Foreclosure in California?

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foreclosure in the State of: California

Like most people in California, I own a distressed home. Here are the facts:

>> I bought my condo in 2006 for $ 440K, paid 10% down. 80% mortgage, 10% HELOC
>> I later paid the original HELOC back, refinanced the home for a lower rate then got another 10% HELOC. Right now my Heloc is frozen and I have $ 28K balance on it that I am paying on interest-only basis.
>> Now the home value is around $ 300K

My wife and I just had a baby and we wanted to move to a bigger house with a better school district taking advantage of the market. I figured if I lost $ 140K on this condo and I can get a house for $ 200K discount, I would do cost averaging. Our loan broker told us that we can show that we can get rental income on our condo and qualify for a 600K loan which would allow us to get our house. All was well.

However, one day I did a what-if scenario and found out that if we are being conservative and not depending on the rental income, we can only afford a $ 500K home. In bay area, even with the current market, that does not buy you much.

Before giving up completely, I decided to see if I have other options. One thing is clear, the condo has to go. The question is how?

1. If I buy the second house and then walk away from the condo to let it foreclose, what happens? I have been reading about deficiency judgment. Does that allow the lenders to go after the new home or other assets? Is there any online resource you guys found valuable regarding these procedures?

2. If I pay back the 28K I owe on the HELOC, what are my chances of negotiating a deed in lieu of foreclosure with HSBC (my primary lender)?

3. Related to number 2, I had this idea of going to HSBC and laying out my entire plan to them. Currently, they are being pretty aggressive to attract some good mortgages. They are giving out 4.5% APR to conforming loans with LTV <= 80%. I could tell them about what I am planning to buy (an REO actually). Since my new house would be a bigger asset to them, I thought I could negotiate a deal with them to accept my condo as a burden to keep me as a customer. Does this sound crazy? Any other options I have other than waiting for my income to come to a level that I can manage both properties OR waiting for the condo to increase in value so I can sell it (both of which are unlikely for the near future). Thanks all!

  1. Reply
    May 4, 2011 at 2:29 am

    First I do not care how desperate a company is you screwing them out of a substantial amount of money is not going to make them want to lend you even more.

    Second the rental is a disaster in waiting for you. Let’s play what if, and do not dismiss my scenario it happens all the time, what if you can not rent the unit, what if you rent and the tenants destroy the property and leave after 9 or 10 months, what if the tenant simply leaves in the middle of the night, is sporatic about paying rents…any of these scenarios means YOU can not pay your OWN mortgage payment.

    You can not even do deed in lieu or short sales unless you are behind in the payments, then if you get behind so you can your credit is ruined.

    When one is as desperate as you are one makes a lot of costly mistakes.

    Stay put and save money like crazy for a year.I know not in your vocabulary.

  2. Reply
    May 4, 2011 at 3:20 am

    Usually they do not seek deficiency judgments in the state of California it is pretty rare. I have done these for 8 years and I have never seen it happen. I don’t think they can go after assets it would just be a judgment for money if they did. A Deed in Lieu is pretty rare too. But I don’t know that if you pay anything off they would be any more likely to do it. Yes that would make them very happy but ig you have the money for that then save it in case you loose your tenant in the condo to pay the mortgage. I don’t think telling them your plan would do anything. They are so busy they just want to get some money or start a foreclosure.
    Anyhow what I think you should do is the last thing. Work it out where you can manage both properties. Don’t necessarily wait for the value to increase because that would mean the new home would cost you more. But do what you can to keep both and maximize your gain. Even if that means you live some where a little small for your family for a while. Don’t do that to your credit if you don’t have to. If you can afford it stay until it goes up and you can sell it any buy a new one. Most people who are in foreclosure right now just can’t afford it so count your blessings.
    If all else fails, you should probably consult with a real estate attorney.

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