Mortgage on second home is underwater -- how to swim? Default?

Say I live in California, holding a mortgage on my primary residence there. In 2005 during the boom years, I bought a condo in Las Vegas, Nevada for 200k. Renting it out (and breaking even so far), it has now depreciated in value to 130k. When the Adjustable Rate Mortgage is up for a change in a few months, it will increase, meaning I will be losing money.

If I’m at retirement age, I may not want to wait the many years it would take for the condo to re-appreciate in value. How do I get out of the situation-- if I default, what will happen? Foreclosure? My overall credit rating right is fab (almost perfect). That’s ruined? Any way to get out of an underwater mortgage?

What is the ARM restructing to? If your credit is golden you may be able to refi for a fixed 5%-6% rate. Alternatively you can potentially increase the rental rate to coordinate with the new interest rate so long as your condo is still price competitive with other rentals.
I’d increase the lease rate a bit on the next lease re-up to compensate for the rate increase and wait until the market recovers. Las Vegas is a terribly overbuilt residential market right now and it may take a few years for the current stock to be absorbed, but it will be and prices will recover. It doesn’t pay to panic right now. Blowing out of the investment now would be the worst long term strategy possible unless you have no other options.

You don’t want to default if you can’t help it. Not only will it ruin your credit, but you’re usually still liable for any debt in excess of what the bank gets out of the sale. (And remember, if any debt is forgiven outside of bankruptcy, that’s considered taxable income come next April).

Refinancing and adjusting the rental rates are really your best options. Banks don’t want to lose any more money than they have to - lay out your situation and see what they can do for you. Of course, this doesn’t solve the issue of the home’s negative equity, but there’s no real solution for that except holding onto it for five or ten more years.

A short sale might be better than default - you’ll take the loss on the property and probably still be liable for any debt the sale doesn’t pay off, but at least you can reduce the amount of the payment due. This would probably be a good option if you lost your renter.

Going forward, just remember the golden rule of financing - use long-term debt for long-term financing and short-term debt for short-term financing. An ARM acts like using short-term debt for long-term financing, and greatly increases your risk - short-term interest rates fluctuate more than the value of the assets. (I might go so far as to say ARMs are a recipe for disaster but I know they have worked for some).

If your rental income doesn’t cover the mortgage, and can’t be raised enough to cover the mortgage, and if you’re near retirement age, I think it would be financially foolhardy for you to make up the difference out of your pocket. If you have no equity in the place, and aren’t likely to gain any, you might as well be burning the money.

Yes, foreclosure will ruin your credit for a few years. (7 years, I think?) Will you be needing to buy anything on credit over the next seven years? If so, maybe you’d better buy it now, before the condo goes into default, and while your credit is still good.

Theoretically, the mortgage holder could sue you for the deficiency if the property doesn’t bring enough at a foreclosure sale to cover the debt. I say “theoretically,” because I’ve never seen a mortgage holder actually go after individual homeowner for a deficiency.

I’m sure some scolds will follow along behind me and try to convince you that the mortgage is some sort of sacred obligation, and that you must sacrifice your retirement to pay it off because that’s what you agreed to do. (harumph)

You might want to talk to a bankruptcy attorney. In some cases, mortgages on 2nd homes can be cramdowned in a bankruptcy proceeding, and there might be protection for your primary residence. But this is really only something a bankruptcy attorney can determine. This might be preferable to simply defaulting on the 2nd mortgage depending on your financial condition.

I’d look into the refi mentioned above as well. Once you’ve seen if you can get a refi and talked to a bankruptcy attorney, you’ll be able to make a better decision.

Why should she file for bankruptcy if she is current on all her obligations? To me it seems better to let that one mortgage go into default and stay current on other debts.

If, and only if, the mortgage company on the condo files suit against you for a deficiency judgment after the foreclosure sale (which I think is unlikely), then you might consider whether bankruptcy makes sense.

The foreclosure will drop off your credit reports in 7 years, if I’m not mistaken.

The benefit of a bk is it may be possible to cramdown the 2nd mortgage, as I clearly stated in my previous post. I don’t know if she should file or not. This is a business decision, and sometimes the benefits of a bankruptcy filing outweigh the benefits of not filing. That’s why I told her to talk to a bankruptcy attorney.

As pointed out already in this thread, if the mortgage company doesn’t go after the deficiency, then the amount of the mortgage waived is taxable income. That may or may not be ok with the OP depending on her financial situation.

So will a bankruptcy, IIRC.

ETA: I’m not advocating the OP take any particular course of action. I am merely pointing out another possible option. Only the OP knows his/her entire financial situation.

That’s true, if the mortgage company formally forgives the debt, and so notifies the IRS. They might do that, or they might just sit on their rights until the statute of limitations on the deficiency passes. No way of knowing. But you’re right; it’s something to think about.

I’d call the bank first and tell them your situation and see if you can negotiate on a fixed rate. Since, in all reality neither you or the bank want you to default, and, surprise, the banks have found out that it is easier and cheaper to keep you in your house vice you defaulting. Especially now since they are being overwhelmed with defaults and managing it all from start to finish and them still loosing money is an incentive for them to keep you happy. Interest rates are crazy low right now so if you do have good credit then you should be able to get it.

Personally, I think it’d be better to sell your place for whatever you can get right now versus a short-sale or a default. If you credit is good and your primary residence has value you can get a home equity to cover the balance.

However, going in the way you are thinking may sound appealing because of the media and the crazy stuff that people are doing. But, a mortgage default is a very big slap to your credit rating. We’re talking a drop of 250 points. So, if you are like me and have an 801 :smiley: minus 250 puts the score at 551. Anything below 640 is considered sub-prime. Thats 89 points below sub-prime so getting a good interest on anything will be difficult. Plus, it will be on your report every time it gets pulled. They will see a foreclosure of a mortgage on there and it will be there for seven years. I know this as I used to sell cars and I’d pull people’s credit and if someone had a default, regardless of their score, it was a no go. Not worth the trouble.

Also, if you are near retirement as in 65, age can be a bitch. And, lack of good and comprehensive health insurance makes doubly more so. If you have any known or “unknown” health issues that arise and you need cash fast. Oops! You’d have to keep working to keep your insurance for the next seven years. Might as well keep the place and keep working to pay the difference and sell it when the value gets closer to what you paid for.

But, I would not fall for one of those default or short-sale scams that are everywhere. Do not use those.


How does the depreciated value of the condo have anything to do with the viability of the rental property? If you’re breaking even with the rent (ie, income covers mortgage), it doesn’t matter whether the condo is worth $130k or $500k. If the ARM increases the mortgage payment, you have to raise the rent regardless of how much the property is worth.

If the problem is that you don;t want to be a property owner anymore, then you’re just stuck. The most prudent thing to do is to be patient and wait for the market to bounce back. Anything else is going to be very painful.

I’m just wondering what motivation the renters would have to accept an increase in rent in a market where rents are still falling, or at best stagnant? A few months ago, vacancy figures for Vegas rentals were at about 8% and still increasing.

Even here in my part of San Diego, where the rental market is tighter than in most parts of San Diego County, there are still plenty of places for rent at prices lower than when we were looking last August. When our lease comes up for renewal this August, if the landlord even mentions raising the rent, we’ll be saying “Thanks, but we’re moving on.” We’re even considering asking for a downward adjustment.

That would be tough to do give that the mortgage amount is larger than the value of the house.

How much are you upside down on the condo, considering any downpayment and equity you may have accummulated to date?

Also, how much do you expect to be losing per month based on the new interest rate?

I, too, am skeptical about raising the rent as a viable strategy. The rental market will typically determine what you can get for the condo. Your expenses don’t affect that. Presumably you’ve already been charging the highest rent you can get for the condo.

You should look into modifying the loan on the second home. I’ve been doing modifications for people for the last few months part time and the banks are (for the most part) very willing to work with homeowners. PM me and I’ll help you with some details to get started.

But, moving is expensive. A $50 increase is only $600, and it costs a heck of a lot more than that to move. Even a do-it-yourself move, there’s the time value of money.

That’s true, but in the current market we could find somewhere with the same amount of space, in the same area, for $100 less than what we’re paying now. Maybe even better than that. So, if our landlord decided to raise our rent $50 a month, the difference between staying and moving would actually be closer to $150 per month for us.

As it is, we’re happy to stay here to avoid the hassle of moving, even though we could probably find something a bit cheaper. But if the landlord raises the rent in the current market, we would feel that this was unjustified, and our desire not to reward that sort of attitude, combined with the whole issue of getting cheaper rent elsewhere, would probably impel us to move.

To be honest, i don’t think that will happen. We like our landlords, and they have also had trouble recently renting out one of the other units in our small (6 condos) complex. When the place next to us went on the market a few months back, they were asking exactly the same as what we’re paying, but no-one rented it over the next month, and they dropped the price by about $75 and still had to wait another month before someone took it. We know we’re excellent tenants, and they like us, so i don’t think they’ll do anything to piss us off.

If you are in CA (probably does not matter where you are, it’s the condo in trouble)
If you are of/near retirement - this DOES matter, just a TINY friggin’ bit.
Your golden credit is of little use if you don’t use it. The closer to retirement (or death), the less you will be needing it (probably).
Wait out the market? Um… News flash - a condo in LV is going to take awhile - you are going to be needing the credit for how much longer?
Is your residence paid for? If not, what kind of mortgage? If you dump the condo (my advice), make REAL certain you will not be needing another mortgage.
Forget making the income equal the outgo - your payment is not the renter’s responsibility - market is market (and, for condo’s in LV…)
So: buy the new car now, not next year or six. Get the place all spiffy - new carpet, paint, appliances. Borrow all the money you will need. And make REAL certain that a pissed-off bank (piss off one, they all get nasty) can’t screw your mortgage.
Then walk.
A short sale is a great deal for the bank - last I heard (may be wrong now), one had to be current in payments to get a bank to even consider a short. Which means you take the loss until the place sells (condo in LV - might take a bit) not the bank. I don’t know what a short does to your credit - but it simply postpones (at a loss) the inevitable.

I may start a IMHO on the following:

How much longer can housing stay depressed before it runs into the long-predicted (at least by me) crash when we boomers start dying en masse? We boomers will be in denial of our aging until we die, but the gen X’ers will figure out the coming surplus.

My father, the financial genius, bought one of General Developments chunk o’ swamp in Port Charlotte. In 1991, I went by. One agent I talked to said some truly scary (30%? 50%?) portion of the listings there were vacant due to death of owner. Think of that applying pretty much globally.

Boomers - the elephant the python swallowed. 1950’s - lots and lots of new elementary schools…