BK7 closed, now considering strategic default of non-raffirmed mortgage. Help!

[murphsmom]

Hello all, need some advice, please.

My husbands Bk7 was just closed. We never signed reaffirmation paperwork for the mortgage, the bank never sent it and we never asked. We are currently in the HAMP modification, which became accepted and offical as of May 1st.

Nowhere in the mod agreement does it say we need to remain in the home for a certain number of years.

We need to downsize to a smaller home. Even with the mod the payments are tight for us. My good friend is selling her small home in Sept 2012, in an area perfect for us, for a price that would work for us. The mortgage would be in my name only, I'm not currently on our title/deed or mortgage.

The way I see it, we have two options for our current home. Continue making the modified payments, reducing the principle owed somewhat, and HOPE that we can sell in June and turn a profit, which we will need to use as a downpayment on the smaller home - OR - strategically default on the current mortgage, bank the mortgage payments for the next 11 months, and for SURE have that money toward the smaller home. I'm virtually certain that any profit made from selling the current home would be much less than banking the current mortgage payment. Plus, we'd have to put some money into repairs, etc... in order for it to sell, which would just be a loss.

Since my husband didn't reaffirm the current modified mortgage, he wouldn't be sued for it, correct? Also, the bank would have to follow all state laws regarding foreclosure, and I'm pretty sure it would take at least a year to foreclose. We live in NY State.

Of course, living in a home that we are not paying for makes me ill, I will be stressed and anxious, but ever since going through the BK, I've learned that we need to make sound financial decisions for ourselves, instead of reacting out of guilt/shame.

Any thoughts or advice would be greatly appreciated.

[justbroke]

This wouldn't be a strategic default, since you are not obligated to pay the terms in the Promissory Note. You would just be surrendering the home post-discharge. Your strategy was and is that you didn't reaffirm, which put you in a better position to deal with the property post-discharge. You are correct that the Modification doesn't read that you must stay or have any language renewing or otherwise reaffirming the debt. You may leave when you like.

However, you can be sued for foreclosure.

This simply means that the creditor can seek an order of the court to allow a forced sale of the property under a Power of Sale clause in a Deed of Trust or through a judicial foreclosure forcing an "Sheriff's sale" for a Mortgage. You are also correct that the bank would need to follow your State's non-bankruptcy laws regarding foreclosure. That includes notification of a default, acceleration, lawsuit and judgment and sale. This can take some time (I don't know what the delays are like in NY, but in Florida, it's about 600 days now). You could also employ counsel to slow down the process, once it gets into the actual litigation portion of the foreclosure process.

Please don't "buy" the profit by spending your dollars today. It is risky to assume that the property will appreciate and the reduction in the principle will allow you to sell at a profit. I see that you have thought this through so you understand the principle of the "cost" of money.

Be aware that if you stop paying your mortgage, there is no bank that is going to loan you money for another home until the earlier of 2-3 years after foreclosure or a short sale. If I understand correctly, you will try to use your unblemished credit and income to qualify for the new (smaller) home. That is another factor in your decision and I think you have been thinking this through.

It's a tough place and the decision is really in your hands. Personally, I'd default on the current home and save the money. Perhaps short-sell it later. So long as no mortgage shows up on your (individual) credit report and you have sufficient credit and income, you could purchase that other home. Please know, and I'm relatively sure that you did, that financing is a little more difficult these days. With your savings for a down payment (10%? 20%?) that will certainly make the process go more smoothly.

I think that you're leaning to stay and default rather than stay, pay and fix. It would appear, given all other data, that may be the better option. There are considerations though.

[AngelinaCatHub]

Actually you have a bright idea. The bank probably wrote you off anyway as a potential loss. Make sure you do actually save that money and not get tempted to squander it. Check your HAMP stuff that it was not an implied reaffirm. I'm not familiar with HAMP. Your debt will be wiped off. Good fortune to you. 'Hub

[murphsmom]

Another possible option would be to rent our current home (we could actually make about $500 per month), I get the mortgage on the new home with affordable payments. Possibly after renting it for a few years, the market would bounce back and we could actually sell for a profit.

This actually may be the easiest way.

[justbroke]

Another possible option would be to rent our current home (we could actually make about $500 per month), I get the mortgage on the new home with affordable payments. Possibly after renting it for a few years, the market would bounce back and we could actually sell for a profit.

I like that strategy! Even without a profit, you could just default on the mortgage. Please be aware that being a landlord is a tough business; especially for single property landlords like us. Make sure you factor for the place being empty 1 month a year and the cost for "redecorating" (bringing it to "rent" ready).

Even with that... I love your idea.

[murphsmom]

Sorry one more thought on renting the house out. If we want to rent it, we will need to continue to make the mortgage payments until then in order to keep the house, and we actually need that money in order to save for the down payment on the smaller house.

It's possible that we could find a way to get the down payment, possibly sellers concessions, tax return, save every penny, etc....

I do like the idea of making money off the rental, which could be applied toward our new lower mortgage, now just need to find a way to pay downpayment and closing costs if we do that. Not sure it's feasible.

[murphsmom]

Actually you have a bright idea. The bank probably wrote you off anyway as a potential loss. Make sure you do actually save that money and not get tempted to squander it. Check your HAMP stuff that it was not an implied reaffirm. I'm not familiar with HAMP. Your debt will be wiped off. Good fortune to you. 'Hub

I read it carefully, and although I'm not an attorney, nowhere did I see that it would be an implied reaffirm. I don't see how it could, since the MOD was formalized before we filed bk and long before discharge/closing.

I did however read another thread that stated that some banks can say that it's an implied reaffirm IF you continue to make the payments after BK discharge. That scares me a little.

[justbroke]

Sorry one more thought on renting the house out. If we want to rent it, we will need to continue to make the mortgage payments until then in order to keep the house, and we actually need that money in order to save for the down payment on the smaller house.

I thought by renting, you meant that you could make "$500" over the mortgage payment. If the mortgage payment is more than $500, then you have a problem with renting for $500.

It's possible that we could find a way to get the down payment, possibly sellers concessions, tax return, save every penny, etc....

Seller concessions are good towards certain things at closing. Make sure that the seller specifies what the concession is. For example, I was to get $5,000 at closing for my home. The underwriter didn't like it and stated that it must specify that it's towards a specific non-recurring charge. So, my sales contract was modified to read $5,000 for "interior decoration and landscaping".

I do like the idea of making money off the rental, which could be applied toward our new lower mortgage, now just need to find a way to pay downpayment and closing costs if we do that. Not sure it's feasible.

Yes, not feasible if the rent is not covering the mortgage and costs (tax, insurance, maintenance).

[murphsmom]

The rent would cover the mortgage, PLUS an additional $500 profit.

The only problem with that is coming up with all the closing costs and down payment on the new house, if we have to continue to make the mortgage payment on the current house until we rent it in September. I was considering banking our current mortgage payment, letting it foreclose, and using that $ for the downpayment on new house.

Need to talk to a good mortgage person, I know several, and get an EXACT idea of how much we'd need to close on the new house.

[justbroke]

Okay, I'm a little slow today. The $500 is the amount left from the rental receipts after servicing the debt (paying the mortgage and bills). So you could only accumulate $500/month. You are certainly headed down the right path. You will need to understand just what the down payment would be for you. If it's an FHA loan, that could be as little as 3% down, and I think the seller can pay this!

Certainly find a broker that you trust. Be careful of points that you may pay at closing for the broker/origination fees, unless you can get the seller to pay these. Most brokers know the creative ways of financing the deal. Even when I sold one of my properties, it was "partly" creative. The person needed to pay off some bills to satisfy the underwriting, but it had to come from the "seller". So I had to change the 5% commission split to be something like 2.5% for my agent and 1.5% for the buyer's agent so that the money still came from "me". You have to love that creativity! No money out of my pocket since -- technically -- I still paid 5% to the buyer and seller. I didn't care where it went, but the underwriter did.

[murphsmom]

I think we will stop paying the mortgage, it just does not make good financial sense to keep paying on a house that's a bit underwater, and one we have no intention of staying in for much longer.

Now, I just have to hope that the foreclosure process takes longer than 11 months. If not, we'll be homeless until September.

[justbroke]

Well, most of the guides seem to suggest the New York enjoys 400+ days for foreclosure from the time of the first missed payment. You could always file an answer to any lis pendens (lawsuit) to slow it down -- preferably with an attorney (in my opinion). Most Florida attorneys are charging $1,000-$1,500 to "defend" a foreclosure suit. It will generally extend the foreclosure timeline by 4-6 months or more. I don't know what such cost would be in New York.