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What to do with the home foreclosure?

Posted by attorney Gene Choe

Question: A married couple with two children owns a home worth $500,000 (the home was worth $750,000 two years ago, by the way), with $400,000 in first mortgage and $70,000 in second mortgage or home improvement line of credit. The first mortgage payment is $3,000, interest only and $1,000 for the line of credit payment. Property tax and home owner’s insurance comes to $600 per month. They also lease one car with a monthly payment of $350 per month, a 4 year lease, with 3 more years to go and $18,000 in remaining payments and own their second car outright without any loans. The second car is worth $7500. They also managed to rack up $85,000 through their 10 credit cards, 9 of which is in the name of the husband. So, their monthly total expense adds to roughly $5,000 before paying on the credit cards. The couple has been making barely minimum payments for the credit cards for the last several months and for some of the cards, they stopped paying. They also have unpaid medical bill for $20,000. Collection agencies have started harassment calls. The husband is the only breadwinner making $5,000 per month. Wife has no income. What to do?

Advice: The home value in Southern California has dropped on average 20% to 30%. The home is not worth keeping any longer because there is no equity in the house. It means that after deducting the mortgage principals and various sales charges, about 8% of the sales price, no money will be left over, even if the house is sold. The couple just cannot afford to keep the house. In this case, the couple could choose to extend their use of the house through short-sale strategy and Chapter 7 Bankruptcy. That could extend their use of the house without paying the mortgage payments for 6 months to more than a year. Besides, freedom from the mortgage burden would free up cash flow to give breathing room for the family now. First, try to obtain a purchase offer by listing the property for much less than the fair market value of the house, for example, $400,000. They would need $475,000 to pay off the mortgage plus $40,000 in sales costs such as broker commission and escrow charges; in total, $515,000. They would fall short by $115,000, since the offered price is only $400,000. Request for the mortgage banks to reduce their principal pay-off amount is called “short sale offer". While the banks entertain short sale offers, they often suspend foreclosure proceedings. In California, foreclosures can be conducted in two ways: one, Judicial Foreclosure and Trustee Sale. Judicial Foreclosure is a formal lawsuit, which could take much time and costs for the lenders, although they would be able to retain their right to seek payment of “deficiencies", the difference between the mortgage pay-off balance and the actual cash sales proceeds through foreclosure. Most lenders do not opt for Judicial Foreclosure due to costs and time factor. The other preferred method of foreclosure is Trustee Sale. Lenders are required under California Law to file “Notice of Default" with the County of Recorder’s Office and wait 90 days for the homeowner to reinstate the default, or pay whatever amounts in default. As of May 22nd, this 90 day period will become 180 days. Thirty (30) days before filing a Notice of Default, the lender must engage in a good faith effort to restructure the loan with the homeowner. Most lenders do not initiate Trustee Sale upon the first month default. They generally wait 2 to 4 months before initiating the procedure. The new law passed by Governor Arnold Schwarzenegger. If the couple successfully petitioned the banks for short sale, that would further extend their time to live in the house without paying for however many months while the banks consider short sale offers.

In addition, filing Chapter 7 bankruptcy would completely stop all collection activities through the “Automatic Stay" Order issued by the United States bankruptcy courts. To resume foreclosure, lenders are required to obtain court orders by filing Motion for Relief from Automatic Stay. This legal procedure could add additional 60 to 120 days. So, to recap, 3 to 6 months for the short sale offer period, 6 to 8 months for the foreclosure process and then 2 to 4 months for the bankruptcy relief process could add up to 11 to 18 months. Meanwhile, the couple could save up unused cash for relocation and other necessities.

Lastly, for the lender to gain possession of the house, they must file Unlawful Detainer action. That takes another two months or so.

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