A question about foreclosure.

I'm hoping this is the right forum for this. I'm asking this question for a friend, and I'm asking it on DU because I frequent this board and neither of us could find any forums on the Internet specific to housing and finance issues.

To make a long story short: Old friend bought home on a 30 year fixed about seven years ago. Three years ago, at the peak of the market, he had another much nicer home offered to him far below market (at the time, anyway). He purchased that home on a 30 year fixed with a great rate, and got his down payment by refinancing his first home with Countrywide. The second home was financed into an ARM with a $50,000 HELOC second which was used for the down payment on the new home. His intention with the ARM was to lower the payment on the home so he could rent it for a while, hoping the market would continue to climb and he could eventually sell it for a profit. Then everything collapsed.

The home is located in the San Joaquin Valley in California, where the prices have dropped substantially. The HELOC drained the equity from the first home, and with the drop in the market he now owes roughly $100,000 more than the home is worth. Even worse, his ARM recently unlocked and his payments skyrocketed. He does have a renter in the home, but the rent no longer comes anywhere close to the mortgage payment ($1100 rent, $2400 mortgage and climbing). He did the math and there is simply no way he can keep the home. He does have about $50,000 in a 401k and about $25,000 in the bank (his sons college savings fund), but applying those toward the mortgage only puts off the inevitable. Once they are exhausted (and that 401k only works out to about $25,000 once penalties are factored in), he will still lose the home.

So here are the questions. First, if the home goes into foreclosure, can his 401k and bank accounts be seized? Second, if the home is foreclosed, what happens to the HELOC debt and any excess mortgage owed? Can he be sued for it, or is it gone once the house is taken? Third, can Countrywide try to claim his primary residence, which is unrelated to the first home but is a major asset? He's OK with the payments on that one, but is freaking over the possibility of losing both homes. He's already written the one off, but we're wondering how badly this is actually going to be for him.

Has anyone been through a foreclosure, or does anyone have any experience with them? My sister may be facing one pretty soon as well, so I'm also curious as to the long term impact of foreclosure on your credit.

or perhaps a real estate lawyer..

He's not overdue yet, and they said that he would need to liquidate ALL of his sheddable assets before they would work with him.

to work with homeowners.

Your friend should not have told Countrywide his whole story and just asked Countrywide to reset his mortgage back to the initial rate because your friend is considering letting the loan go into foreclosure. The fear of having another loan in foreclosure could possible get the Countrywide guy moving on making some changes.

They cannot touch the 401K, and whatever he does, do NOT use the 401K. Are the college savings fund in a special college savings plan (i.e. 503b or something like that)? They would be exempt also.

He said "college savings account", so I mentally pictured an actual savings account with money in it. It didn't occur to me to ask about the type.

but it's my guess that as long as the first house was not used as collateral for the loan on the second house the first house should be safe. Countrywide's claim is on the house that they have an interest in. The HELOC was taken on the first house which Countrywide has no right to make a claim against.

As long as there's no bankruptcy involved his first house should be safe. However, if Countrywide is not agreeable to taking a loss on the disposition of the property there may be a situation where Countrywide could possibly become an unsecured creditor against them.

We have what is called the "Depression laws" re foreclosure. He needs to see a lawyer.

California law might surprise you, might not. See a lawyer. You will pay high attorneys' fees, but you will get peace of mind if you know where you stand. Don't try to save money on lawyers' fees. It is a false economy. Foreclosure law in California is complex. Be sure to see a lawyer who specializes in that area. Call your local bar association and the bar associations in surrounding counties for references. Don't just ask a friend for the name of a lawyer on this one.

You need to know your options. You need to make decisions based on knowledge and understanding, not on emotions and panic. Once you get a lawyer, ask questions. Call your lawyer. Don't just think things are taken care of because you have talked to a lawyer.

He needs about 1300 above the rent to make the nut, and has about 50K liquid. Its risky, but things will likely be better in 3 years.

:shrug:

You friend screwed the pooch.

There was a major real estate forum here recently, and the conclusion was that prices would stop dropping in three years, and that sales numbers might reach "normal" levels again in 5-6. They didn't project a price recovery to 2005 levels for at least 10 year, and even then only if the U.S. managed to avoid any recessions.

Nationally, the market will probablyu recover in a few years, but prices shot up faster here than anywhere else in the country, and as a result the crash is more intense here than anywhere else. I was a millionaire there for a while because of the boom...not any more :)

I agree w/talking to a lawyer specific to your state, or better, contacting the lender about resetting the rate (default resolution).

The best advice you can give is to check with a California real estate attorney. The lenders are much more reasonable about helping people in this situation. He could contact the lenders directly and ask if they will re-negotiate the loans for him so the payments are more reasonable. If he could hang on--for say another 3 or 4 years, he'll be able to sell the property for everything he's got in it and not lose anything.

Your credit can recover from a foreclosure but it's not easy and takes a long time--it's like a bankruptcy.