Financing in Minneapolis>Question Details

Steve, Home Seller in Minneapolis, MN

What happens if I stop paying the 20 in my 80/20 mortgage?

Asked by Steve, Minneapolis, MN Wed Mar 4, 2009

I currently have an 80/20 mortgage. I am talking with savemyhouseusa.com and they've advised me that their lawyers can reduce my interest rates by talking with the lenders. My question is if I got my 80 modified and locked in at a great rate, what would happen if I quit paying on the 20? I know my credit would take a hit, but how big? I would already have my house and a vehicle so I won't need my credit for any purchases in the near future. The 20 lender can't foreclose on property. What's my incentive to pay? What are the ramifications beyond my credit? Thank you!

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The posters before were correct, the second lien holder can initiate forclosure. Yes there is little for them to gain but as mentioned, they could get a deficiency judgment against you and garnish your wages, that's perhaps the worse situation because it becomes forced instead of a situation where you're trying to work with the bank and may get a break in the payments or possibly some debt forgiveness.

On a side not, there is usually a cost not to escrow on a loan, not because teh lender wants to make money off your interest in your escrow account (that's not even legal actually, those accounts are heavily regulated), it's because if you decide you don't like the services received from your city/county/state, they could initiate foreclosure even if your first and second are currently on-time. So the extra risk "not" to escrow is usually passed on via a 0.25 point cost to now escrow (just a tidbit of info incase anyone wondered).
Web Reference: http://RobWeber.com
1 vote Thank Flag Link Wed Dec 21, 2011
What makes you think that the 2nd mortgage holder can't foreclose on your property? Of course they can! But whether or not it makes sense for them to do so is another question.

They could: garnish your wages, place you with a credit collection agency, or seek a legal judgement against you.

And if you think this will only affect your ability to purchase items like a vehicle, think again. Just about everyone bases their decisions about you on your credit score these days. You vehicle and homeowners insurance could go up. Your credit card interest rates will go up and your limits can be reduced. A potential employer may decide you are not their kind of person. You will have a difficult time finding a place to rent if you need to.

Another major consideration is this - every mortgage application I have ever seen has the question "Have you EVER filed bankruptcy or been in foreclosure?" Since they use the word "EVER" you have to answer honestly and give them information regarding the circumstances. If a lender decides they don't like your answer, they can deny you a mortgage even if it has been 10 years and has dropped off of your credit report. So a foreclosure WILL follow you around the rest of your life.

Now if you have a hardship, like a loss of a job or catastrophic medical problems, there is help. Try the Minnesota Housing Finance Agency's Foreclosure Prevention program: http://www.mnhousing.gov/consumers/home-owners/foreclosure/i… or you can contact HUD and get Foreclosure Avoidance Counseling: http://www.hud.gov/offices/hsg/sfh/hcc/fc/index.cfm?webListA… or contact the Minnesota Home Ownership Center: http://www.hocmn.org/stayinyourhome.cfm

These are all good local places to get help.

Also, please be aware, Minnesota is very different from most other states when it comes to foreclosure. You need to speak with a MINNESOTA real estate Attorney before you take the advice of any out-of-state lawyer.
1 vote Thank Flag Link Sun Mar 29, 2009
Steve--MN-----------------

You really should, in my opinion, talk to a local attorney who specializes in foreclosures, bankruptcy, credit, and so on.

DO NOT RELY ON OPINIONS OF OTHERS ALREADY EXPRESSED HERE, I WOULD SAY.

The foreclosure process is different in every state. Some of the earlier responders do not live in MN and seem to be giving you information that is applicable where they live. This may or MAY NOT apply where you live.

You say: "The 20 lender can't foreclose on property." I don't understand why this would be true. But, as a couple of people mentioned, it may be that they could legally foreclose, but your situation is such that they would not gain by doing so. So then your statement might true in practice. However, in general, the second lender DOES have the right to initiate foreclosure proceedings and carry them through to a foreclosure sale. So, legally, what you say does not seem right to me, unless there is some reason they cannot legally foreclosure which you have not mentioned. I have never heard of a lender NOT being able to foreclose, unless stopped from proceeding by a court order. And even then, usually that order is temporary and the foreclosure, after a delay, can go forward.

I've never heard any knowledgeable person say what the junior lender would do in such a position, so I have little to offer you.

If you can get the first loan payment reduced, it might be you could do the same for the second loan. If you could make both those payments into the indefinate future, that might be a good move for you.

While somebody else surmises that you are upside down, with loans greater than the property value, you do not indicate this. I suspect that this could be the case. I'd suspect that the degree to which you are upside down should be used in making a decision as to what to do.

I have read that doing a short sale will effect one's credit less than allowing a property go to foreclosure. So, that may be a better answer than either letting the property go to foreclosure or acting as you describe.

In general, if one can stop paying mortgages entirely, and then live in the house for many many months until the foreclosure is complete and one is evicted or threatened with eviction, with no mortgage or rent, one can save money to be used to move forward. Of course, at that point you would not have a house, but, presumably, you would have your car still.

It might be possible, given the action I just described, to then buy a property from somebody without a new instituational lender. This could be an owner-financed sale, or a lease with option to buy, a contract, or something similar.

There are so many different possibilities, and some of them depend upon details of your own situation, it is not possible to give good advice, in my opinion. Thus, it makes sense to me to consult an attorney. Another possibility would be to consult with a credit counselor or some legitimate service that cousels people in similar situations to yours.

I suggest you be very leary of dealing with the company you mention. I did a google search on the name and there is almost nothing on them on the internet. It would be well to have a chance to talk to other people who have relied upon them, it seems to me, so that you could find out what their experience has been. That it appears that nobody has reported back on them leaves you in the dark.

Good Investigating and Good Deciding***********Ron Starr**************
1 vote Thank Flag Link Fri Mar 20, 2009
In response to the agent who spelled out doom and gloom for "walking away", I pose a question. What happens to the banks who caused this mess in the first place? What happens to worthless real-estate agents like yourself who smiled and reassured clients asyou waited for your check? Answer that!
0 votes Thank Flag Link Sun Dec 18, 2011
Ok, so I've been reading a lot of info on the web since my last post and here is what I've found out. If you stop paying your 2nd mortgage, and your home is worth the same or less than your 1st mortgage, most likely the 2nd lienholder will not initiate foreclosure b/c they will get zero. However, what they CAN do (and most likely WILL do) is "write off" your debt, which they will sell to a collection agency and then you will be harrassed by them. They can also keep a lien on your property so that if you ever do sell, you will be required to pay off that debt before you can sell the house. So no easy way to walk away I'm afraid!
0 votes Thank Flag Link Wed Jun 3, 2009
I'm in the same position. I, stupidly, took out an 80/20 loan on my home at the top of the market because I needed to keep my savings fluid as we were starting up a new company. Here we are 3 years later, and we cannot pay our bills without raping our savings account every month, we are only bringing in one income b/c the new company is not profitable yet, and our home is worth $130k LESS than when we bought it. So, even our first mortgage is upside down. In my situation, the holder of the 2nd mortgage would be an idiot to initiate a foreclosure because they would get *nothing*. I am completely devastated that took this route, and both my husband and I have FICO scores over 800. This will hurt immensely if we decide to stop paying, but I cannot put my family's financial security at risk and completely deplete our savings. Any advice?
0 votes Thank Flag Link Wed Jun 3, 2009
Steve,

I am no attorney but eventually the 20 will be able to get a judgement against you and begin to garnish your wages. The 20 does have the power to foreclose on the property but likely won't get much out of a sale so they will allow the property to go back to the first mortgage holder and will possibly pursue you in district court for the deficiency. Once they obtain a judgement against you they will likely begin the process to collect on the judgement. In the end you will lose the house so I don't think this is the best route for you.

Cameron Piper
Web Reference: http://www.campiper.com
0 votes Thank Flag Link Thu Mar 5, 2009
More than your credit will take a hit. When your FICO score goes south, the insurance rate on your car will go up, the interest rate on your credit cards will go up, your credit limits on your cards could be slashed, it will be harder to get a rental in the future when your home is foreclosed on, the first mortgage could decide to raise your newly negotiated rate, your home owners insurance cost will go up, etc. You may not "need your credit for purchases in the future", but you sure do need your credit for the present. People fail to realize how their credit score effects different aspects of their lives.

You should really think hard before you renege on the commitment you promised to fulfill with your mortgages. And as for the ramification beyond your credit, how about your moral obligation?

Oh, and by the way, if you lose your job, many companies are now looking at people's FICO scores and credit history to see if they would be a reliable employee to hire. Bad credit scores could mean a tougher time of finding a new job.
0 votes Thank Flag Link Wed Mar 4, 2009
Be extremely careful on this. You should first try to work with your lender without hiring an outside company. My suggestion would be to dial "211" - kind of like 311 in Mpls, or 411. 211 is the number to United Way and you will get the option of talking with someone there who, for free, can point you in the right direction with regard to foreclosure prevention. I know nothing about the company you referenced, but I also have no success stories of any company or lawyer yet that has actually been able to do what the homeowner could not (short sales are a viable option but they still affect your credit). The only other thing I would add is that you agreed to pay your mortgage - the first and the second. People choosing to stop paying is part of the reason we have our current problems.
Web Reference: http://www.ShawnaGibson.com
0 votes Thank Flag Link Wed Mar 4, 2009
The agent below is correct in that fact that your second trust lender could initiate the foreclosure process. The caveat is that they will have to "take out" the first trust as well. In this market/economy the chances of that happening are almost impossible. Being that you have a second mortgage (80/20), I am going to guess that you are upside down on your equity. No second trust lender is going to try and take the home under these conditions; mathematically it would not make financial sense. They will write it off as a loss. The bank does have the ability to place a judgment on your credit (50/50 that they will execute) and for this reason I always recommend short sales. In a short sale transaction, the banks have already agreed in writing to take the loss and not pursue you in the future.
I hope this helps.
0 votes Thank Flag Link Wed Mar 4, 2009
You would be considered late and the foreclosure process would begin when you are about 60 days late. You do have 6 months to get current or complete a "short sale" before the sheriff's sale which occurs appox. 6 months after yuo stop making payments. You would have then an additional 6 months to get current or a complete a short sale. Short sales that I work with are generally successful as we use a professional negotiator.
Justyna Johnson
0 votes Thank Flag Link Wed Mar 4, 2009
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