First of all, let me say up front that I'm not a financial expert or a lawyer - this is just an account of my personal experience.
Since we're on the subject of how the banks are ripping everyone off, I thought I'd share my personal story. My wife and I moved across the country to California in 2003 because she got a good job there - I got a job a couple months later (phew!), and we decided to buy a house (cue the scary music!).
Fast forward to 2007 - we now have a kid, and the grandparents back east are getting older (it's hard and expensive for them to fly cross-country to see their grandchild). And we're thinking of having a second child. So I start looking for a job back east - in my field, not an easy thing to bet on, but after a year, I got one! We would take a massive cut in pay, but the cost of housing is supposedly lower on the east coast, right? (We would quickly learn that's not the case, but that's for a different post...)
Now the fun begins.....
So we list our house for sale. It appraised for $680,000 in 2006, and we owe about $500,000 on it (in other words, we had ~25% equity in the house). It's now worth about $280,000.
Scary numbers, I know - but we never did any crazy "liar" loans, we played by the rules, and never even "took money out" the way so many other people were doing with second mortgages, etc.
We listed the house at $640k, dutifully reduced the price when it didn't sell, and eventually got an offer for $580k. Yippee! We can get on with our lives and our family. Unfortunately, this was right around the time the housing market collapsed, and the banks imploded - and bang! - our buyer couldn't get a loan anymore.
So now we were in trouble - we lowered the price more (a LOT more), and now we were looking at PAYING 30-50,000 (all of our savings) to get out of the house, and that was IF we could find someone to buy it at a bargain price. Anyway, we couldn't - and now at this point, we're so far underwater it's hopeless. 1/3 of the houses in our neighborhood have gone to foreclosure or short sale, so we started looking at a short sale, where you hopefully get the bank to agree to accept less than the full amount owed, and work out some arrangement where you bring some money or work a payment plan, etc.
Meanwhile while all this was happening, our servicer (the bank that managed the loan, accepted payments from us, etc.) changed 3 times! First it was ABN/AMRO, then it was LaSalle Bank, and now its Bank of America. So we take a serious offer to BofA, and they call me and say they'll consider a short sale if I agree up front to accept their terms. (They wouldn't say what the terms were up front though.) So I say "Let me see something in writing, and hopefully we can agree - we're happy to bring a reasonable amount of money to close, or work out a payment plan."
So after literally 2 months of this back and forth, BoA finally issues an "approval letter" where they say the following:
Bank of America agrees to accept $296000 in certified funds as payment towards the above referenced loan. Upon the Bank's receipt of $296000, the Bank will release the lien and charge off the remaining debit as a collectable balance. Our recovery department will be in contact with you to make arrangements on this balance. Will report the account to the credit bureaus as "Charged Off", and show the balance remaining owed to Bank of America. Please note that any subsequent refund received by the Bank will be applied to the outstanding balance of the loan.
In other words, if we can find someone to pay $300,000, BoA will allow us to sell the house, but then turn the remaining $200,000 into unsecured debt - like credit card debt. There was no up-front offer to arrange a payment plan or plan to settle any of the debt, no indication they won't sue us for the balance some day, etc.
I called them back and pointed out that this leaves us no legal protection, and BoA can come and sue us for a couple hundred thousand dollars, and we'd have no choice but to file for bankruptcy. They said "lots of people are signing this letter, and after you sign it, you talk to the recovery department". They refused to let us talk to the recovery department ahead of time to find out what would be in store for us if we agreed.
So our choices were these:
- Sign the letter and throw ourselves and our financial future on the mercy of Bank of America. In this case, we would expect to file bankruptcy in the next year or two, or have them come after us to take our car, belongings, etc.
- Forget the deal and let the house go into foreclosure. It will be devastating to our credit, but we don't use a lot of credit anyway, and the short sale (#1 above) is almost as bad on your credit anyway. In California, banks of "one action" available to them - in this case, the foreclosure would be their action. They can't foreclose and then sue. Not all states have that protection, unfortunately.
So we've decided on #2 above. We feel bad that we made a financial commitment that we can't keep, but now we have 2 kids futures to think about.
We could have settled this and moved on if BoA would have let us negotiate with the recovery department ahead of time. And if anyone is out there dealing with this, be aware that the wording of these BoA "approval" letters DO NOT release you from the obligation. All it does is let BoA sell the house, and then it turns your debt into UNSECURED debt. (Allowing them to sue you at any time.)