Mortgages Discharged but house underwater

[FreshStart2009]

Folks,
I hope I can get as many inputs from you as possible. Here is our situation.
We filed for chapter 7 and, thank God, we got discharged of all our debts, including 1st and 2nd mortgages on our home.

Home is worth 200K
1st mortgage: 295K (payOption ARM, current rate 2.75%)
2nd mortgage: 30K (current rate 5.25%)

As you can see we are underwater by 125K. Our monthly payment is ~1700 including tax and insurance. We can rent a house of comparable size for that amount of money.

What shall we do? I don't think Bank of America will negotiate with a discharged mortgage (to possibly reduce principal loan balance).

Options we're considering are:
1. Walk away and rent in a better school district area
2. Keep paying down mortgage for the next ~2 years, by which time we should be able to qualify to buy a home in a better area. Then we can rent it out (small ~200/month negative cash flow). The goal being it will be paid off using rental income for the remainder of the mortgage life (~22 yrs).

Are we missing something or overlooking any other possible option? What would you do??

Thanks for your help!

FreshStart2009

[keepinitreal]

That's great that you have options now, since you didn't re-affirm your 2 mortgages.

Your first is an adjustable rate mortgage, so who knows what will happen with that in the future.

Remember, if you do move and rent your house out, you'll have more expenses than just your mortgage, unless you have the perfect tenants that rent the second you move out, are never late with their rent, and your house never needs repaired or maintained.

If you want to move, take your time and carefully pick your next home. If you decide not to be landlords, stop paying your mortgage and save up until the title is no longer in your name, so you'll have money to move, first and last month's rent, rental deposit, and possibly deposits for utilities.

Just don't rush into anything. Good luck!

[HakunaMatata]

Folks,
I hope I can get as many inputs from you as possible. Here is our situation.
We filed for chapter 7 and, thank God, we got discharged of all our debts, including 1st and 2nd mortgages on our home.

Home is worth 200K
1st mortgage: 295K (payOption ARM, current rate 2.75%)
2nd mortgage: 30K (current rate 5.25%)

As you can see we are underwater by 125K. Our monthly payment is ~1700 including tax and insurance. We can rent a house of comparable size for that amount of money.

What shall we do? I don't think Bank of America will negotiate with a discharged mortgage (to possibly reduce principal loan balance).

Options we're considering are:
1. Walk away and rent in a better school district area
2. Keep paying down mortgage for the next ~2 years, by which time we should be able to qualify to buy a home in a better area. Then we can rent it out (small ~200/month negative cash flow). The goal being it will be paid off using rental income for the remainder of the mortgage life (~22 yrs).

Are we missing something or overlooking any other possible option? What would you do??

Thanks for your help!

FreshStart2009

Principle reductions are extremely rare (with or without discharged personal liability).

If you're planning on renting your existing property, please review FHA underwriting standards. While you don't appear to foster the "buy and bail" mindset, lending practices have changed to disallow this. If you intend to purchase a new home and convert your existing home to a rental, you will likely need to have sufficient income to support both mortgages.

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-25ml.doc

I wouldn't convert a home to a rental with negative cash flow (rent and repairs/upkeep) unless I was confident I was building equity and had a steady income. BK offered me the opportunity to cut my losses and rebound financially. Employment and the housing market are too volatile for me to take risks.

It appears your goal is to move into a new area. If I were you, I'd continue to look for rental properties in this area that are less than your current mortgage. If you're able to secure one, I'd let the primary residence foreclose, ride out the housing market storm, and hopefully buy when the dust has settled.

[FreshStart2009]

That's great that you have options now, since you didn't re-affirm your 2 mortgages.

Your first is an adjustable rate mortgage, so who knows what will happen with that in the future.

Remember, if you do move and rent your house out, you'll have more expenses than just your mortgage, unless you have the perfect tenants that rent the second you move out, are never late with their rent, and your house never needs repaired or maintained.

If you want to move, take your time and carefully pick your next home. If you decide not to be landlords, stop paying your mortgage and save up until the title is no longer in your name, so you'll have money to move, first and last month's rent, rental deposit, and possibly deposits for utilities.

Just don't rush into anything. Good luck!

Yes, rental property comes with its own headaches. By the way, we also let go a condo rental we had as part of the Chapter 7 BK. We bought that one for $250K and we couldn't short sell it for $100K. The bank foreclosed on it.
It was big negative cash flow (about $1000/mo negative cashflow!).

Our current home is good to be an entry level rental. 3BR/2BA in a nice area. The only thing I don't like about our area is the school district. It is not the best one.

Thanks for your input!

[FreshStart2009]

Principle reductions are extremely rare (with or without discharged personal liability).

If you're planning on renting your existing property, please review FHA underwriting standards. While you don't appear to foster the "buy and bail" mindset, lending practices have changed to disallow this. If you intend to purchase a new home and convert your existing home to a rental, you will likely need to have sufficient income to support both mortgages.

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-25ml.doc

I wouldn't convert a home to a rental with negative cash flow (rent and repairs/upkeep) unless I was confident I was building equity and had a steady income. BK offered me the opportunity to cut my losses and rebound financially. Employment and the housing market are too volatile for me to take risks.

It appears your goal is to move into a new area. If I were you, I'd continue to look for rental properties in this area that are less than your current mortgage. If you're able to secure one, I'd let the primary residence foreclose, ride out the housing market storm, and hopefully buy when the dust has settled.

The reason I don't want to let the house go to foreclosure is for 2 reasons:
1. The home price came down from $400K at the peak in 2005 down to the current $200K. Going forward (next 20 years), it's likely that the home prices will rebound at least to match expected inflation.

2. As long as the rental income covers the mortgage (more or less) I think it is prudent to keep the house. At the end of the mortgage ammortization, it will be pure income less maintenance cost. The house is relatively new (only 5 yrs old) and bread-and-butter rental (3BR/2BA).

Thanks for your suggestions!

[seatbelt]

The reason I don't want to let the house go to foreclosure is for 2 reasons:
1. The home price came down from $400K at the peak in 2005 down to the current $200K. Going forward (next 20 years), it's likely that the home prices will rebound at least to match expected inflation.

2. As long as the rental income covers the mortgage (more or less) I think it is prudent to keep the house. At the end of the mortgage ammortization, it will be pure income less maintenance cost. The house is relatively new (only 5 yrs old) and bread-and-butter rental (3BR/2BA).

Thanks for your suggestions!

Hi there,

Have you considered that you'll be paying non-homestead taxes as well as once the economy rebounds how that will affect your ARM? With it being that much underwater, you won't be able to get a fixed rate for quite some time without some serious cash down, right? Just two thoughts we've had....

[HHM]

The reason I don't want to let the house go to foreclosure is for 2 reasons:
1. The home price came down from $400K at the peak in 2005 down to the current $200K. Going forward (next 20 years), it's likely that the home prices will rebound at least to match expected inflation.

2. As long as the rental income covers the mortgage (more or less) I think it is prudent to keep the house. At the end of the mortgage ammortization, it will be pure income less maintenance cost. The house is relatively new (only 5 yrs old) and bread-and-butter rental (3BR/2BA).

Thanks for your suggestions!

That is still a VERY Irrational position. Consider this...you can dump that home, rebuy the same home in 3 years at probably the same price as today (home prices have reset, you need to lose that stock market mentality that home prices are going to go back up in any meaningful time; there is no underlying economic force to bring prices back, inflation is nil, unemployment is still 10%, and none of that is going to change for several years) and be back to even in 3 years instead of 20.

Dump it, let me be blunt, any other choice is just stupid, wishful, thinking.

You can probably settle the 2nd mortgage, but you WILL NOT get any movement on the first.

[WC Nurse]

Why don't you apply for a mortgage modification? Our Ch. 7 was discharged in July 2009. We did not reaffirm our 1st or 2nd mortgages with Chase. Our home is worth about 270k and our mortgages combined totalled about 390k (l350k on the first and 40k on the 2nd), so we were also underwater. Shortly after our BK was discharged, we applied for a HAMP loan modification and made our first trial payment in October. It's taken awhile but we just received our permanent modification last week. Prior to the modification, our payments on the 1st were $2587/mo. They are now $1972/mo, quite a difference. We are now negotiating a settlement on our 2nd (for approximately 15k) and will hopefully have that completed within the next month.

Having the mortgages already discharged in BK and being so much underwater put us in the ideal situation to quality for the modification and to negotiate the 2nd. I made it very clear to them that since our mortgages are discharged, I can walk away at any time with no consequences but would like to stay in the home if they are willing to work with us. I am very happy with the terms of the modification and am glad we get to stay in our home with an affordable payment. You might want to look into this also....

[FreshStart2009]

That is still a VERY Irrational position. Consider this...you can dump that home, rebuy the same home in 3 years at probably the same price as today (home prices have reset, you need to lose that stock market mentality that home prices are going to go back up in any meaningful time; there is no underlying economic force to bring prices back, inflation is nil, unemployment is still 10%, and none of that is going to change for several years) and be back to even in 3 years instead of 20.

Dump it, let me be blunt, any other choice is just stupid, wishful, thinking.

You can probably settle the 2nd mortgage, but you WILL NOT get any movement on the first.

HHM,

My point is that if the house will be self-sustaining (i.e. rent covers mortgage payment), isn't it better to keep it forever and let the mortgage ammortize over time? I'm not assuming any appreciation of the house (although I believe it is reasonable to expect appreciation equal to inflation in the long run). At the end, I will have a paid-for house that generates monthly income :-) That's many years away though Just thinking out loud ...

THANKS for your input!

[FreshStart2009]

Why don't you apply for a mortgage modification? Our Ch. 7 was discharged in July 2009. We did not reaffirm our 1st or 2nd mortgages with Chase. Our home is worth about 270k and our mortgages combined totalled about 390k (l350k on the first and 40k on the 2nd), so we were also underwater. Shortly after our BK was discharged, we applied for a HAMP loan modification and made our first trial payment in October. It's taken awhile but we just received our permanent modification last week. Prior to the modification, our payments on the 1st were $2587/mo. They are now $1972/mo, quite a difference. We are now negotiating a settlement on our 2nd (for approximately 15k) and will hopefully have that completed within the next month.

Having the mortgages already discharged in BK and being so much underwater put us in the ideal situation to quality for the modification and to negotiate the 2nd. I made it very clear to them that since our mortgages are discharged, I can walk away at any time with no consequences but would like to stay in the home if they are willing to work with us. I am very happy with the terms of the modification and am glad we get to stay in our home with an affordable payment. You might want to look into this also....

WC Nurse,

Thanks for your input! Our situation is very similar to yours. Our lender is BofA (Countrywide) and they just announced today that they will give priority to principal reduction for their home retention / loan modification programs.

I was under the impression that since our 1st mortgage and 2nd mortgage (HELOC) were both included in BK and discharged, the bank will not modify the 1st mtg. From your story, however, that seems not to be the case.

On BofA's webpage, they say they'll modify the loan if your mtg payment is more than 31% of gross monthly income. In my case it is not (at least due to the current very low interest rate. We have option ARM) I'm not sure if that will be a problem . . .

THANKS AGAIN!

[jmanford]

Why don't you apply for a mortgage modification? Our Ch. 7 was discharged in July 2009. We did not reaffirm our 1st or 2nd mortgages with Chase. Our home is worth about 270k and our mortgages combined totalled about 390k (l350k on the first and 40k on the 2nd), so we were also underwater. Shortly after our BK was discharged, we applied for a HAMP loan modification and made our first trial payment in October. It's taken awhile but we just received our permanent modification last week. Prior to the modification, our payments on the 1st were $2587/mo. They are now $1972/mo, quite a difference. We are now negotiating a settlement on our 2nd (for approximately 15k) and will hopefully have that completed within the next month.

Having the mortgages already discharged in BK and being so much underwater put us in the ideal situation to quality for the modification and to negotiate the 2nd. I made it very clear to them that since our mortgages are discharged, I can walk away at any time with no consequences but would like to stay in the home if they are willing to work with us. I am very happy with the terms of the modification and am glad we get to stay in our home with an affordable payment. You might want to look into this also....

Did they forgive any of the principle on your first mortgage?

[daglo]

Did they forgive any of the principle on your first mortgage?

What does that mean when they discharge a mortgage? I am new to this, and I thought if you didn't reaffirm, you lost the house.

[Brazzy]

I would really look into that hybrid option arm. A lot of the time the percentage rate they show you is not your real interest rate. It is simply the rate they use to calculate the minimum monthly payment. I spent a lot of time selling hybrid option arms for a large creditor. Their minimum payment was based on half of the actual rate. So for your situation the arm rate was actually 5.5% but the minimum monthly payment was calculated at a fully amortized rate of 2.75%. They had the option of paying the payment at the 2.75%, interest only at the 5.5% or the fully amortized 5.5%. Regardless of what they paid on it accrued interest at 5.5%. It was an easy sell because everything the customer saw simply said the rate that was used to calculate the minimum pmt (2.75%) and they thought it was a steal.

Odds are your more likely to get a loan mod rather than a principal reduction. That really wouldnt lower your monthy pmt all that much. However it would help you actually pay down the principal rather than be stuck in the neg am loan.

If you dont reaffirm you dont necessarily lose the house. Banks dont want your house. If you stay current on the pmts they will pretty much leave you alone. Credit wise you dont any credit for making the pmts as on your credit it will show it was discharged in BK.

[js1980]

Folks,
I hope I can get as many inputs from you as possible. Here is our situation.
We filed for chapter 7 and, thank God, we got discharged of all our debts, including 1st and 2nd mortgages on our home.

Home is worth 200K
1st mortgage: 295K (payOption ARM, current rate 2.75%)
2nd mortgage: 30K (current rate 5.25%)

As you can see we are underwater by 125K. Our monthly payment is ~1700 including tax and insurance. We can rent a house of comparable size for that amount of money.

What shall we do? I don't think Bank of America will negotiate with a discharged mortgage (to possibly reduce principal loan balance).

Options we're considering are:
1. Walk away and rent in a better school district area
2. Keep paying down mortgage for the next ~2 years, by which time we should be able to qualify to buy a home in a better area. Then we can rent it out (small ~200/month negative cash flow). The goal being it will be paid off using rental income for the remainder of the mortgage life (~22 yrs).

Are we missing something or overlooking any other possible option? What would you do??

Thanks for your help!

FreshStart2009

Why not stop paying and live in the house until foreclosure is done in you're evicted? In my area (Kentucky) it's taking around a year and a half for everything to be over and done with. Even if it's a year, that's 1700x12 = $20,000 in the bank. Being that far underwater, there's no reason to keep paying those mortgages. Also, since the loans were discharged, there's no consequence at all if you stop paying. The lender can't even call you to see what's going on.

[jmanford]

discharge means you no longer owe anything on your mortgages. They can't legally collect from you. Yes, they can foreclose on you if they want. However, if you continue to pay your monthly payments they probably won't.