More homeowner woes in Southern California...

Question

I own a home that was refinanced a few years ago. I also have a second mortgage. Both are 30 year fixed mortgages. The second was taken out to buy out my ex as part of a divorce settlement.

My company just layed off several people. I make a very good living, but I am very concerned that another round of layoffs is coming, and that I might be a casualty. In fact, my industry in general is hurting right now, and getting a job with similar compensation would be difficult.

As for the note on the property, I owe $530K (includes a second mortgage of $135K), on a house that is probably worth $425K (at best) right now.

If I do lose my job and can't get another, (which pays enough to allow me to afford the mortgages), in a reasonable period of time, does it make sense to drain my savings for a house that is losing value? Then what? I will be broke and jobless (or under-employed). It seems that I would lose the house anyway...but walk away with nothing in the bank if I try to hold on to the bitter end.

I don't have the same issues as sub-prime borrowers, but I am being impacted by the bad economy AND all the foreclosures driving home values into the toilet.

Do I want to invest $48K per year (one year's worth of payments) for a house that is losing value? If it took 5 years for housing to recover, that's nearly a quarter of a million dollars spent...for what? To just "break even"? Is that a smart plan? Tax advantages will be moot if I am not working.

Is it worse to dump every last penny into a house that is depreciating? Is that smarter (and more economical) than getting killed on my credit?

In summary, if I do lose my job, my thought is to immediately bail out of the house (unless my creditors are willing to go the extra mile to help me). I see no value in taking the moral ‘high road’ as I lose everything.

I do believe in living up to my obligations. But I also believe that common sense has its place too.

I would love some advice.

Answer 1

You are lucky to have a fixed-rate loan and a decent job. Since you aren't selling now the loss is on paper only.

I'd say to look for some roommates now, before the squeeze sets in. Just choose carefully.

And tighten-up your resume and keep your ears open for a more stable job.

Answer 2

Let's see, every time you signed loan papers, you agreed that the house was worth the money and that you would pay the money back.  You considered yourself a good risk.  So did the bank.  You figured if the worst came to worst, you'd sell the house.

Now you want the bank to absorb the loss the because you guessed wrong on the value of the house.  YOUR asset went down in the value.  The house belonged to you, not the bank.

And you want me to pat you on the shoulder and say it's okay, it's not your fault, you are a good person.

Fortunately for you, if you do walk away, the 2nd mortgage will only affect you on your state taxes.  Any money you fail to pay back to the bank *is* income at the state level.  It would be too on the federal level, but congress gave you a huge bone.  

(I paid cash for my house.  When it goes down in value, I'm the one that loses.  I can't take a loss on my 1040.  You on the other hand, can walk away and exclude the cancellation of debt income on the 1040 under the Debt Forgiveness Act.  How is that fair to me?)

Answer 3

You might see writing on the wall,, What i see is an opportunity to get ahead by doing extra work to help your company survive. Should you give up your house and credit, you could also be hurting the next job application, as many companies that pay what you make do credit checks...  

Save every penny you can.. and show your willingness to work for the good of the company. Also be sure to network with others in your profession. Never know when it might come in handy to know someone at another company that might need your expertise.

Answer 4

If you lose your job, this counts as a hardship for a short sale, which may be an attractive option for you.

A short sale is where you come to an agreement with the bank for them to take whatever you can get for the house to pay off the debts. This is a better option than a foreclosure for a couple of reasons: First, it's less of a negative hit on your credit report. It shows that you took some responsibility to work out a solution rather than just walking away (foreclosure). Second, a bank can go after other assets with a foreclosure to get their money back. This may include hiring a collections agency, who will hound and pester you forever. With a short sale, the debt is just forgiven.

One requirement for a short sale is to submit a hardship package to the bank (the loss of a job is one such hardship - and "I owe more on the house than it's worth" is not a hardship). The bank then instructs you to sell the house for whatever you can get for it. The listing will include a disclaimer saying something like "Offers accepted pending lender approval." When an offer comes in, the bank will then negotiate with all other lienholders (other mortgage holders on the property) to deetermine who gets how much if the property sells for that offered price.

If all lienholders can come to agreement, the bank instructs you to accept the offer. The transaction then proceeds like any other real estate sale. The only difference is that the bank may instruct you to pay all of your closing costs (like property taxes owed, real estate commissions, etc.). If the lienholders can't come to an agreement, then the bank will instruct you to reject the offer and list the property for a higher price.

Some banks require you to go into default before agreeing to a short sale. In this case, you stop making payments and they issue a notice of default that stipulates that the property will go up for foreclosure auction about 3-1/2 months after the notice of default is issued. This basically forces you to go through with the short sale in an expeditious manner, with the threat of foreclosure looming over your head. And, I read in the paper this weekend that only 20% of short sales go through. The rest become foreclosures.