Second Mortgage Charge Off Question

I am in California and am proceeding with a short sale.  I am delinquent on my first mortgage, but current on my second.  I intend to pay the second as agreed, and according to the terms of that note.

To get a short sale done, I need the second to release the property.  The house is worth $400k.  We owe $700k to the first, $75k to the second, so the second does not currently have an equity position.  We have gotten the first to agree to pay the second $23k, which is very good.  We are still making payments on the second, and will continue to do so.

The second just came back with approval for our short sale, but says they will charge off our debt, and refer it to their collections department.  This is Bank of America.  It seems ridiculous, and I will not sign the paperwork allowing them to do this.

My question:  If we simply allow the first to foreclose, and continue to pay the second, can they still charge off the debt when the home gets foreclosed on?  It seems that if we are current and making payments, they should not be able to randomly charge off our debt.

Its not a question of if you allow this---they have a right to seek collection of debts due them ---and your mere intent to pay them doesn't count for much.

Now I don't know waht your  2nd note says --but so long as you are not in breech of the terms of the note the lender should have no beef.

But odds are the fine print of your second has words to effect that you need to be current with your first and/or you cannot increase sums owed on your first for any reason --so by not paying your first  may have triggered a breech of the second.

But what exactly do they mean by charge off debt--by itself what is wrong with a charge off--did you expect them to send you roses for not paying them as you agreed to do?

The second is in a position to gum up the parade --otherwise why would  1st agree to pay 2nd  even a dime much less $23K!

mmresources:

If we simply allow the first to foreclose, and continue to pay the second, can they still charge off the debt when the home gets foreclosed on? It seems that if we are current and making payments, they should not be able to randomly charge off our debt.

It won't be random.

Read your loan contract. There is most likely a provision in there stating that a foreclosure is a breach that allows the lender to call in the loan as fully due and payable regardless if you are current.

Look at it from the lender's point of view. You are already defaulting on a major obligation. The lender's not going to rely on you continuing to pay after the loan is no longer secured. So don't count on it.

Amusing that you use the word "allow". You're the bad guy here, defaulting on your mortgage. You have no leverage.

I don't think you quite understand.  I'm current on my second.  Did I expect them to send me roses for not paying them as I agreed to?  Did you read my post?  I have been paying them exactly as I agreed.  They are current, 100% current, never missed a payment.

The second is not in too much of a position to gum up the parade.  The first only wanted to pay $7k.  We wanted the second paid off as much as possible, that reduces our debt.  The first wants to close via short sale, as if we let it go to foreclosure, it will cost them more, and they will not be able to sell for as much as they can now.  We've kept the house nice to this point to sell.

The second should be willing to work with us, as if we file BK, they will get nothing.....  Plus, we have been paying them, and will continue to pay them.

Adjuster Jack, it's amusing that you pretend to know my circumstances.  I'm in control here, and I can allow them to foreclose, I can allow them to short sale, or I can simply bring them current and continue to pay on a debt that secures an asset worth much much less than the debt encumbering it.

I do have leverage, I have the leverage of BK with the second.  This is not a case of me not being able to afford my mortgage, this is a case of my property value falling 60% and me making a business decision to walk away.  In making that business decision, I intend to get the best terms on the release of debt available to me.

You could have stopped at your point that a foreclosure could be a breach of contract allowing the lender to call my loan due and payable.  That would have answered my question and I would have been grateful for the information.  Instead, you choose to make assumptions about my postion, and poke fun at the words I chose to use.  I don't choose words randomly.  Finally, you end with a statement that is entirely inaccurate, stating that I have no leverage. 

I have plenty of leverage, and will walk away from this place owing very little, compared to the almost $800k I owe now.  Then I will go purchase the same home down the street for $350k.  I would urge every american in a similar "underwater" situation to do the same.  Even if they cannot purchase another home tomorrow, they certainly will be able to in 2-3 years time.  Perhaps less, seeing as how something like one in 12 mortgages are 30 days late or more right now nationwide, and I would expect loan guidelines to change sometime in the not too distant future so that the housing market has more able buyers to help pull it out of this mess.

Actually you make a perfect point  as to why I think we blew in when we broke from British rule and abolished debtors prisons  as well.

You made the deal! Why should I in a sense need to bail you out.

Why should I have to bail everyone else out?  If the underlying asset was not so far underwater, I would be happy to stay.  This asset, however, will not recover for 10, 15, 20 years, if it ever does at all.  This was not due to my actions, but due to the actions of others.  I wasn't happy about it, but I need to look out for myself, certainly no one else is going to look after my financial well being.  This was an investment.  When an investment goes bad, you don't continue to hold and hope for the best.  You make a business decision to sell that bad investment, then you go put your money into a better investment.  That's what I'm doing.

Large corporations are able to walk away from debt every day, and it is considered being business savvy.  Individuals walk away from debt and get this kind of reaction.  The supreme court just ruled that corporations have the same rights regarding free speech as individuals.  Seems only common sense that individuals should have the same rights to make business decisions that are in their own best interests just like the large corporations.

I know you don't like it, but you better get used to it.  This is going to become more and more common.  What is it, something like 25% of homes nationwide are underwater?  Everyone tells these sheep to keep making payments, the real estate market will come back.  That's false, it will not come back.  It was inflated by loans that required no documentation, and home prices spiraled way out of proportion to the median income.  Now that you must document your income, home prices are once again firmly attached to that number, meaning you won't have the huge double digit appreciation.  That, in turn, means folks like me, in areas down 50-60%, will likely never see the values return to where they were 3 years ago.  Maybe in 20 years.  No sooner.

It's simply a bad investment, and it would be a poor financial decision to keep pouring money into a bad investment.  Cut your losses, get out and find a new investment.  Sooner or later the general public will realize this.  The majority of foreclosures have been due to the inability to pay.  I'll be curious to see what happens when the wave of "business decision" foreclosures hits.

You made the deal with your eyes open--and I presume you got as far as 11th grade in HS and were of legal age at the time.

Had your market value tripled you would not be here to complain. And as a practical matter your lender didn't personally torpedo th values on your block. Suppose your value tanked because the neighbors of both sided decided to rent out thier homes for a bunch of unrelated Section 8 tenant and nobody would tough tyourhome at its previous price for owner occupied use---who should pay for that?

Yes, I know its a Constitutional right to declare bankrupcy--but you bought what you hoped would be a diamond and it turned out to be a lump of coal.

Now if 50% of the folks are out there with plans to stiff the legitimate lenders then no wonder its now become almost impossible for even well qualified  buyers to get decent borrowing terms --lenders need to cover losses some how-or avoid future folks who would stiff them! 

It may be your right not to pay..and a good number of students in our local HS will just about tellyou its thier right not to work either --and they assume government will give them 3 checks a month just like they do for Mama!

But at what point do I get  too tired to carry the burden for all the failures of others?

You can get too tired to carry the burden all you like, it doesn't really matter, as you don't have a choice.

Yes, I did make the deal with my eyes wide open, just like when I purchase stock, I do so with my eyes wide open.  That does not mean I am right 100% of the time, when I am wrong, I cut my losses, sell, and move on to the next investment. 

Not only did I make the deal with my eyes wide open, but the bank made the deal with it's eyes wide open as well.  I qualified full doc, showed my tax returns, etc.  I hid nothing, but the bank knew that it's security ultimately was the real estate collatarlizing their loan.  They made a calculated risk based on my credit, my income, the amount of money I put down and the value of the home.  They made just as poor of a financial decision as I did.

You could say that the banks were funding all of these loans, including the 100%, no doc subprime loans, for investors who were looking for diamonds in the rough.  They were just as speculative as any of us.  Even more so.  The subprime banks had reps out all over the place showing people how to purchase homes with no income.  They were really pushing the high risk financing, you would be surprised at how much they would push to bring these loans in.  And why not, in the heyday, these subprime lenders could sell the paper and make 3% or more on the sale easy.

Now the government selects who to bail out, who to help, and I'll tell you what, it certainly is not the average Joe like me.  Why should I grin and bear it?  Again, what is right for big business is frowned upon when the average american makes a financial decision in their best interests.  The ship may be going down, but I won't be on it.  I'm jumping off early so I can build me a nice life boat, one that will secure my retirement.  15 years from now, when I am enjoying the fruits of my business decision, those who decided not to jump will be working, treading water, trying to get back to break even still.  I wish them all the best of luck.

Now, to say that it is tougher to get a loan because the banks need to cover their losses, that is just uninformed chatter.  The regional banks would be more than happy to make good loans, problem is the government has stepped up regulation in such a huge manner, it is difficult for these banks to be liquid enough to lend like they used to.  Community banks cannot lend because the government has come in and told them they need to hold larger reserves.  So now, when a loan pays off, instead of turning around and putting that money back out there, these community banks are putting that money into their reserve.

The large banks, if you care to research the numbers, are funding a great deal of loans for residential loans.  Maybe not as quickly as they could, due to new disclosure regulations (which don't improve disclosures by the way), appriasal laws that punish appraisers (they force lenders to order through a third party apprasial company.  Funny, one of the main guys who pushed this legislation owns one of the largest of these types of companies.  I'm sure they have profited nicely from this), new licensing requirements that are cumbersome, and don't really have much of a purpose other than to appease the public (most states don't even have tests set up yet, and folks in the industry are expected to be licensed in the very near future), larger punitive damages and less protections for mortgage professionals, etc.

Oh, and by the way, did you know that every mortgage broker must be licensed through a national database now, unless you work for a bank.  If you work for a bank and originate loans, you don't need to take a test, be licensed, have a background check, have fingerprints taken, etc.  Lots of legislation to make more money for the big companies.  Oh, the poor banks, in my opinion, this downturn will turn out to be a windfall for the large banking institutions as the little guys get driven out of the business.  Just look at some of these companies that were so down and out they needed billions and billions of bailout dollars.  BILLIONS.  $25 BILLION here, $45 BILLION there.  Now that money is repaid, and these companies are bringing in record profits, paying out record bonuses still, only a year after they got bailed out?  And I should feel bad for stiffing them?

So the large banks are funding loans, and selling them to the government.  The smaller community banks, the onese that have been regulated to hell and back, the ones who portfolio their loans and don't sell them to the government, they are being forced out of the lending business.

No, the reason it is so difficult to get a loan is not because the banks don't want to lend, it is in good part due to the government's actions.  All the while they publicly say "lend more lend more" to appease the american public flock.

I don't feel bad for these banks, I took a risk, they took a risk, they have already bounced back from this, the large banks at least.  Why shouldn't I be able to bounce back just as quickly?

Well, I think I should be able to, so that's what I'm doing.  Don't hurt your back with that heavy pack you're carrying over there, it's only going to get heavier.

MM don't sweat these guys. They like to make judgements without any facts.

Your 2nd loan agreement probably does have a due on sale clause meaning your loan agreement changes from your monthly paymets due over 30years to a balloon payment of the full amount due immediately.

The second can and will torpedo your deal. It is not a good idea to threaten them with BK as that can be viewed as extortion. Banks do not make sense in a lot of their decisions.

Since you have money I would strongly suggest that you speak with a tax attorney or CPA ASAP. They can advise you of your best options and make a plan whether it is BK or SS or something else. This result will solve your current problem.

mmresources:

My question: If we simply allow the first to foreclose, and continue to pay the second, can they still charge off the debt when the home gets foreclosed on? It seems that if we are current and making payments, they should not be able to randomly charge off our debt.

First, understand what a "charge-off" is. It is simply an accounting entry that takes the asset (the loan is an asset to the lender) off its books when it determines that the loan is unlikely to get paid. If the lender meets the criteria for it, that charge-off may also result in a tax deduction for a bad debt. That's it. A charge-off itself does not affect you in any way.

Your real concern is whether (1) the lender can call the entire loan due immediately and (2) if you don't pay if the loan is called what actions the creditor can take.

The answer to the first of those is found in your loan agreement. Most mortgage lenders have provisions that say that if the home is transferred the loan is due immediately. This is known as an acceleration clause. If your lender has that clause in the loan agreement, then this short sale can trigger the acceleration clause. Unless you get the lender to commit in writing that it will not accelerate the loan as a result of the short sale, you'd be at risk of the lender calling the loan due now.

If the lender calls the entire loan due and you don't pay, the lender may report the loan as delinquent to credit bureaus and may sue you to get a judgment for the debt.

mmresources:

It seems ridiculous, and I will not sign the paperwork allowing them to do this.

Your best recourse here is to get the bank to agree in writing that it won't call the loan due and that you can continue to pay if off monthly under the terms of the mortgage agreement. Your best pressure here is that there is no equity for the bank in this property but it will get $23,000 out of it anyway in the deal you set-up. So, there is an incentive for the bank to get you to go through with the sale. If you play it right with the bank, you can probably get it to go along with this proposal since it comes out ahead over what a foreclosure would get it.

Cygnusx111:

It is not a good idea to threaten them with BK as that can be viewed as extortion.

Typically the threat to file bankruptcy would not be extortion. However, lenders hear debtors tell them this all the time, and many of the debtors never actually file bankruptcy. Debtors that are going to file bankruptcy tend to just go ahead and do it. As a result, the lenders generally don't take these threats very seriously.

Cygnusx111:

Since you have money I would strongly suggest that you speak with a tax attorney or CPA ASAP. They can advise you of your best options and make a plan whether it is BK or SS or something else. This result will solve your current problem.

A CPA cannot give legal advice. Thus, advising on bankruptcy or arranging a short sale for a client would violate the rules against the unauthorized practice of law.

A bankruptcy/debtor's attorney is what the poster really needs in terms of advice on solving the problems in this sale. Some tax advice might also be needed, but the tax consequences should not be the major driver in deciding what to do here. If the poster has several options that are viable, then getting tax advice becomes much more significant since one option may be much better than the others in terms of tax outcome.