Q: I am currently in default on my first mortgage for my condo. I bought a one bedroom condo for $220,000 in 2005, and recently married and moved out of state.
The decision to allow the condo to go into foreclosure was not one that was made lightly, but was the only option for me. There’s another unit in the building that was foreclosed on last October. It is listed for $89,000 and has not yet sold.
In my ZIP code, there are multiple foreclosures for sale at rock bottom prices and excess new inventory that has been sitting vacant for over three years. The developers are offering no homeowner association fees for the first year. My monthly homeowners’ association fee is $364.
My question is this: What will the ramifications be if I choose to default on my home equity line of credit? I’m already taking the credit hit for the foreclosure. How much worse can it be if I default on the home equity line of credit?
A: It sounds as though you’re in quite a difficult situation. To buy a condominium for $220,000 and have it be worth less than $89,000 now (I’m assuming less than that since the other condo at that price hasn’t sold) is an extremely tough blow.
I suppose the silver lining is that if you also default on your home equity line of credit, your credit history and score won’t be much worse than where they are right now. You will probably have to wait another 5 years to buy something new, due to the new rules from Fannie Mae and Freddie Mac about people who have had a foreclosure.
The concern I have for you now is how you wind down your relationship with the lenders. You must make certain that your primary lender takes back the house as the sum total of what you owe. Once you do that, you will have to negotiate with the home equity lender to make sure that this debt is forgiven.
What you don’t want is for these lenders, or perhaps the private mortgage insurance company that insured the top 20 percent of your loan (if you didn’t have a 20 percent down payment) to come after you several years from now demanding repayment.
In some states the lender can’t go after the borrower for the difference between the loan amount and what the lender got paid while in others the lender can.
If you lived in a state that allows the lender to come after you for the money the lender lost in connection with the loan on your home, you might then decide to pay off the equity lender, if you can afford to do that.
If both lenders decide that you are gone for good, and have decided against pursuing any action against you for the losses on the condominium, the foreclosure on the primary loan on your home and, thereafter, the foreclosure or write off of the value of the equity line of credit might hurt your credit to an equal degree.
These are possible complications you would be well-served to settle now. I suggest strongly that you hire a real estate attorney to make sure that all of your loose ends are tied up, so that you can begin your new life without worrying about them.
Aug. 14, 2008.