Financing in 90034>Question Details

palmer, Home Buyer in Los Angeles, CA

Here is refinance strategy from my broker. What are my chances?

Asked by palmer, Los Angeles, CA Tue May 17, 2011

I have 80(adjustable)/20 loan. 1st = 380,000 2nd=96,500. Condo purchased for 483k, now valued at 370k. Broker said I can refi the 1st into a 5.3 fixed 30yr. He's applying for a short payoff on the 2nd. If I can't do a short payoff, we will ask the 2nd to subordinate. If they agree, I can refi the 1st. Are banks agreeing to subordinate on the 2nd? What are my chances. After the refi, I will default on the 2nd to settle the loan since it is unsecured. Can anyone give me any advise on this. Thanks.

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Hello Palmer-

I am not an attorney but I believe you will have to file for bankruptcy in order for the 2nd lien to be considered "unsecured". For those that are unaware, this practice is called "equity stripping" . In a foreclosure proceeding, if a second trust on a house is completely underwater, it is considered "unsecured" regardless if the house was originally pledged as collateral. It is effectively "stripped" and is treated like a credit card in a chapter 13. In negotiating a settlement with a second trust lender, a homeowner can use this as some pretty serious leverage as a chapter 13 is not too difficult even today regardless of how much tougher it is to do a chapter 7.

I had a client settle for about 10 cents on the dollar with No deficiency judgement using this tactic. Pretty interesting.

Having said all of that, I am certainly NO expert on short sales, bk's or negotiating mods and if anything I said here is erroneous, I welcome any correction from someone that really knows. The strategy of your broker is creative but I agree that the chances of success are dicey.

Best of luck!
1 vote Thank Flag Link Wed May 18, 2011
One of your answers you stated "I'll just pay the 2nd lien holder 10%". In a short sale, you're not the one paying the 2nd 10%, we would get the 1st lien holder to offer 10% to the 2nd. It is possible the 2nd may want another couple thousand on top of that, but that's only in a short sale situation.

If 2nd lien holders were just allowing people to pay 10% for them to go away, the amount of short sales & foreclosures out there would dramatically decrease overnight.

However, you say your 2nd is unsecured? That doesn't make sense, I'm sure your house is the collateral for your 2nd, if you're stating that your 2nd lien was a cash out equity loan, then the bank will want a 30% payout if you short sell.

If you can email me directly, I can talk to you about how that would 'go down'. You DO NOT have to default on your 2nd in order to get a short sale approval.

Dec. 31st 2012 is your D-Day, after that you will owe taxes to the IRS & the state for the negative amount on your short sale. I strongly suggest to start the short sale at least 6mos prior.

EmilyKnell1@yahoo.com
562-430-3053 cell
Realtor Since 1996
Short Sale Expert
1 vote Thank Flag Link Tue May 17, 2011
Hi Palmer;
Here is the direct answer to "What are my chances?"
0% None. No. Zip.
There are simply no second TD holders who will subordinate to a new second on an underwater property. There is no motivation for them to do so.
Will they short sell? Possibly, depending on your hardship and financials, but not so that you can refinance and stay in the property. If they short sell, the emphasis is on SELL; all parties have to take a hit, and that includes the First, the Second, AND YOU.
As all short sale agents will tell you, the first document you will sign with a lender who agrees to short sell is an "Affidavit of Arm's Length Transaction." This document says that you give up all rights to the property, and that the third party purchaser is not a relative, friend, potential landlord, etc. You do not get to benefit in any way from the transaction, even indirectly.
You are being given inaccurate (bad) advice. No Realtor should give you legal or tax advice, including whether or not to keep making payments on the first or second. Decisions like that have credit, legal, and tax implications that we simply cannot advise you on. We can assist in putting the hardship package together in the best light for you, and the rest of your advisers will help direct you. The best thing for you to do NOW is have an agent, qualified and knowledgeable in short sales, have a sit down with both lenders after going over your short sale and hardship package. You stand a good chance of avoiding foreclosure if you do this in a timely manner, and get the lenders on your side NOW.
I invite you to check my references and then call me to set up a meeting for this week...I suggest we get to work on this now.
Best,
Deborah Bremner
The Bremner Group at Coldwell Banker
REALTOR, 00588885, ABR, CDPE, eAgent, CSP, SFR, HRC, CRE
(O) 310-571-1364 DIRECT
(D) 818.564.6591
(C) 310-422-4288
http://www.thebremnergroup.com
Accredited Buyer Representative|Certified Distressed Property Expert |Pre-Foreclosure Specialist Certified
I want you to know that I appreciate any referrals from friends and associates who may be in the market to buy or sell real estate. You can count on me giving them the same high-quality service I provide to all of my clients.
1 vote Thank Flag Link Tue May 17, 2011
Palmer:

"Creative financing" got you into this mess. Keep that in mind as you consider the latest round of "how the mortgage broker makes money" (Incidentally, they get paid even if the end result is you ruin your credit and lose your home.)

If you are currently sitting on your original purchase money loans, then refinancing will take away your protections under the law regarding non-recourse debt in the California. Also, you are still upside down after the refi. What benefit does this provide for you? The broker gets paid for doing the loan and you get what ????

You might be better off doing a short sale. There are streamline short sale programs with many of the major lenders that would get you out from under the debt and put you in a position to buy again in a few years. Meanwhile, if you are listening to the news, it looks like housing prices will not be recovering any time in the foreseeable future.

If you decide to proceed with this new round of "creative financing", I highly recommend that you speak with an attorney, financial advisor, and tax professional. Don't jump out of the frying pan and into the fire. Get advice from someone who does not stand to benefit from the advice they give.

Hope this has given you some food for thought. Let me know if I can feed this line of thinking with any additional information or help. Dare to Dream.

Shel-lee Davis, QSC®
Certified Distressed Property Expert – CDPE®
Short Sale & Foreclosure Resource – SFR®
Certified HAFA Specialist – CHS®
SSG Pro®
Your Real Estate Consultant for Life
RE/MAX Palos Verdes Realty
424-2HELP12 (424-243-5712)
myrealestateanswers@gmail.com
http://shel-lee.listingbook.com
1 vote Thank Flag Link Tue May 17, 2011
Check with others, but the 2nd can start foreclosure proceedings too if they are not being paid forcing the whole house of cards in.
1 vote Thank Flag Link Tue May 17, 2011
I was just looking through old post and I noticed yours. If you were not able to refinance at the time of the post, I can certainly help you out now. You can call me at 408-352-5147 or email me at AGreer@themortgageoutlet.com. You can check us out at http://www.TheMortgageOutlet.com. I will look at your situation and present you with some options.

Alex Greer
NMLS #1056079
0 votes Thank Flag Link Thu Aug 15, 2013
I agree with Deborah...how can you refinance the 1st and short sale the 2nd? It doesn't work that way! Your being given bad advice!

There are many scams out there...beware...this sound like one!

Good luck!

Kat Becker
Prudential California Realty
katbecker@prula.com
0 votes Thank Flag Link Tue May 24, 2011
Hi Palmer;
I'm glad you're getting advice from BK attorneys. Again, be sure you have a conversation EARLY with both lenders.
When you get ready to short sell, call me, I'm happy to help.
Deborah Bremner
The Bremner Group at Coldwell Banker
REALTOR, 00588885, ABR, CDPE, eAgent, CSP, SFR, HRC, CRE
(O) 310-571-1364 DIRECT
(D) 818.564.6591
(C) 310-422-4288
http://www.thebremnergroup.com
Accredited Buyer Representative|Certified Distressed Property Expert |Pre-Foreclosure Specialist Certified
I want you to know that I appreciate any referrals from friends and associates who may be in the market to buy or sell real estate. You can count on me giving them the same high-quality service I provide to all of my clients.
0 votes Thank Flag Link Wed May 18, 2011
I've talked to 5 bk lawyers. They all say I can strip the 2nd loan with bk13. My 2nd loan is 100% underwater verified with BPO. The problem with BK is that you have to have a lot of consumer debt for it to work. My only debt debt is this 2nd loan and some CC credit that is not a problem. So with BK, I would end up paying more to the 2nd lien then I would if I try to settle with default. So if I can't settle the 2nd with default, I will have to short sale. If short sale doesn't work, I have to go to BK.
0 votes Thank Flag Link Wed May 18, 2011
To add, my understanding of "equity stripping" was that it can only be stripped if the entire lien was underwater. For example, if you owe 500k on a first and 100k on your second, if the property was worth $1 over 500k, then it could not be stripped in a chapter 13. If it were worth 500k or less in this scenario, my understanding was that the court would consider it unsecured and then it could be stripped.

Again, I will defer to Deborah or anyone else on this one with expertise on the subject.
0 votes Thank Flag Link Wed May 18, 2011
Deborah-

Thank you!!!!

I wish you were close so we could do some business.

Great info.
0 votes Thank Flag Link Wed May 18, 2011
Hi Ben;
"Cram downs" (equity stripping) are only possible with non owner occupied homes, under current bankruptcy law.
Buried at the end of a recent story in The Wall Street Journal contains an excerpt referencing how the existing bankruptcy rules can be used when stripping second mortgages from "underwater" real estate (either owner-occupied or investment properties), and how the current bankruptcy cramdown rules (unless changes currently under consideration are enacted) can only be used to modify (ie. cramdown) existing first mortgages on investment properties and not those that are owner-occupied:

"Samuel Schwartz, a Las Vegas bankruptcy lawyer, has a client who is facing foreclosure on her primary residence even though she has been able to modify the loans on her two investment houses. Under the current bankruptcy rules, she was able to "strip away" the second mortgage on one of the investment homes and she "crammed down," or reduced, the principal balances on the first mortgages for both rentals -- reducing her combined loan balances to a total of $355,000 from $590,000.

She was also able to strip away the second mortgage on her primary residence but couldn't modify the first mortgage. That mortgage, Mr. Schwartz said, is more than $100,000 above the current value of the property. Thus, she still may lose her own home. Under the [proposed] new law, her first mortgage on her home also could be modified."

My take on Palmer's question is that this is his (owner-occupied) home, and cram down (equity stripping) would not be applicable.
Deborah Bremner
The Bremner Group at Coldwell Banker
REALTOR, 00588885, ABR, CDPE, eAgent, CSP, SFR, HRC, CRE
(O) 310-571-1364 DIRECT
(D) 818.564.6591
(C) 310-422-4288
http://www.thebremnergroup.com
Accredited Buyer Representative|Certified Distressed Property Expert |Pre-Foreclosure Specialist Certified
I want you to know that I appreciate any referrals from friends and associates who may be in the market to buy or sell real estate. You can count on me giving them the same high-quality service I provide to all of my clients.
0 votes Thank Flag Link Wed May 18, 2011
I meant in a bankruptcy instead of foreclosure in the third sentence in regards to "equity stripping". my apology for the confusion and for not knowing how to edit.

Cheers.
0 votes Thank Flag Link Wed May 18, 2011
I am assuming you have tried a loan modification? If not, you will probably have better luck with a loan mod than the route you are going with your broker. A loan modificaiton is usually the same or similar process as a short sale and some banks require that you attempt a loan modification before they will consider a short sale. So you will probably save time and this way. However in either scenario you still should contact a CPA and Attorney as you have many tax and legal implications.
Sammer Mudawar
714-595-2423
0 votes Thank Flag Link Tue May 17, 2011
Thank you everyone for the frank answers. I'll give my broker a chance to do his thing. It's really a win-win if he can get it done. If he can't do it, then i'll just short sale. Have to try though.
0 votes Thank Flag Link Tue May 17, 2011
Palmer,

I agree with Deborah here. I'm a mortgage professional and I have to tell you that a big part of my job these days is outlining for those I serve the PROBABILITY OF SUCCESS. If your broker is suggesting the approach above to you, he/she should know enough about its odds to give you a good approximation of your chance of success.

If the chance of success is estimated to be high, and you believe that, you probably wouldn't have the concerns that you do. If the chance is low, your agent should be telling you that now so that you can make a smart move.

But like I said, I'm with Deborah on this. A subordination is virtually an impossibility.

Rob Spinosa
rspinosa@rpm-mtg.com
0 votes Thank Flag Link Tue May 17, 2011
How is this creative financing? My 1st loan is going to adjust in two years to a much higher rate. At least I am now at a fixed rate on the 1st with a good rate. As for the 2nd, many realtors have told me to stop paying so that the bank can consider me for a short sale. That's definitely on the table, but if i can settle the 2nd for 10%, that's a win for me. It will be as if I bought my place for close to 400k, not the 480k i purchased for. In ten years, hopefully, the value can come up to just half way to 480 and I have gotten my money back. If none of this works, i'll short sale.

My other question is, do banks subordinate their 2nds? I'm trying to find out the trend for this.
0 votes Thank Flag Link Tue May 17, 2011
Palmer:

My advice is that you seek guidance from a CPA and Real Estate Lawyer if you want to identify the "path of least damage"!
0 votes Thank Flag Link Tue May 17, 2011
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