Monday, Oct. 26
Written 10:30 a.m. EST
TWO-PARTER: DW in Tacoma writes:
I was harassed out of my home a couple a years ago by some crazy renters who moved in next door to me. I tried everything to get their landlord to evict them, and eventually moved out of my home into a rental. After a few months in the rental I found a run-down house in the neighborhood and bought it, taking some equity out of my first home, figuring I could do the cosmetic work, sell it and move back home after the crazy people left. Both my houses are Fannie Mae and I am not under water on either one of them, but the bank (Chase) tells me since my loans are 'bifurcated" I can't refinance either one under the HARP plan.
What is a bifurcated loan? And is it true I can't use HARP to refinance either one?
DW, I'm not sure what Chase means by "bifurcated." I'll take a guess and speculate that you have home equity debt on both houses. You got a home equity loan or line of credit on the first property to buy the second house. If you still owe on that loan, and if you got an equity loan or line of credit on the second house, too, that's probably what Chase is talking about.
If Chase says they can't refinance either of loans because of second liens, then Chase is using the wrong verb. The correct verb is "won't," not "can't." Lots of lenders won't refinance first liens under the Home Affordable Refinance Program, so Chase isn't alone.
The first lienholder has to get the second lienholder to agree to remain in the second lien position after the refinance. Second lienholders are reluctant to do this; they would rather you just pay off the second mortgage and get out of their hair. First lienholders (in your case, Chase) would rather use their staff time to pursue activities with a greater chance of success than persuading second lienholders to remain in the second position.
If you want to make everyone (except possibly yourself) happy, you'll sell one of the houses, then pay off the second lien on the remaining house, and then apply for a HARP refi.
IS IT OK TO WALK AWAY?: In February 2008 I wrote an article that tried to answer the question: Can you refi when you're upside down? In that article, a homeowner said that he owed $25,000 more than his house was worth, and Wells Fargo demanded a $25,000 payment before it would refinance his loan. That reader asked if maybe it would be better to walk away. I answered that walking away "will result in foreclosure, and foreclosure should be a last resort. To walk away from a mortgage in a temper tantrum is self-destructive behavior at its worst."
Reader MG found that article recently and had some comments and questions:
What if you purchased a house for $627,000, put $129,000 down with a 10-year interest-only loan at 7 percent, and 3-1/2 years later the bank is telling you that your house is worth $350,000 at most? You have never been late with a payment, you have excellent credit and all you want to do is refinance your loan to a conventional 30-year fixed at the current going rate so that you can a) lower your payments and b) make some headway on gaining some equity on your property. You realize that in 6-1/2 years, your loan will balloon into an amount that you cannot afford (i.e., principal and interest). Would you take the gamble and continue paying interest only for the next 6-1/2 years (which by the way is over $250,000) and take the chance that your house will be worth the $498,000 that you owe at that time so that you can refi at that point?
My guess is No, you wouldn't. Sure, foreclosure sucks, but in that amount of time that we'd be shelling out over $250,000 in interest only, we could be saving that money and rebuilding our credit that will essentially be trashed after they foreclose on our home. Can you give me a reason why it would benefit us to stick around? Or perhaps provide us with any knowledge you have as to how to go about refinancing such a loan?
What I really don't understand is: The bank already has a bad loan (e.g. we owe more than the house is worth). Wouldn't they rather have a homeowner stay in their home and work with them rather than go through all the hassle of foreclosure proceedings and then eventually auction off or sell the home at the current value anyway? It makes absolutely no sense to me!
Now, remember that I had written that it's self-destructive to walk away from a home in a temper tantrum. In MG's case, walking away wouldn't be the result of a temper tantrum. It would be a financial and legal decision. In MG's case, I think it would be best to solicit the opinions of a financial planner and of an attorney and maybe of a certified public accountant.
The financial planner will clarify MG's thinking about saving and spending. MG says she would pay $250,000 in house payments over the next 6 1/2 years, and that if she walked away, she would save that money. But she still would have to rent, right? And with a foreclosure on the credit report, interest rates on all types of debt would be high for years. Just how much would she really save?
Also, financial difficulties often lead to divorce, which is expensive. That possibility has to be factored in.
An attorney could advise MG whether the lender would have recourse -- in other words, if the lender could sue for the shortfall between the loan balance and the proceeds of the foreclosure sale. An accountant could advise on the same matter, and also on the tax implications of walking away.
Call me old-fashioned, but I'm reluctant to tell people to walk away from debts that they can afford to pay. Would I walk away were I in MG's shoes? Maybe. Maybe not. But that's different from recommending a course of action.