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Her Mortgage Check Won't Be in the Mail

October 16, 1994|CATHY CURTIS | TIMES STAFF WRITER

On the last business day of 1989, I did a very stupid thing.

Not realizing (who did?) that real estate was at its delirious peak, I signed the mortgage papers for my first house, a vintage two-bedroom bungalow in North Long Beach, one of the "affordable" areas of the city I'd lived in for several years. I put 10% down on the $165,000 purchase price and was delighted to snag a 30-year mortgage at 9.75%.

I've since come to the conclusion that living far from friends, night life and good bookstores is a drag, that maintaining a big back yard I never use is a nuisance and that my homeowner's tax benefits essentially are eaten up by my high monthly payments ($300-$400 or more than I'd be paying in rent) and property taxes.

I can't rent out my house because my mortgage payment is twice as much as monthly rents in my neighborhood.

So I decided to sell. After having been turned down for refinancing last year because I had no equity in the house, I thought I had few illusions about the market. But I had no idea how bad things were.

Although I still owe about $144,000, similar houses in my area are selling for between $125,000 and $130,000. Add selling costs and the agent's 6% commission, and I'd have to pony up something like $27,000 simply to get rid of my house.

Well, I don't have that kind of money--most of my savings went into the down payment and some early fix-up projects--and even if I did, I'd be loathe just to throw it away.

I'd heard that many people actually were walking away from "upside-down" loans like mine. But letting the bank foreclose on my property sounded frightening--a black mark on my good credit rating that might have awful repercussions in the future. Wasn't foreclosure just for deadbeats or for people who have lost their jobs?

After talking to several experts, I've concluded that most of the options for homeowners in this situation have major drawbacks in the current market, while foreclosure may not be the dread animal it appears to be.

The most frequent recommendation from experts is a "short sale," which permits the homeowner to work out an arrangement with the lender to sell the property at less than the remaining loan balance.

Some lenders say they are unlikely even to discuss this possibility with you until you stop paying your mortgage.

At Home Savings, however, homeowners facing financial problems are encouraged to let the bank know "as soon as possible," according to public relations chief Mary Trigg, rather than waiting until they are no longer able to make their monthly payment. (In some hardship cases, Home Savings has allowed mortgage holders to skip several payments, which were then tacked onto the loan balance.)

The bottom line, however, is that bankers will negotiate for a short sale only in situations of unavoidable hardship, such as loss of your job, unexpected business reverses or heavy medical bills. If you just want out, banks likely will foreclose.

"If there's a good offer and a good possibility that the property will end in foreclosure two months from now," said Petra Vazquez, foreclosure administrator at First Interstate Bank in Los Angeles, "most investors will consider the offer. . . . (But) hardship and the loan type play a big role. We had one instance where the homeowner couldn't stay in her (crime-infested) neighborhood, but financially she had no problem." Her request for a short sale was denied.

"Each case is different, so there are no set rules," Trigg emphasizes. But, she adds, "if there is any rule of thumb, it is that you have to have a documented economic hardship."

If you have private mortgage insurance (PMI), as do most homeowners who put less than 20% down, it will protect 15%-25% of the loan, says Rick Alkire, owner of Mountain View Financial in Hemet, but the PMI agency has to agree to the short sale as well as the primary lender.

Some desperate homeowners may be tempted to sell their title to a company that promises to urge the lender to accept a short sale. The company pockets 1% of your note as a processing fee, and the property becomes a company investment rather than a personal residence. You are told that any losses would be claimed by the company.

Sound too good to be true? Richard Pittman at Consumer Credit Counseling in Los Angeles, a HUD-certified agency, warns that these companies don't tell consumers about their potential for tax liabilities.

Say the bank is owed $150,000 but the value of the home has slid to $100,000. The bank can let it be sold at $100,000 and take the $50,000 loss, but according to IRS laws, that $50,000 is income earned by the seller--income that should be taxed.

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