I had an occasion to meet with a young couple recently to discuss their real estate situation. To all appearances they are a very lucky couple. They had just closed on a new home, which was a bank-owned property. No down payment was required because they obtained a VA loan. In addition, the sellers credited them with $8,000 toward closing costs as well as turning the property over to them in relatively mint condition. Their new home was priced approximately $100,000 less than it sold for three years ago.
A substantial problem, however, looms threateningly over their financial security. Four years ago, before they achieved the current success in their present employment, they purchased a condominium. It was a one-bedroom, one-bath priced at $300,000. There was no down payment requirement. They obtained a first mortgage for $234,000 and a HELOC (Home Equity Line of Credit) for $65,000 from the same lender. Their first mortgage was an ARM (Adjustable Rate Mortgage) with interest only for five years and an increase in interest after that time. Due to current market conditions, they are unable to sell their condo since its value has decreased by 60%. They inquired about a modification and were told, ” no!”
Since they wanted and needed a larger home, closer to their employment, and the opportunity arose for them to purchase the home they recently closed escrow on, they proceeded with the purchase. Now they have to decide what to do with the “upside down” condo.
These are the circumstances that brought about our meeting. I advertise myself as a Real Estate Broker, a consultant, a problem solver. In this real estate market, that is a distinct challenge. We reviewed the options as I presented them. I thoroughly urged them to check with an attorney and an accountant before proceeding in whichever choice(s) they made.
First, we discussed modification. They had made an attempt, although verbally by telephone and had no record of the conversation. It is my opinion, since they have purchased and moved to a new home, they do not qualify for modification. The rules do not allow for non-occupant owners. Although, I did suggest we send a letter requesting modification in order to document the attempt. The rules may change and it would be wise to have a record of the request.
Second, we covered short sale. A short sale is a pre-foreclosure program essentially. An owner, whose property value has decreased below its financing asks the lender to allow a sale at its’ current value and “forgive” the difference (in other words the bank would take a loss and relieve the borrower from the balance of the financing above the sale price). The difficulty with this approach is two-fold. One: it takes a very long time, sometimes up to a year, to get an answer from lenders, who may or may not approve the plan; and two: there is a tax implication, i.e. IRS may tax the owner on the amount the bank “gave” them by relieving them from the balance of the loan.
Third, we analyzed foreclosure. In California, if a lender forecloses on a Trust Deed by Trustee sale in a purchase money trust deed, the lender cannot obtain a deficiency. The rub here is that there are two loans. The second loan could become a deficiency to haunt them down the road. (My understanding is that many lenders with deficiency eligible loans are selling them to collection agencies for pennies on the dollar and those agencies are unlikely to hold back on collecting.) There is also the credit rating issue; however, almost any solution is going to possibly effect their credit rating. I mentioned the idea of declaring bankruptcy after the foreclosure to eliminate any possibility of deficiency, which I emphasized would require a consult with an attorney. The stigma of bankruptcy stabbed them like a piercing sword.
Finally, we looked at renting the condo. The total debt on the condo is approximately $1800 per month. First and second loans plus homeowner association dues. At best, the current rental market indicates the most a one-bedroom, one-bath condo in this neighborhood can rent for is $1200. They would have to take a $600 per month hit plus management fees and/or the costs and frustrations of the vagaries of having a rental.
From the above, I believe anyone can see the aggravation and frustration suffered by this couple. And you can multiply this situation by the millions of couple is like circumstances. My partner and I are in a similar dilemma. We purchased a condo in 2005 which was the height of the “balloon” market. Because it is very close to the ocean, I felt it would forever hold its value and be a snap to sell, should we decide to sell.
After two years, we decided to move. Having a large equity in the condo, we borrowed against it for a down payment on our new place. We also took an interest-only mortgage at a higher interest on the new house with the expectation that upon the sale of the condo we would have additional money to reduce our loan on the new place and refinance it at a reasonable rate with a 30-year fixed mortgage. “The best plans of mice and men…” as the saying goes. We are ineligible for modification (although the terms on the condo are not all that bad). Short sale and foreclosure would be anathema for us since we need to refinance our new home.
Everything the government is doing seems to help only those who are poorer and or mismanaged their finances. There is no assistance for hardworking, honest people who have been caught up in this economic crisis entirely beyond their control nor had they the ability to stave off the consequences. Of course there has been plenty of “bail out” for the banks and lenders who have been devoid of transferring any benefit to consumers.
We adjourned our meeting. I left them with the options and some material that would be useful if they decided to rent out their unit. I also suggested that I could “pitch” their property in my real estate exchange meetings. Sometimes, a swap of problems provide solution. Exchangers are great at brainstorming and problem solving; it may well be worth the try.
On a final note, as I was writing this, it occurred to me that they might want to stay in their “old” condo and rent out the “new” until they obtained modification. As owner-occupants they can qualify for modification, although there are other considerations that may render them ineligible. I will ask them to explore that possibility.