What do you want from your house?

User phiphibone left a comment that got me really thinking. And I’d like to address his situation generally, and share some insight that I had during my process – some of this is pointed directly at him, and some general – I hope it helps!

What do you want from your house?

First, you need to figure out if you want to keep the house. Something that everyone needs to understand is that the house you live in, is not a very good investment even in normal times. “My parents bought a house for $20,000 in 1970 and it is worth $300,000 now” may be true. But how much did they pay over those decades in taxes, maintenance, upkeep, improvements? Add it all up, and compare that having put all that money into even a conservative mutual fund. Or even the stock market as a whole. They would have A LOT more than $300,000 in investments today.

A house, however, could be more important to you than the money. It is to me. I rent right now, and my plan is to buy again. The place I buy, I plan on living in until I die. So – in that situation, it could be worth a billion dollars, or one dollar to someone who would buy it from me, but that makes no difference for me in reality - it is priceless (or worthless, depending on how you look at it!). It is truly worth nothing other than the enjoyment I get out of it. Right now I can rent some of that enjoyment – but for my goals, renting does not fulfill all of the enjoyment owning the same property does. So a monthly payment to own, in my case, is worth more.

The point I'm trying to make is that you need to know what your goals are. Do you want to have enough cash at age 65 to travel the world, not be tied down to a house, and could care less about "roots" at that point? Or do you want a place to set down strong roots and be buried in the back yard? Or some of both? Only you can decide that.

Summary of Phiphibone’s situation

Phiphibone has a first and second mortgage, which, taken together, are pretty much the value of the house. His second (I’m guessing a HELOC which is somewhere between 10-20% value of house) has high interest rate that he would really like to reduce. He tried negotiating, but he is current on his payments, and is just getting the runaround. Since rents are significantly lower, he is thinking of walking.

If your credit is already tanked

If your credit is already tanked (or you have decided it is a price worth paying), and you want to keep the house, stopping paying the second may be a good strategy. For all practical matters, a second lien holder can not foreclose in most situations such as yours. This is because it is doubtful that your house could ever receive bids over 80% of the appraised value bidding at a foreclosure auction in today's climate. The first always gets paid first in a foreclosure, and all remaining liens are erased once the foreclosure is complete.

How the foreclosure process actually works

The foreclosure process is an auction by the government which is designed to completely clear encumbrances to the title of a house so that it can be repossessed and resold without lien or title problems from that day forward. In most situations the banks that held the mortgages are the high bidders at this auction – not some lucky guy who read a book on foreclosures, or bought a seminar on TV. This is because the first lien holder has a significant investment, and can bid to an amount somewhere between the lowest amount they would settle for recovering and the liquidation value of the house with no additional risk whatsoever. This is because the fist lien holder as bidder is also the bank that receives the proceeds of the same winning bid. So if XYZ Mortgage Corp. is owed $200,000 on the house, and the house is worth $160,000 in a liquidation situation, they can, and will, always bid close to $160,000 at the auction. (They could bid up to $200,000 and pay nothing, but if bidding passes a liquidation value that is acceptable to the bank, they will take the money, rather than the house.)

Side-note on semantics

When people say they “bought a house from foreclosure” they really almost always bought it after foreclosure – from the Real Estate Owned (REO) department of the mortgage company – that is the party that actually bought the house at foreclosure. Same with those Realtor FOR SALE signs that say FORECLOSURE – the foreclosure is over if a Realtor is selling it…that is just a marketing tactic to convey that the bank owns the house (REO) and is ready to sell at liquidation pricing.

The bottom line is the second lien holder usually gets nothing in foreclosure

Bottom line is that in a foreclosure, when a second lien has less than 20% equity, the second would get nothing. That is precisely why second mortgage interest rates approach credit card interest rates when they have the last % of equity stake as collateral. The truth is, while they want you to believe otherwise, they really have zero security if you decide to walk away. The only security they have is when you house value goes up enough that they can initiate a foreclosure and can also be the high bidder at the auction, and subsequently expect to sell the house for more than they bid. Just like every investor sitting there waiting for a deal. They have no advantage other than that. So if XYZ Mortgage Corp. has $160,000 on a $200,000 home, and PDQ Mortgage has $40,000, and liquidation value of the home is $160,000, PDQ can only bid to an amount less than the liquidation value. That means they won’t win the auction and won’t get paid a dime. That is, unless some guy who just read “How To Make A Million In Foreclosures” bids $200,000 on the house!

So, if you are walking away from a house, the second might as well be a glorified credit card.

So, simplified, if you walk, the foreclosure auction proceeds pay off the liens in order. In this situation, it is almost certain that every cent goes to your purchase-money mortgage, leaving nothing for the second lien holder. And, in reality, your purchase-money mortgage company will almost always be the high bidder at auction, so they will wind up owning the house in REO, to resell.

Money talks, and bullshit walks

So you are in a very strong bargaining position with no. 2 (assuming they care, and some do not.) In good times, no. 2 may not care much – any are simply glorified consumer credit companies (read: a credit card) – and might just stonewall, using foreclosure threats as their collections tool of choice. But I don’t think they are (or soon will be) looking at these things like that today! That said, I doubt they will sit up and take notice of anyone until they stop seeing payments for a while. From both ends of any money deal, the old cleche is true.

Your mantra: "I will do everything in writing. I will do everything in writing. I will…"

At the point where you begin to negotiate with your creditor, do everything in writing, and be sure you are sending this to someone who can actually negotiate the loan. You can find that out, once you start getting phone calls from them to find out why you are not paying. Always be polite. These are just people on the other end of the phone trying to pay their own bills. Tell them that you want to work something out, but that you have been advised you must do it in writing. Do not accept the customer service address. If you are persistent, they will almost never hang up on you – you are the one that has to terminate the telephone conversation. Just continue to insist for this information. You will get it. Send all correspondence certified mail return receipt requested. Save copies of everything.

Stick it out

I believe if you stick this out long enough you will come to a point where you can negotiate with the second in your favor. Be patient and do not give up. Continually present your offer to the bank. If it is reasonable, once the debt passes to someone’s hand who has the authority to negotiate, they will negotiate – really, they have no other choice. Until that point, you just keep waiting, and don’t pay. They can’t foreclose. They can’t collect. Someone will eventually negotiate. There almost always comes a point where a bank is ready to take something rather than nothing.

Back to "goals" and "plan"

But all that said, you need to have some financial plan. You need to sit down and figure out what your goals are. Where do you want to be in five years when the dust has settled and your credit has returned? What do you want your life to look like?

You know when to walk away from your house

Once you have a plan, and you know what you need, you'll be able to see what makes sense for YOU. That is how the banks work when making offers as well. When you know what is right for you, you negotiate from your own needs – not from “is this the best I can negotiate.” Because the best you can negotiate might still be no good for you, and hinder your reaching your goals. If you know your goals for five years out, and you know what you need to do to get there, then you know how much you can offer the bank. And you know when to walk away from your house. Being ready to walk away form a negotiation is also a very strong negotiation position to be in.

"I could rent the same place for half"

Making comparisons of “I could rent for less” is frequently only a rationalization. This fact may not matter as much as it seems to taken alone, if one of your primary goals uncovered in your plan is to actually own this house! You already own the house – you have an advantage in today’s climate that I did not have: you will probably be able to negotiate with both mortgage companies to some extent if you do it right. So, if you know what your goals are, and know when to stand up and walk away from the table and rent, you are empowered to manifest your goals just as much the machine that you are up against is.

Basically, you’ll need to leave emotion at the door – and you can only do that if you have the same information as they do: what makes cold-hard-sense to achieve your goals.

Intro

Hey, I thought I would share my foreclosure and bankruptcy experience from 2004 with everyone who is facing similar situations today.

This blog is more to be interactive than me going on and on about a past that still chimes in to weigh on me somewhat. I'd like folks to ask questions about their situation, and I'd like to share my experience - in the hopes that I might help some folks understand the whole picture, and the gravity of the decision.

The decision to walk away is a serious one. It is gut-wrenching. It is final. I literally had nightmares for years after. I felt guilty and could not face my old neighbors for quite some time. foreclosure has a lot of sides to it - and I want everyone to make the decision knowing as much as they can.

In hindsight, my family most certainly made the right decision. But I had wished greatly back then that I could talk to someone else who had gone through this, without constantly second-guessing our decision.

SO YOU'RE THINKING OF WALKING AWAY FROM YOUR HOUSE

We had to make a very similar decision, for somewhat different circumstances than you are probably facing. But the bottom-line was the same: we owed far more than our house was worth, and we decided to walk away.

It was a painfully difficult decision to make, and it was not made lightly. The reason we owed more, was actually because a refinance of our mortgage went bad. More specifically, I had a business loan, and they had every single thing I owned (including the kitchen sink) listed as collateral for that loan. Including, quite unfortunatley, a "second" mortgage on my house.

Anyway, as I'm sure you can guess by now, the business went belly-up. The stack of personally guaranteed business debts then became my personal debts. These debts were not insignificant - an amount I, as an individual, could never expect to pay. After consulting several professionals, it was absolutely clear personal bankruptcy was the only solution.

We actually continued to pay the mortgage on time, every month until the end of the bankruptcy proceedings (which were quite lengthy in my case) because we always intended to keep our home - it wasn't even a consideration. We could afford the payments, and were never in arrears. Losing our home was the last thing on our minds.

Ooops...

The bankruptcy law said I would be able to discharge a portion of the business loan that had a second mortgage on the house, reduced to the amount of equity it actually held in the house. But guess what happened? I had refinanced my house to get a better interest rate some time after the business loan was taken. The refinance was apparently sloppily done, and the new mortgage company never noticed the business loan sitting there with a second mortgage. So the business loan became the first mortgage on the house (first in time), and the refinanced purchase loan became the second mortgage! Oh well, their problem - right?

Wrong. It was my BIG problem.

Purchase-money mortgages (you know, the mortgage that buys the house) couldn't be discharged or modified in bankruptcy at all. And the business loan, since it was less than the value of the house, now had 100% equity, so it could not be reduced.

Ooops again...

But that should be solvable - right?

Wrong again.

"Pay some lawyers, and they'll get it done", you say? Don't count on it. I had the former Chief Judge of the Federal Bankruptcy Court as my lawyer! He was not optimistic.

See, the ugly fact was that the bank had no obligation to anyone other than themselves to be in the proper lien position. And when you try to work with one bank you've paid, and another bank with an error in their favor, the only result is sleepless nights worrying about your situation, while they do nothing. The banks are experts at this game. They made the rules. You and I are just numbers on paper - not parents frantically trying to save the home two of your children were born in.

But this blog isn't about victims or perpetrators. Many of us have a truly emotional story. Few would get into this situation intentionally, as some bitter commentators may coldly suggest from the sidelines.

This blog is about the facts you will face walking away from your home.

I can tell you that the only thing positive that came out of the banks during my futile attempt was the complete elimination of the responsibility I actually once felt toward them. They purged every last iota of guilt I might have had in that regard (and then some.) That lasts to this very day - and I would advise *anyone* in *any situation whatsoever* thinking of walking away from a bank debt not to spend a moment concern with guilt/responsibility toward the bank. They won't for you - they play by the rules of the game, rules they made. And giving two shits about honor or doing what is right is not in the playbook.

There are precious few things I know in life for certain. Trust me on this one.

Ok, that is it for now. Hopefully I can drive some traffic here to get a discussion going!

-Mark