against federal
law. I'm not saying that someone playing the game will be prosecuted.
They probably won't. Hardly anyone is prosecuted for mortgage fraud
unless it's to extract cash. People playing musical houses aren't trying
to extract cash; they're just trying to get a better deal on a house.
It's still illegal.

Here's why it's illegal: If you're applying for a mortgage, and you plan
to default on your current mortgage, that is a material fact that you
are legally obligated to disclose when you apply. Withholding a material
fact is deception, and it's just as illegal as lying on the loan
application.

If an applicant *did* disclose the fact that he or she planned to
default on the current mortgage, the application would be denied. So no
one would be able to successfully argue that the deception made no
difference.

Holden Lewis
Reporter
Bankrate.com
(561) 630-2400 x11338
11760 U.S. Highway 1
North Palm Beach, FL 33408
Read Mortgage Matters, the blog about mortgages and real estate:
http://www.bankrate.com/mortgagematters/

We will be looking into the details of this in coming posts. But even if all of this is true and is not up for legal interpretation (and in my opinion, everything is up for legal interpretaion) then that still leaves the huge opportunity to walk away and rent for a couple years at a fraction of what you are paying now. And then there are the rent to own possibilities which are everywhere now.

Stay tuned and we will cover all of these bases.

And thanks to Dr. Russ for his excellent contribution. I look forward to hearing more from him.

Are California Mortgages "No Recourse"? Talk to an Attorney

On Trulia.com, the Real Estate Search Engine, a reader asks if mortgage loans in California are "No Recourse," meaning that once the borrower turns over the house, he or she owes the lender nothing more.

Hemet Real Estate Broker Christopher Walker answers:

California does not provide recourse for "purchase money" loans with only rare exceptions. Purchase money is when you are taking a loan at the time of purchase. If you have re-financed your home, taken out a HELOC or other loan after the time of purchase, your lender may have the ability to collect from you even after foreclosure. It is imparative that you seek the advice of a competent real estate attorney immediately.

Excellent advice. If you didn't completely read and understand your mortgage when you signed it, then make sure you talk to an attorney before you give your house back to the bank. An attorney may be expensive, but you want to make sure that you cover all your bases.