A Story About a Man Named Tom

"Tom in California has a $550,000 condo with a $4k payment a month.

Tom’s income drops, home value drops, 401k value drops.

Tom is not happy. Tom thinks about selling his Mercedes.

Tom stays up late at night thinking how can I save Tom’s A$$.

Tom devises a plan to legally work the system.

Tom stops paying his mortgage and property taxes.

Tom pockets $4k a month.

Tom’s lender doesn’t send out a default notice for 6 months because said lender is really overwhelmed with foreclosure notices, plus there has been a moratorium. Tom now has $24,000 under his mattress.

Tom’s credit has gone bad and Tom’s credit card limits have been cut down to their balances.

Tom is frustrated and spends some of his cash.

Tom now has $22,000.

Tom’s lender under California law has to wait 3 months for a Right of Redemption period before filing a 21 day notice to sell his property at auction.

Tom pockets another $12k from not paying his mortgage payment.

Tom now has $34,000.00.

Tom gets a notice on his door saying his home is going to auction. Tom calls lender to try for a loan modification under Obama’s new plan.

Lender postpones foreclosure for another month. Tom pockets $4k more ($38,000).

Lender offers Tom a reduced monthly payment starting 30 days later. Tom pockets $4k more. ($42,000)

Tom decides his condo is $100,000 underwater and doesn’t think he will recover his equity anytime soon because an REO next door has been on the market for 100+ days with no offers. Tom looks for a place to rent.

Tom finds a comparable place to live closer to work at $2k a month. Saving $2k a month.

Landlord doesn’t like Toms credit, so asks for 1st & last month’s rent plus a 2 month deposit. Tom now has $34,000 under his mattress.

Tom’s condo forecloses. Tom feels bad, but knows a lot of other people have foreclosed as well and is somewhat happy about his $34,000 under his mattress. Tom’s loan was a purchase money loan so the lender does nothing about his deficiency. Tom receives a 1099 from his lender but doesn’t have to pay thanks to the Mortgage Forgiveness Debt Relief Act (through 2012).

3 years pass by and Tom sees values continue to drop and stay low. Tom saves $72,000 by renting. (Interactive foreclosure calculator)

Tom notices a much bigger & upgraded condo with a killer view for sale for only $500,000.

Tom finds out that even though he had a foreclosure, after 3 years the FHA will do a new loan for him with only 3.5% down and he is now considered a first-time home buyer with eligibility for a nice tax credit (currently only good through 2009, but may be extended).

Tom lifts up his mattress and grabs his down payment of $17,500, which leaves him with $88,500.

Tom gets his rental deposit back of $4k and the first-time home buyer tax credit of $8k (see below).

Tom puts it with his $88,500 and it becomes $100,500.

Tom buys stock in a real estate ETF.

4.5 years later the foreclosure falls off his credit report.

Tom worked the system.

The law defines first-time homebuyer as a buyer who has not owned a principal residence during the three-year period prior to the purchase.

The FHA requires a minimum 3.5% down payment on loans backed by the agency, which means that buyers could put little or nothing down on homes up to $230,000. It is close to having nothing down, says Thomas Lawler, an independent housing economist.

A borrower whose previous residence or other real property was foreclosed on or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for an insured mortgage. However, if the foreclosure of the borrower’s principal residence was the result of extenuating circumstances beyond the borrower’s control and the borrower has since established good credit, an exception may be granted.

My Thoughts

Are Tom and the banks/lenders that much different?

*Disclaimer - Don’t try this at home"