Home Selling in Los Angeles>Question Details

Marites Tulpo, Both Buyer and Seller in Los Angeles, CA

what happens if I just walk away from my home which as lost more than 20% of its value. Will the 2nd mortage?

Asked by Marites Tulpo, Los Angeles, CA Thu Apr 24, 2008

I bought my home 2 years ago for $539K. Now it is worth about $400. I does not make sense to me to hold on to it. I have paid close to $100k in mortage payments and property taxes over the 2 years.
Should I just give up and walk away. Will the 2nd mortage holder seek the $109K that is on my 2nd loan?
Thank you for any answers

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17
Wow, Yev's post is the first right on comment I've seen on Trulia since the bubble burst!

Marites, ordinarily I'd agree with Ann's post as sound advice. However, because of some new factors in the market you will have to weigh this decision for yourself. First of all you need to realize that real estate agents are just sales people and you wouldn't go to a used car sales person to get advice about the future of the auto market nor should you seek out real estate agents for the direction of the housing market.

First, know that maybe the 1st inning of the housing bust will end by the end of 2008. You're really going to see the value of houses fall off by 2009. I wouldn't even think of buying a house for a few years. You're going to see prices drop by at least 50% of what they were before the bust. Look for prices as they were in 2000 or earlier before you start to make a move.

Next you need to understand what caused the bubble burst. The Federal Reserve caused it by dumping too much money into the market in the form of low interest rates. They did this to help the stock market recover from the tech bubble which has caused the U.S. dollar to devalue by about 50% in the last 5+ years. Now we see the Fed once again dropping rates to almost the rate of Japan's interest rates and commodities of course sky rocketing (to the point that there are food riots in some part of the world). You may wonder what will be the next bubble if this technique even succeeds this time around. But wait...there are other factors at stake.

You may have noticed that the Fed has attempted other means to try to pump liquidity into the market this time around, and even President Bush is handing out free money (tax rebates). Understand this means they'll be borrowing more money from countries like China in order to do this which means the dollar will continue to lose value. Sounds crazy, right? You have to understand that people in high places are freaking out because the housing bust is threatening to trigger the bust of something even larger...an investment product known as Credit Derivative Swaps (CDS). I won't go into what a CDS is here but know that the risks of housing mortgages as well as any other market are tied up in these experimental things. Yes I did say experimental; you see, they haven't been around all that long but the global market is entirely tied up in these things with a supposed value of around $500 TRILLION, yes with a "T". That's more than the value of everything in all the markets and far more than the U.S. or even the world's entire GDP. How can they be worth more? They're basically bets about risk and a lot are worthless because the risk calculations were wrong which is why we see the Fed helping J.P. Morgan/Chase buy up Bear Stearns (with our tax dollars to cover the "investments" gone bad which is really more money borrowing). The housing bust threatens to expose them all, and if that happens, we'll see a worldwide depression; yes, the "D" word!

Another factor is that the U.S. Federal Government is now incurring another TRILLION dollars in debt every 15 months! So expect the U.S. dollar to continue to fall at a rate that also increases (exponential fall). What happens when all the baby boomers retire and strain the non-existent Social Security Trust and puts more demands on Medicare? That sends us into $50 TRILLION of promised future debt. How do we pay it? Borrow more money from China, Japan and S. Korea? These countries have already expressed official concern over the past few years because the value of the dollar has fallen so much. They're looking to park their money elsewhere. So how will our government continue to make good on promised money when the markets lose faith? What happens when they can't even pay the interest payments on their debt which is coming soon. Do they start confiscating property or converting National Parks into whole sale auctions to the world?

Now you also have to consider that the U.S. Commerce Dept. has been facilitating the rapid export of our manufacturing base to China and at our labor wages there's no way we could imagine to compete with them, so basically we can produce less and less wealth. Their argument is that we are now a services economy. However, countries around the world have been positioning themselves to gobble up a share of the services market like India and China for engineering and science and the U.A.E. for the financial sector. So you have to ask yourself where is all the wealth going to come from to make the housing market as valuable as it once was. Sure there will be pockets here and there with an unprecedented divide between the well off and an expanding sector of run down neighborhoods (just like the third world already has).

Yes, it's complex to know what the future holds under these circumstances, but the last person I'd ask is a sales person.
3 votes Thank Flag Link Thu May 1, 2008
Paul,

Your type of advice is what got her in this situation most likely. We are in the worst downturn in the real-estate market and you are talking about her home gaining its value back and more???? Are you insane !!!
This market will be down so far by the end of this year I'll be surprised if some realtors on this board will survive.

Her property lost 25% and will likely lose more. I don't know her financial situation, but here is a link so she can assess her position herself. How much more should she lose??? How many years will she have to wait to gain back the lost value !!! You think its normal for real-estate to gain 20-25% a year? NO NO NO.

http://www.doctorhousingbubble.com/when-100000-makes-you-go-…

Marites, either run the numbers for yourself or sit down with a CPA or financial planner and figure it out.

Good luck.
3 votes Thank Flag Link Wed Apr 30, 2008
Do not sell if you do not have to. Your home will gain its value back plus more. Hang in there.
If you are having difficulty making payments, try renting out one of the rooms in your home, see if this will give you the money you need to make the payments. If that is not an option, then discuss the situation with your lender(s) and or consult with a Realtor about putting your home on the market.
2 votes Thank Flag Link Fri Apr 25, 2008
I am assuming this is a California transaction. Generally speaking, a lender in California can not pursue a borrower for a defiency for a purchase money loan on a residential property, whether a first or second loan. California's Code of Civil Procedure, Section 580(b) states, "No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."

In plain English - the bank cannot seek a deficiency judgment (that is come after you for the amount owed) against the borrower if the loan was for purchase money on a residential one-four owner-occupied property. These loans are commonly referred to in the lending industry as "non-recourse" loans. The borrower has to live there---if it is an investment property or vacation home, then 580(b) may not save the borrower.

However, borrowers are NOT safe from deficiency because if they did a re-finance or pulled further equity out of their home with a Home Equity Line of Credit. (HELOC).

So, in summary, if you borrowed the second as part of the original purchase money for a a residential one-four owner-occupied property , the bank may not be able to pursue you for the deficiency. However, if you refinanced or borrowed later, there is the possiblity a lender could pursue you.

Best of Luck,
NewportFiji
2 votes Thank Flag Link Thu Apr 24, 2008
Hi Marites,
First, I have a question, Are you behind on your payments? Or has your financial situation changed that would make it more difficult to make the payments on time?
If you can answer no to these questions, then you will need to understand, the market promises nothing, your future however holds many opportunities. The purchase of your home was and is the best long term investment you could have made, for your future. The pricing market has it's ups and downs, and a home purchased is an investment, that will go up in value and at times will go down. Do not get discouraged by the negative market pricing, the longer you stay in your home, the better chance of a greater return.
The real estate market has cylces, Seller's markets and Buyer's markets, we are in a Buyer's market now, which means the prices of homes have declined. If you can hold on to your investment til the cycle changes back to a Seller's market. I hope this was helpful to you.
Best Wishes,
Ann Medford
2 votes Thank Flag Link Thu Apr 24, 2008
If you can afford to stay in your home, don't think about what the home is worth. I've sold during the last cycle when we had foreclosures and short pays. If people had held onto their properties, they would have so much equity in their home and it was just 8 - 10 years ago. The market will change. It always does. If you can't afford it, that is a different story. You should first try to work out a different payment structure with your lenders...especially your 2nd since they will be the first to be wiped out in the event of a foreclosure. I'm not sure about your tax consequences if you walk away (we can't give tax/financial advice).
1 vote Thank Flag Link Tue May 20, 2008
Marites,

I feel bad for your situation, but ...

If you give up and "just" walk away, do you have any idea what the ramifications will be credit wise...?

You might want to read on:

Sunday, April 13, 2008

(04-13) 04:00 PDT Washington -- The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain.

On March 31, Fannie Mae sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years.

Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.

Freddie Mac, Fannie's rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers "to preserve our deficiency rights" where permitted under state law.

The walkaway trend is particularly noteworthy in former housing boom markets - including California, Florida and Nevada - where many homeowners find themselves upside down on their loans, owing tens of thousands more than the current market value of their houses. If they invested little or nothing in down payments, some owners reason, continuing to make payments - even if they can afford to - may be throwing good money after bad.

A number of Web sites have popped up claiming to cut the hassles of bailing out of a mortgage. One company promises that clients "will be able to live in (the) home for up to eight months with no mortgage payments," after paying $895 for a customized plan. The same site says it will provide clients with "legal credit repair" to "improve your FICO scores."

Another Web site claims that "your credit can be repaired and (you will) be able to purchase a house in as few as two years" - after paying a $495 fee. Still another company says walkaways can expect "up to one year living payment free" as the lender goes about filing for foreclosure. That company charges $995 for its how-to-do-it kit.

Fair Isaac Corp. of Minneapolis, developer of the FICO scores used in most mortgage transactions, is unhappy at any suggestion that a foreclosure could be minimized or wiped away in a short period of time. Its scoring model counts foreclosure as a long-standing and severe event, nearly comparable with bankruptcy, with negative consequences for all forms of credit that walkaways might seek to obtain. That includes credit card applications, auto loans, student loans - and even insurance and employment.

FICO spokesman Craig Watts said that the impact of a foreclosure on an individual's score depends heavily on the payment history, length and number of credit trade lines in a consumer's file, but "it is always significant."

Robin Stout Migala, consumer outreach manager for Freddie Mac, said in an interview that "there are so many bad reasons for walking away" from a home loan. Not only are borrowers' credit standings wrecked - forcing them into excessively high interest rates on any credit they can manage to obtain. But they also face other potential problems, including federal income tax liabilities.

Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven. Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid, according to Migala.

Many borrowers facing foreclosure today have endured serious financial crises, said Migala - loss of employment, loss of an income-earning spouse, medical issues, predatory loan terms - that led to their inability to make their mortgage payments.

When they apply for a loan from either Freddie Mac or Fannie Mae, she said, the standard application form asks whether they have ever experienced a foreclosure or handed over their deed in lieu of foreclosure.

If applicants check "yes," the loan is immediately shifted to manual underwriting. Every piece of information is scrutinized by underwriters, who probe for the facts surrounding the loss of the house.

For borrowers who faced genuine financial hardships leading to foreclosure, underwriters are likely to be more sympathetic a few years down the road. But if you walk away, here's the deal: Don't expect to get a new home loan - certainly not one with favorable terms - for five to seven years.

That's no matter what some promoter promised you online."
1 vote Thank Flag Link Thu Apr 24, 2008
There is a new program that can help you to stay at your home and make lower payments for your home.
I understand your situation is not easy, but you have to be creative to stay home.
There are some investors that can help you. Read the article I attached below, maybe it will help.

Good luck.
0 votes Thank Flag Link Sat Sep 29, 2012
Dear Marites,
It's possible Real Estate will regain it's footing and your house may eventually be worth more then you paid for it..in the long term. If you can afford the payments and can build equity in your property, there are advantages to owning and I would recommend you investigate those. You may be able to have an adjustment to your mortgage that lowers your monthly payments.
Walking away will have very negative consequences to your credit so unless there is no other way..stay in your home.
0 votes Thank Flag Link Sat Nov 26, 2011
Hi Marites

The Government is offering programs in 2013 that will reduce your home loan to the value of the house.
However, you cannot be late on Payments. You should check on sites such as

http://Www.HUD.gov

Also go to by blog and check the post on Keep your Home in California. This is a State program.
Not sure what your first loan is?
Good luck.
Perry
Perry
0 votes Thank Flag Link Sat Nov 12, 2011
Very sad how this question, asked and mostly answered in 2008, got responses from real estate agents mostly along the lines of: just hold on, prices will go up, houses are great investments, etc. ad nauseaum. I suspect Marites' home is now worth even less, perhaps 350k or so. Hope you dumped it back in 2008 and didn't listen to the conflict-of-interest-overstuffed agents on this board.
0 votes Thank Flag Link Sat Nov 12, 2011
This question was asked 2.5 years ago - don't you think Marites already got the information she needed?
0 votes Thank Flag Link Thu Oct 14, 2010
Your credit will be hit badly for about 7 years

Inflation is going up soon and if you can afford to stick with it another couple years you will probably find rising housing prices/inflation bring you back into the black as far as valuation

Or you can sell it and suck up the debt

Or walk away - - but you will take a hit.


Talk to your lender. They might be able to work something out these days.
0 votes Thank Flag Link Thu Oct 14, 2010
Mariles,

I will ask you this first: did you buy this home with the intention to live in it, or to make money out of it?

If you answer the initial part then you must keep it, what does makes sense is you have a roof under your head. Home are great investments in the long run, unfortunately you got caught up in the Subprime market, which was not the best solution for buyers like you, since homes lost their values.

Now, if your choose option two, there is no way you can escape the consequences of damaging your credit. You may think walking away is the right thing to do...that's your prerogative! You may ask your lenders if you can negotiate your loan in order for you to retain your home. Look the advise of a professional home retention consultant, before you make any decisions that will cost you more in the end.

Good Luck!
0 votes Thank Flag Link Sat May 24, 2008
I think this will help answer your question;

http://getprequalified.com/article/105088/real_estate_forecl…
Web Reference: http://getprequalified.com
0 votes Thank Flag Link Sat May 24, 2008
Marites,

I think Ann's answer is great! Are you unable to make your payments? Do you have a place to live for free? As long as you continue to make payments you will reap the tax benefits of home ownership & will build equity. Yes, I said build equity!!! The market will come back at some time & you just may well be priced out of it if you walk away & will regret it.

The value of your home really only matters when you need to sell or if you need to use it for a loan.

Best of luck,

Karen Miller
562-756-4144
0 votes Thank Flag Link Thu Apr 24, 2008
This is a bad situation. You will likely be forced to pay the 2nd loan or declare bankruptcy...

I might suggest trying to sell the home. Though I know how tough the market is these days.
0 votes Thank Flag Link Thu Apr 24, 2008
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