Seeking input - mod primary, strategic default on HELOC

[onwards]

Assuming half this thread will be dedicated to people telling me how immoral and what a jacka$$ I am, I'd like to ask in advance that everyone please just ignore those posters. It's better than fueling their anger; personally I don't give a damn what anybody thinks, it's my life and my finances.

The current situation is as follows:

We own our primary residence, secured by a primary mortgage and a secondary HELOC.

The house appraises at under $500K right now (probably $470K or so).
The first with GMAC has a balance of $570K, with a 4.1% 5/1ARM set to reset in 2014 following a modification I got myself last March.
The second with USAA is a HELOC, a refinance (within 60 days) of the original 2nd mortgage, with a balance of $125K and 2.3%.
We are therefore overall about $225K underwater.

I filed for Ch7 in August and got discharged in December, so hardship is easily proven. My wife was excluded from the filing. Therefore, I am no longer responsible for the debt on our primary residence, but she still is so.

My goal is to get the balanced owed to something that resembles real-life numbers a bit more.

I've been doing as much research as I can, and have come up with a tentative plan. I'd like to ask for input and feedback, see what I'm missing and where things can be improved.

Plan for the first
-------------------
Call GMAC. They are simply the servicer. Wells Fargo is the national servicer, and I THINK Deutche Bank actually owns the loan. This thing got sold and resold many times so it's hard to track properly, but that's as far as I got.
Ask them... about what? HAMP? I'm actually fuzzy here as I'm not sure what we can qualify for if anything.
Regardless, if they do not play, stop paying the first for 2-3 months, then see what happens. I'm pretty confident we can get a further modification done, hopefully on of those 2%/3%/4%/5% I keep hearing about; we'd love that result even if the overall balance on the first is not adjusted down (we intend to stay in the house at least 10 more years).

Plan for the HELOC second
------------------------------
Stop paying.
This being California, I believe the only recourse USAA has is to go through a judicial foreclosure. However, to do that they would have to pay off GMAC first, which would not make sense since the house is worth significantly less than the balance owed GMAC.
Thus, my bet is that they will harass my wife for 6 months then charge the loan off and sell it to a collections agency, at which point we can negotiate a settlement for 10-20% of the balance.
Funny thing is, I would be happy to negotiate one right now with USAA, but from my experience with these folks last year, they refuse to negotiate regardless of loan status, timing, or market conditions.
I want to get this done before the Mortgage Debt relief Act runs out, so we have a bit of time to still consider this, but at the end of the day, I also do not want to wait too long.

So... thoughts?

[HHM]

I don't know why you think people would say your jack ass or stupid.

As for your plan, this thread outlines the strategy

http://askmethner.com/?p=450

I think defaulting on the first is too risky. You need to run the numbers in advance. Basically, can that mortgage be restructured such that the monthly payment would be 31% or less of your gross monthly income (is the payment already 31% or less of your gross monthly income). If the payment cannot be brought into that realm and a permanent basis, you won't get a mod. If your payment is already 31% or less of your gross monthly payment, from the bank's perspective, there is no need to mod. I don't think you are going to do better than what you already have.

As for settling with the 2nd, that is a good plan. The bank will probably negotiate with you directly. The only catch is, your wife didn't file BK, so you may need to come out of pocket a little more of the settlement then you might have otherwise. Also, keep in mind, the settlement will need to be lump sum cash.

[DeadManCrawling]

I've seen the types of sites that hammer people for taking care of their finances wisely. Folks get crucified for taking care of their family by people who invoke all the feeble "moral hazard" arguments and policies that are never equally applied at the top of the food chain, to lenders, credit rating agencies, govt, and so on.

I think your plan is a good one, overall. Only question I would ask: Are you prepared to lose the house if your Plan A on the first does not go as expected? There is a chance the servicer will simply foreclose if you stop paying. You, technically, were discharged from the debt, though your wife is not, apparently. I wonder about the ability to get a mod in this circumstance. For example, what if the servicer is not willing to negotiate unless it includes both of you on the new mod? You would then, possibly, be back ON the hook for something that was supposedly discharged in bk. I wonder about the wisdom and legality of this attempt.

But, even then, what if they simply pursue foreclosure? Not sure it is worth the risk, if you are truly intent on being there in ten years.

[LimpDisc]

I like your plan and attitude. Doing what's best for your family is important regardless of what other think.

What about losing the loss? Have you guys talked about that possibility if the plan fails?

[HHM]

I've seen the types of sites that hammer people for taking care of their finances wisely. Folks get crucified for taking care of their family by people who invoke all the feeble "moral hazard" arguments and policies that are never equally applied at the top of the food chain, to lenders, credit rating agencies, govt, and so on.

I think your plan is a good one, overall. Only question I would ask: Are you prepared to lose the house if your Plan A on the first does not go as expected? There is a chance the servicer will simply foreclose if you stop paying. You, technically, were discharged from the debt, though your wife is not, apparently. I wonder about the ability to get a mod in this circumstance. For example, what if the servicer is not willing to negotiate unless it includes both of you on the new mod? You would then, possibly, be back ON the hook for something that was supposedly discharged in bk. I wonder about the wisdom and legality of this attempt.

But, even then, what if they simply pursue foreclosure? Not sure it is worth the risk, if you are truly intent on being there in ten years.

You raise a good point, if you attempt Part I (default on GMAC), you need to be prepared to lose the home. I really don't see you getting much benefit out of part I and I think the chance of part I failing is greater than it succeeding. Just settle with your 2nd mortgage and leave it at that. Once you remove the 2nd mortgage, the 1st mortgage will be in a better position to modify, or refi; since it doesn't have to worry about subordinating the 2nd mortgage. In essence, your plan is backwards. Settle with the 2nd mortgage, get the lien removed. ONLY THEN start exploring your options with the 1st.

As a practical matter, as I take a closer look at your numbers, I question the wisdom of keeping the home.
You owe $570K on your first on a house that could only sell for $470K (if you are lucky). That is a HUGE negative number. You are 17.5% upside down in value. You are NOT going to get that value back in 10 years. You would be better off financially, walking from the house, renting for 2 years, then buying. You are essentially renting from yourself anyway since you are merely digging out of negative equity. My rule of thumb is if the home is 10% or more upside, you walk. There is nothing worth saving.

[onwards]

I don't know why you think people would say your jack ass or stupid.

Because I am discussing a strategic default approach; we can definitely make payments on that second, it's just that I'm not so sure it makes sense considering how underwater the house is. I've seen and experienced many adverse reactions to the notion of strategic default that I sort of expect to get lambasted about it.

Thank you the link.

As for settling with the 2nd, that is a good plan. The bank will probably negotiate with you directly. The only catch is, your wife didn't file BK, so you may need to come out of pocket a little more of the settlement then you might have otherwise. Also, keep in mind, the settlement will need to be lump sum cash.

I'm OK with coming out of pocket a little more; it's just that it doesn't seem to make sense to pay back all of it considering the hit to valuation.

[onwards]

I think your plan is a good one, overall. Only question I would ask: Are you prepared to lose the house if your Plan A on the first does not go as expected? There is a chance the servicer will simply foreclose if you stop paying. You, technically, were discharged from the debt, though your wife is not, apparently. I wonder about the ability to get a mod in this circumstance. For example, what if the servicer is not willing to negotiate unless it includes both of you on the new mod? You would then, possibly, be back ON the hook for something that was supposedly discharged in bk. I wonder about the wisdom and legality of this attempt.

But, even then, what if they simply pursue foreclosure? Not sure it is worth the risk, if you are truly intent on being there in ten years.

Well... we love the house, which is why we are willing to overpay some (which is in effect what we are choosing to do by not walking away). It's unique in servicing our needs where we live in the sense that we couldn't, say, rent something comparable even if we wanted to do so (we've looked).

It's just that there is a difference between overpaying some and overpaying a lot :-)

As for the first... I can put away the payments and sit on them for a bit. Foreclosure can almost always be forestalled by making arears, ESPECIALLY if the lender stands to lose a lot of money by foreclosing. They don't HAVE to know my real intent - in many ways, it becomes a game of chicken and who blinks first. The most I am risking is some late fees, and possibly a couple grand for a lawyer depending on how far I'm willing to play - and for the amounts in question, I'm willing to play quite far.

As for the second... California's one-action rule combined with their subordinate position makes it more or less expected that they will simply charge it off. Dealing with a CA or JDB afterwards is something I am happy to do; I would love to do the same with the actual lender, but my experience with them indicates that no matter what, they won't settle on balances and rather charge it off. Not sure why but it's what it is, not my problem really. They are entitled to make their own decisions, as I am entitled to make mine :-)

[onwards]

As a practical matter, as I take a closer look at your numbers, I question the wisdom of keeping the home.
You owe $570K on your first on a house that could only sell for $470K (if you are lucky). That is a HUGE negative number. You are 17.5% upside down in value. You are NOT going to get that value back in 10 years. You would be better off financially, walking from the house, renting for 2 years, then buying. You are essentially renting from yourself anyway since you are merely digging out of negative equity. My rule of thumb is if the home is 10% or more upside, you walk. There is nothing worth saving.

Well... honestly - and this is based on very recent and quite extensive market research, historical values, and rent-to-own ratios - we believe the house is actually worth in the mid-500K or so once inventory is cleared up. We may be wrong, we may be deluding ourselves, I accept all that, but we are comfortable with the equation on the first - just not the second.

[onwards]

You raise a good point, if you attempt Part I (default on GMAC), you need to be prepared to lose the home. I really don't see you getting much benefit out of part I and I think the chance of part I failing is greater than it succeeding. Just settle with your 2nd mortgage and leave it at that. Once you remove the 2nd mortgage, the 1st mortgage will be in a better position to modify, or refi; since it doesn't have to worry about subordinating the 2nd mortgage. In essence, your plan is backwards. Settle with the 2nd mortgage, get the lien removed. ONLY THEN start exploring your options with the 1st.

Question: does any of the existing programs deal with 1st+2nd situations? what happens to the 2nd if, say, a 1st get remodified under HAMP?

[SleepWellNow]

We also modified our first loan with GMAC. I was told GMAC is the servicer, Wells Fargo the investor but Duetsche Bank showed up on the Motion for Relief of Stay filed with the court during our BK. The modification agreement had a reaffirmation written into the contract. In our case, the reaffirmation was not filed with the court prior to our discharge so we are not reaffirmed although the mod is in place. In your case, if GMAC writes all their mods the same, I'm afraid you will be reaffirming the loan if they isuue you a new mod post discharge.

[HHM]

This document gives you an overview of what happens in HAMP behind the scenes

https://www.hmpadmin.com/portal/docs/hamp_servicer/npvoverview.pdf

I still think you should blow out the 2nd as your first move. I don't think you are going to do much better on the modification front. As for home values...none of us has a crystal ball, but given the market you are in (CA), houses will be depressed for far longer than other areas. This is not just a temporary draw back in home prices, this is a true readjustment. Home prices in areas like So. Cal, NV, AZ and FL were driven by speculation not by the ebb and flow of true supply and demand. Are you, by chance, in the Inland Empire; if so, you are not likely to see a return to pre crash prices for 10+ years, but, that is just my opinion. You really have to think through it, what on the horizon is going to drive prices up? Nothing. CA is not exactly attracting new businesses, highest overhead of any state, high unemployment; who exactly is going to step in and start buying houses to drive up prices?

[onwards]

I still think you should blow out the 2nd as your first move. I don't think you are going to do much better on the modification front. As for home values...none of us has a crystal ball, but given the market you are in (CA), houses will be depressed for far longer than other areas. This is not just a temporary draw back in home prices, this is a true readjustment. Home prices in areas like So. Cal, NV, AZ and FL were driven by speculation not by the ebb and flow of true supply and demand. Are you, by chance, in the Inland Empire; if so, you are not likely to see a return to pre crash prices for 10+ years, but, that is just my opinion. You really have to think through it, what on the horizon is going to drive prices up? Nothing. CA is not exactly attracting new businesses, highest overhead of any state, high unemployment; who exactly is going to step in and start buying houses to drive up prices?

That's a great link for the NPV discussion... I'll have to get into it more deeply but I think I have a shot at getting the primary into HAMP. At this point I am probably going to work on these in parallel; the next chance we have to miss a payment on either is early February, so I'll start chatting to GMAC right now about what program they might fit us into, warning them about difficulty, and stop the autopay on the second.

California is a big place... we're in the San Francisco bay area in a pretty decent spot. It's not the inland empire, or southern cal, or Stockton and so forth. As for what drives prices up... you know, at least in this area, there is always demand because it's still the place to be for high tech. Prices do fluctuate here faster and harder than most, but if you recall the late 80's, discussions were similar to now and prices have not only recovered but gone far, far beyond those levels in real terms in here.

[SleepWellNow]

I read an article last week from the Washington Business Journal:

"Washington is among the few markets in the country to maintain steady improvement. San Francisco is the only other major city to post gains for seven months in a row. Minneapolis and San Diego have seen median home prices rise for six consecutive months."

As a Realtor, I have seen these increases first hand. I agree with "onwards". The San Francisco Bay area and San Diego are much different markets than the Island Empire or Central Valley of California. My biggest difficulty right now is not having a large enough supply of quality houses for buyers wanting to purchase.

[albacore44]

Well i am in a similar situation, and yes, i am in the inland empire, and i can tell you it aint pretty here right now. here is my plan. i should be filing my Ch-7 by month end.
mortgage = 1st Citi $417K 7 year adjustable 4.5% 10 int only option adjusts in May 2013 .
2nd (heloc) HSBC $241K Int only adjustable currently at 4.5%, house is worth mabee $450k ?? depending on forclosures 9many), most people in this tract of Mcmansion homes which started building in 2003 are under water. many are walking away. some homes topped out a $1m right before the down turn.

As soon as my BK is final, I'm stopping the 2nd. i'll save the $$ and see what happens. i'll try to settle with HSBC but i'm reakky hopeing they charge it off and sell to a JDB, then I will settle with them, trying for 10% of the balance .

then i will attack the 1st. but i'm still good for 2 1/2 years. even then I can still pay interest only for another 3 years after that, assuming the rates dont skyrocket. but if I were Citi, i would try to get me into a different loan. we shall see.

[onwards]

Alright folks. I have just canceled the autopay on the HELOC. Next payment is set for 2/5, so it will be a while before anything starts happening, but... I'll keep everyone posted.

For the record, I reasonably expect the loan to get charged off and then settle. However, I will do my best to settle with the HELOC lien holder (USAA) before charge off, but I am certain they will not do anything until they are convinced I am serious - that is, at least 90 days late. And having experienced their approach just last year, I highly doubt they will do anything regardless.

Interestingly, I found that the HELOC is under my name; wife did sign it, but only as co-owner of the property. The loan appears under her credit report but I'm not entirely clear that it should; I will be going through the paperwork this weekend. If indeed she is not a co-borrower then there is absolutely nothing legally they can do, because due to my ch7 the debt is no longer collectible and all they have is a worthless second lien.