My second is a intrest only equity loan. What happens if I default?

Asked by Mike, Michigan Sat Jan 31, 2009

I was laid off in Late October 08. Running out of cash, and ideas. Looks like I will have to default soon.
My main concern is the second interest only equity line. I'm so upside down the first it prob. will not be covered after auction. I'm in Michigan. I owe 125,000 on the first, 40,000 on the second. And have credit card bills....ugh

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David Stafford’s answer
David Staffo…, Agent, Albuquerque, NM
Sat Jan 31, 2009
Mike, Dennis just provided a great answer with lots of good information. I can tell you from my experience with short sales that just because the 1st is so far upside down that there is no value for the 2nd does not mean a short sale can't work. The 2nd will realize this and usually be willing to release the lien as fully satisfied (no deficiency judgment following you) for as little as $1000 in your case - need to make sure they agree to the full release before signing anything! The 1st will usually be willing to pay the 2nd $1000 if the offer still nets them more than if they foreclosed, as Dennis pointed out. This number is usually about 85% of CURRENT MARKET VALUE, which they will determine by Broker Price Opinion or appraisal - make sure to meet these people at your house and explain that you are trying to avoid foreclosure and point out all the problems with the house - explain that the value needs to be accurate! You might also offer them some coffee - my point is that social engineering can help make sure they do not overvalue your house. In order to do all this, almost all lenders will require that you list the house with a licensed agent, so take the info Dennis and I have provided and call a few agents and ask them about a short sale, if it sounds like they are explaining the things we have explained, then you might have found one who can help you. You will have to price aggressively. Best of luck to you Mike!
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Dennis Smith, Agent, Carlsbad, CA
Sat Jan 31, 2009

In general, there are several options, depending on your financial situation.
Your best are probably A, 2 and 5

A - Call the lender(s) and explain the situation. Ask for a workout.
1 - Sell at a loss and come out of pocket with the difference.
2 - Sell as a Short Sale and the lenders take the loss (You must have a verifiable hardship).
3 - Keep the home till it appreciates to the loan balance.
4 - Rent it out.
5 - Get a loan modification from Hope Now - HOPE NOW is an alliance between HUD approved counseling agents, servicers, investors and other mortgage market participants that provides free foreclosure prevention assistance. See the tab called "Helpful Resources".
6 - Let the home go into Foreclosure.
7 - Deed in Lieu of Foreclosure. You quit claim the prpperty back to the bank. They do not have to accept.
8 - Bankruptcy (If the house has no equity, it will be removed from the BK).

First a definition:
A "Short Sale" means that the loans and obligations are more than the property is worth so the seller is "short" of enough funds to pay off the existing loans, taxes, closing costs and other obligations against the property. The seller requests the bank take an amount which is short of the amount owed instead of foreclosing on the property. The bank will consider a short sale if the seller has a verifiable financial hardship, and, the bank will get more for the property than it will in a foreclosure.

A Short Sale can occur with or without the bank filing for foreclosure. Usually it is a race to see of the property can be sold before the foreclosure. Foreclosure in California takes 90 plus 21 days from the date the bank filed. This can be proceeded by 2 to 12 months of the seller not making payments.

The seller does not get any money from the sale, however, the seller usually is not asked to pay any of the back obligations or transaction costs. The bank pays all these costs and eats the loss. It is a big hit on your credit report but not as bad as foreclosure.

There are 3 approvals required on a short sale.
1 - The Sellers acceptance of the buyers offer. That is easy since the seller does not have to pay anything.
2 - Banks acceptance of the price & terms. Banks usually want at or near fair market value.
3 - The banks acceptance of the sellers verifiable hardship = no deal.

A Short Sale is usually anything but "short".
Most banks will not agree to a short sale in writing until they have a formal offer. Before a short sale is APPROVED, the sellers have to submit an application, hardship letter, financial statements, tax returns, pay stubs, the purchase agreement from the buyer, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender.

Either lender can start the foreclosure action.

If your equity loan is not a "purchase money" loan, they will be able to come after you for the difference but rarely do, except in cases of fraud.
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