Ch 7 Discharged...now, the mortgage game (need advice)

[btbeme]

We received our Ch 7 discharge in AZ last week. Now, I need advice on what to do mortgage-wise.

The details: we did not reaffirm either mortgage, but would prefer to stay in the house. A model-match home in our neighborhood just sold for $390k; we have a $557k first and an $82k HELOC second. We have not paid on the second since July (when we filed Ch 7) and are currently 60 days behind on the first.

Obviously, we would like to negotiate a loan mod for the first; but we are prepared to walk away if we can't get a reasonable deal. Since we are personally off the hook for the loans, I don't want to go "back on the hook" unless it really makes sense - I'd rather live rent-free and play the short sale game as long as we can, if it comes to that.

Questions - do we negotiate with the 2nd to release the lien? If so, what do we negotiate for (deed in lieu, cash for lien release, what)? Do we start the negotiations on the first for a loan mod before the second is somehow resolved?

[Charlie777]

I'm thinking out loud here...

You need to be careful about renegotiating since you didn't reaffirm, and cannot reaffirm now since you've been discharged.

Right now you owe nothing on either note, and as you state, the two liens exist. The way things will work is that eventually the holder of the first will foreclose, that will extinguish the second lien. For the second lien holder to foreclose, they have to buy out the first lien holder. The only way you're going to be able to deal is to work out a foreclosure by the first lien holder with a sale to you. But how are you going to pay for it? You can't get an FHA mortgage until the later of two years after your discharge or three years after the foreclosure (that hasn't even started) is "completed". Conventional loan waiting periods are even longer. I doubt the first lender is going to take a haircut on principal and turn around and finance you, even if the second is extinguished, but your market is more distressed than my area and anything is possible.

[HHM]

What do you really need to accomplish with the modifications?

Based on the numbers you stated, there is NO REASON to stay in the house. Banks rarely, if ever, do principal reduction on the 1st mortgage. Modifications really only go to adjusting your payment and interest rate. Your home is 30% upside down on the 1st mortgage, just bail, there is nothing worth saving. No modification will get you back to even. You will be FAR BETTER OFF letting it go and rebuying in 3 years. Home prices in AZ are not going anywhere up.

If you decide to negotiate with the 2nd, what you are negotiating for is a cash for release of lien. You would start your offer at 5% of the balance owed, but go no higher than 10%. If you can get rid of 2nd, that can make the loan mod process on the 1st go more smoothly, but again, as I said above, not sure you really accomplish anything with a loan mod on the 1st.

[LimpDisc]

Now, I need advice on what to do mortgage-wise.

With your home being $250k underwater I see no option other than to leave.

We are only $25k underwater and I thought our decision was simple. I have no doubt that we will be MUCH better off in 2-3 years when the housing market stablizes.

[btbeme]

We have found a terrific rental opportunity for about $1000 less a month than we pay on mortgage, insurance, and HOA dues. I have also had contact with the top circle of the bank that holds my 1st - they say they will have an answer for me by Tuesday of next week, and they said that a principal reduction is a consideration.

From what I have read, the few reductions that have come through are on the type of loan I have (an option ARM) and typically come immediately after a Ch 7 discharge (like we just had). However, it appears that the best that they do is 115% of the home's value, which is still an untenable position for us.

If we could get the loan amount cut and the interest rate secured for about the same price as a rental, we would stay. If not, we will move. Period. that has always been the strategy.

The bigger question is the 2nd - do I need to nuke that before the 1st mod happens (if it does)?

[biotechsolution]

to nuke the second you'll have to offer a buy out.