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Author: explorer1999 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308882  
Subject: foreclosure questions Date: 12/12/2010 1:33 PM
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First let me thank you all for the help I have received from you all.

I am defaulting on my second loan (20% of the loan) on a rental property . It is an interest no principal loan. I will not be able to pay the 33k when the loan matures. I have tried everything with the mortgage company but they will not modify etc.

Here are my three questions:

How will this effect my credit?

How long will this effect my credit?

How many points will this effect my credit?

Again thanks again. If you do not know the answer please point me in the right direction.

Happy Holidays
Merry Christmas
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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299955 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 1:54 PM
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Your credit score will drop significantly. How long it will effect your credit rating will partially depend on how long it takes for the foreclosure. In California, it takes a minimum of a year. During the time the foreclosure is being processed, your loan will be reported as in default. Your credit rating can't start to recover until the foreclosure is complete.

The foreclosure is not the final financial issue. Sometime after the foreclosure is complete, a 1099-C will be issued for the amount of the default.

Have you notified the holder of the first? How far underwater is the property? I am assuming it is underwater because you haven't attempted to sell the property.

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Author: explorer1999 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299956 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 2:51 PM
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thanks vkg,
I am keeping the property but am stopping payment on the 2nd loan because the loan is interest only and I will not have the money to pay the full amount of the loan in 10yrs (when the loan is called) nor will they allow the loan to go into a fixed rate.

I plan on keeping the property and continue paying the fist loan ie the 80% of the loan (it is a 30yr fixed). I spoke with the majority loan company and they said that it is rare that the holder of the 20% will be able to forclose on me.


What is a 1099-c and how woill that effect me?

Thanks again

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299957 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 3:12 PM
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I am defaulting on my second loan (20% of the loan) on a rental property . It is an interest no principal loan. I will not be able to pay the 33k when the loan matures. I have tried everything with the mortgage company but they will not modify etc.

Sorry for your troubles.

First of all - your title "foreclosure questions" - is likely to be incorrect. If this is a 2nd lien and you don't have a lot of equity, it is unlikely that you will be foreclosed upon, since the 2nd mortgage holder would have to pay off the 1st mortgage before they can collect any money.

Since you are not an owner occupant, it is unlikely that the lender will modify. Modifications are meant to keep people in homes that they are living in, not to help investors restructure their investment debt.

How much do you owe? How much is the propety worth? Have you tried selling the property? I presume that you have also tried unsuccessfully to refinance the debt on the house and not just asked for modifications? Do you have any other sources of credit that you can use to pay the debt?


How will this effect my credit?

How long will this effect my credit?

How many points will this effect my credit?


A missed mortgage payment is a significant derogatory mark. Since the lender is unlikely to foreclose, each month that you are unable to continue to make the payment will count against you, until you get to 6 missed payments - at which time it will probably be charged off. The derogatory mark from this account will affect your credit for up to 7 years and 180 days after you go delinquent, although the impact will diminish as time passes. How many points your score will drop depends on what your score is now, and what, if any, other derogatory marks you also have. If you have pretty good credit, there will likely be a larger drop than if you have a lower score because of other derogatory marks.

Additionally, since this is a second lien on a non-owner occupied home, there is a good chance that it may be a recourse loan. You will need to understand your state laws and read your mortgage documents to determine if this is the case. If the loan is a recourse loan, that gives the lender to right to sue you for any deficiency, including their costs.

If the lender is successful in bringing suit and gets a judgment against you, they may be able to place a lien on any other property you hold title too, or they may be able to seize money/assets from your account. A judgement will also negatively affect your credit, separately from derogatory from the delinquent/charged off account. Depending on your state laws, the judgement may be able to be renewed indefinitely until satisfied.

AJ

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299958 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 3:14 PM
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Your credit score will drop significantly. How long it will effect your credit rating will partially depend on how long it takes for the foreclosure. In California, it takes a minimum of a year. During the time the foreclosure is being processed, your loan will be reported as in default. Your credit rating can't start to recover until the foreclosure is complete.

This is only correct if the lender chooses to foreclose. In many cases, for 2nd liens, the lender will charge off the loan after 6 months, rather than go to the expense of foreclosing.

AJ

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299959 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 3:20 PM
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I am keeping the property but am stopping payment on the 2nd loan because the loan is interest only and I will not have the money to pay the full amount of the loan in 10yrs (when the loan is called) nor will they allow the loan to go into a fixed rate.

If this is your thinking, you need to get yourself a good real estate attorney to find out what will actually happen before you stop making the payments.

You may as well stop making the payments on the first mortgage, too, because you are unlikely to be able to sell the property until the 2nd mortgage is satisfied, including any accrued late fees and interest.

AJ

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299960 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 3:30 PM
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I plan on keeping the property and continue paying the fist loan ie the 80% of the loan (it is a 30yr fixed). I spoke with the majority loan company and they said that it is rare that the holder of the 20% will be able to forclose on me.

There will come a point, as you pay down the first mortgage, where it will be worth it for whoever owns the rights to the 2nd mortgage to foreclose, if you keep paying the first mortgage. The reason that the 2nd lien holder doesn't foreclose now is because it will cost them money, as they have to pay off the first mortgage holder. As you pay down the first mortgage, the cost to do that will become lower and lower, until it will be worth it for the 2nd lien holder to foreclose.

AJ

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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299961 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 4:13 PM
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Just for curiosity's sake, what did you use the $33K 2nd mortgage for?




Seattle Pioneer

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Author: TheEvilDrP Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299962 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 4:19 PM
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Just for curiosity's sake, what did you use the $33K 2nd mortgage for?




Also why aren't you able to pay it back? You knew the principal would come due at some point, right, and planned for the payment to increase, yes?

TEDP

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Author: Gingko100 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299963 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 4:20 PM
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So...you won't have $33K in 10 years? Really? That's a long time away to decide to do such a major thing right now. Your property may appreciate by then and if sold could cover it. Or, more simply - you could just save $300 a month for 10 years and pay it off then.

I don't know why you would atom bomb yourself for something that may or may not happen in 10 years.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299964 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 4:38 PM
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Just for curiosity's sake, what did you use the $33K 2nd mortgage for?

My guess is that the OP used the $33k 2nd mortgage to purchase the home.

Also why aren't you able to pay it back?

Because the OP can't be bothered to, or doesn't want to, change their lifestyle enough to save the $275 a month (probably only $250 after accounting for compounding interest, even at today's rates) that it would cost to pay off the loan in 10 years, or, even less costly, add $150 (or so - depends on the interest rate) a month to the 2nd loan as a principal repayment in order to pay the loan off in 10 years. They would rather try to get the lender to take a hit, and continue collecting the rent.

To the OP: speaking of rents - you better read your 2nd lien contract. If there is an 'assignment of rent' clause, the lender may be able to seize the rent your tenant pays you. Again, you need to get a real estate attorney.

AJ

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Author: TheEvilDrP Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299965 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 6:02 PM
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Also why aren't you able to pay it back?

Because the OP can't be bothered to, or doesn't want to, change their lifestyle enough to save the $275 a month (probably only $250 after accounting for compounding interest, even at today's rates) that it would cost to pay off the loan in 10 years, or, even less costly, add $150 (or so - depends on the interest rate) a month to the 2nd loan as a principal repayment in order to pay the loan off in 10 years. They would rather try to get the lender to take a hit, and continue collecting the rent.

To the OP: speaking of rents - you better read your 2nd lien contract. If there is an 'assignment of rent' clause, the lender may be able to seize the rent your tenant pays you. Again, you need to get a real estate attorney.


Yeah, that's what I am figuring. I wondered if perhaps s/he had to lower rents or had increased taxes and insurance that might be contributing factors. If they're just "strategically defaulting", well, then...

TEDP

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Author: tconi Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299966 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 6:28 PM
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this will Affect your credit for many several years...


peace & defaults
t

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299968 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 8:52 PM
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I wondered if perhaps s/he had to lower rents or had increased taxes and insurance that might be contributing factors.

Lower rents and/or increased costs are a risk of the investment when one purchases a rental property. Cash flow risks such as this can be accounted for by using less margin. The fact that the investment doesn't turn out the way one hoped for isn't a reason to default on the margin obligation that was used to purchase the investment. When one purchases stocks on margin and the investment goes the wrong direction, there is a margin call, and the investor either pays for it and continues to reap any benefits from the stock, or the stock is sold and the margin loan is repaid. For a rental property, if the investor chooses to default on the margin loan and attempts to continue collecting the rents, the fact that the OP's credit would be negatively affected is well earned.

If they're just "strategically defaulting", well, then...

When the reason for default given is that "In 10 years, I won't be able to pay the contractual obligation I signed up for, and the bank won't change the terms I voluntarily signed up for, so I'm going to stop paying now, but I'm going to continue collecting the rent" - it's a strategic default.

AJ

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Author: TheEvilDrP Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299969 of 308882
Subject: Re: foreclosure questions Date: 12/12/2010 11:38 PM
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Yep; totally agree with you.

TEDP

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299975 of 308882
Subject: Re: foreclosure questions Date: 12/13/2010 11:38 AM
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What is a 1099-c and how woill that effect me?

Thanks again


Unless insolvent (which apparently you aren't) and this property isn't eligible for any of the primary residence exemptions, the amount reported on the 1099-C is taxable income. The full amount of the loan plus all of unpaid accured interest, late fees and lender expenses are reported on the 1099-C.

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Author: MarinBMWZ4 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299988 of 308882
Subject: Re: foreclosure questions Date: 12/13/2010 9:59 PM
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The full amount of the loan plus all of unpaid accured interest, late fees and lender expenses are reported on the 1099-C.
------------
Doesn't the value of the property come into play here to offset the loan liability? For example: $200k owed, property value $150k, net is $50k.

MZ4

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299989 of 308882
Subject: Re: foreclosure questions Date: 12/13/2010 10:43 PM
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Doesn't the value of the property come into play here to offset the loan liability? For example: $200k owed, property value $150k, net is $50k.

If the OP is upside down (which was never confirmed) it may be, but it depends on the specifics of the circumstances. It may also require that the basis of the property be reduced by the forgiven debt, so if the OP is ever able to actually sell the property, they would have to pay capital gains tax on the forgiven debt amount. The details are contained in IRS Pub 4681: http://www.irs.gov/pub/irs-pdf/p4681.pdf

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299991 of 308882
Subject: Re: foreclosure questions Date: 12/14/2010 12:13 PM
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Doesn't the value of the property come into play here to offset the loan liability? For example: $200k owed, property value $150k, net is $50k.

MZ4


He is defaulting on the second, hoping they won't foreclose. If this is what happens, then the full amount will be reported.

It would have been more correct to state the full amount of the lenders loss.

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Author: wasmick Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299992 of 308882
Subject: Re: foreclosure questions Date: 12/14/2010 12:59 PM
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Get a lawyer.

Since this is an investment property, the bank probably got either an assignment of rents document of a 1 - 4 family rider, either of which would give the bank the ability - in cases of default - to take the rent directly from the tenants.

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Author: xtn Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299996 of 308882
Subject: Re: foreclosure questions Date: 12/14/2010 4:01 PM
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For a rental property, if the investor chooses to default on the margin loan and attempts to continue collecting the rents, the fact that the OP's credit would be negatively affected is well earned.

When the reason for default given is that "In 10 years, I won't be able to pay the contractual obligation I signed up for, and the bank won't change the terms I voluntarily signed up for, so I'm going to stop paying now, but I'm going to continue collecting the rent" - it's a strategic default.

I would have said the same thing, but like this: Not only does the OP have a slimy moral character, he wants our help figuring out if he can get away with harming others.


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Author: llamalluv Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 300007 of 308882
Subject: Re: foreclosure questions Date: 12/15/2010 8:18 AM
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Vouch. I'm five and a half years out from a foreclosure on a house that I got sold at the last minute. That one 60 days late will stay on my report until July of 2012, and it is like an anchor dragging my credit score down.

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