We need a Mortgage Revolution. What this country needs is for everyone who is substantially under water on their mortgage to stop paying all at once. I am not talking about being under water five or fifteen percent-I am talking 30 or 50%. Like us. That would get the attention of banks, of politicians and of our President. No more dinkin' around, this would get resolved and quick!
Ok, so here we are. Into this house for $566,000, when it is now worth $300,000. (Yes, we bought at the damn peak in 2005. I was pregnant with my second and living in 270 square feet with a six year old. I needed a nest with some space.) We received not too long ago a Tax Assessors Statement that said our house was now at $342,000. I think that is inflated. A house, with more bedrooms and bathrooms sold around a year ago for $340,000 just across the street.
We have been calling our bank, who has both our first and second mortgages, Wells Fargo since the beginning of this year. We had never missed a payment since we bought this in 2005. All the payments had been automatic, straight from our bank to theirs. All we kept hearing at the beginning of the year was that since we were current, there was no way to help us, we didn't need it, in Wells Fargo's eyes. We called and called. We said we were sitting on almost $600,000 worth of mortgage loans on a house that was worth $300,000. We needed it. No help came.
We then went to a highly recommended attorney to help us figure a way out. He looked at our financial papers and was stumped by the fact that we didn't have any debt-besides the house really. We have two student loans, one for around $200 and the other for around $20,000 and we also have a $158 a month motorcycle loan. That's it. He ran a bunch of scenarios and informed us that we could claim bankruptcy and that would solve everything. He told us to stop paying on these mortgage loans and that he would have us back to sign papers. Only my husband would be going bankrupt though, as he is the only one on the loan.
We stopped making payments. A while later my husband had a meeting with another lawyer in his office to sign papers and she noticed that we were not walking away from any debt, so why the bankruptcy? We can't walk away from student loans and my husband still wants his motorcycle. I started getting worried, and figured that this lawyer didn't know as much as our primary lawyer. A few weeks after that we got a call from our primary lawyer, it was true, we could not file bankruptcy. He had made a mistake. Only now, we had not been paying on both loans for a few months-as he had instructed us to do.
This is our dilemma: we have no debt. If we had walked in with $40,ooo in credit card debt to our lawyers office, we could have walked away from this sinking house, and not had to worry about any tax liability on the house. But, because we don't have any debt, we are now in a sticky situation. If we go into foreclosure on this house, we can wait to receive a 1099 from Wells after the foreclosure goes through.
What is a 1099? Form 1099 would be given to us by Wells Fargo and reported to the IRS by Wells as well. It would indicate that we would be walking away from the difference between the loans we had with them on the house and the current market value. They see that as income. What does this mean? It means that that difference would be added to his yearly income and we would owe taxes on it. So, if our house is worth $300,000 now and our first is $480,000, the difference their is $180,000. And our second is $86,000, so we add that on to the $180k from above and get $260,000. We would be responsible for paying income tax on my husband's salary as well on that $260,000. So, our tax bracket would go from 25% to 33 or 35% in one fell swoop. We would have to come up with between $85,000 and $91,000 extra this year for the IRS. The $28,000 that we will have spent on taxes this year through his salary will be nothing compared to that addition. In fact it would surpass what he earns, which is around $108-112k.
For this year then we will have to pay the IRS between $113,000 and $119,000 in taxes for walking away from our house. More than what my husband earns in a year. Take that number now and add to it the $180,000 we have paid on time the last four years in interest only mortgage payments. It comes to $293,000 to $299,000 that we would be paying on a house that we would have lost and that is only worth $300,000. How does that make sense? We lose the house, we lose his credit, we pay off almost what the house is worth in full. Talk about finding ourselves in a pickle.
So, we need a way out. Because, while we are fine paying 10 or $20,000 to get out of this house, we are not fine paying $$$$$. What's the message here? Get into debt, stay in debt. If we would have had debt then we could be walking away from all of this without the tax liability we now face. We are screwed because we have no debt outside of our upside down mortgage.
What's a way out of the tax liability? Claim insolvency, that's what our lawyer said. But, we don't meet the requirements for insolvency, per the IRS code-because we have no debt! IF we had $1000 more of secured debt per month, we could claim insolvency. Secured debt is a car loan or a house loan. Yes, if we had a second house, we could walk away from this one scott free! But, now my husband has late payments on his credit, so no conventional banker will touch him. How to get a second home? Late payments because our lawyer told us to stop making the payments and because Wells would not even think of modifying without us being late. Screwed, we are.
Right now, per the IRS code to test for insolvency, we have $1500 in disposable income a month. They would take that monthly amount for five years, which would total $90,000. Five years from now we would be done paying the $90,000 tax bill from walking away from a home that we already spent $180,000 in interest only mortgage payments the last four years. Totaling the amount spent on a house that we would no longer own to $270,000, which is currently worth $300,000. Nutty.
We can go out and buy two cars, of which we don't need-we drive a '07 Camry and an '83 truck and a '06 motorcycle. Fine by us, they do the job and two are completely paid for. We will get completely screwed with the financing though because we have now late payments. We can buy a house with owner financing or with Private Lending Sources of which we would need to put 30 to 40% down.
The whole time we were talking to the lawyer, we were trying to work with Wells Fargo to modify. After Wells wrote asking for the same exact documents for the fourth time, I made an appointment with our local HUD office. I brought the completed package in to their office and waited a month for our appointment. Our Foreclosure Counselor submitted the papers to Wells. I just heard Monday, the 24th of August that we are in the Final Review with Wells. I can only think that it is because now we have HUD doing the submitting. Although, today we received a letter from Wells that we need to submit the same documents within ten days AGAIN or else the modification process will be cancelled. I'm calling our Foreclosure Counselor first thing in the morning tomorrow.
What's the message? Get in debt, stay in debt. You're covered when you are in debt-you have safety nets you've never even realized when you are in debt. Reduce your debt, pay off your credit card each month and live within your meager means and you're bound to get screwed when something that you have no control over, like the housing market crumbles. How to put an end to all this madness? A Mortgage Revolution, that's how.
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