What Happens When The Sole Owner Of A House With An Upside Down Mortgage Dies?

[honobob]

Quote:

Originally Posted by Martha I said "likely" foreclose. The lender is upside down, why would the estate try to sell the house when there isn't anything in it for the heirs? .

If someone who held their selves out as a practicing attorney told me I’d "likely" go to jail, I’d be making a "dating" plan! I’m afraid I’d "likely" be popular. You remember I was a model.

The lender is upside down, why would the LENDER try to sell the house when there isn’t anything in it for the LENDER? I can think of "way more" (not a legal term) reasons for an heir to want to continue to make prompt payments on an inherited property than for a lender to allow a short sale or force a foreclosure.

Quote:

Originally Posted by Martha BTW hono, I am aware of a number of standard mortgage forms which provide that if the borrower or mortgagor dies it is a default on the mortgage and the lender can foreclose. I am not aware of state laws barring this provision, though some states might have such a law and maybe some state's probate laws could slow it down.

I did go to law school but never practiced but I would have to ask you if you think everything in a contract is enforceable? I would also NOT advise a personal representative to default on the mortgage payments. What if the property doubles in value before the probate is complete. Imagine the liability to the heirs.

Marty, when you think about this stuff I suggest reading up on the concept of enforceability.

Most states have passed laws that say that a death does NOT trigger the "due-on-sale" clause of the mortgage. You just keep paying. You are not really assuming the mortgage since you didn't fill out any paperwork. You are taking the property "subject to" the mortgage.


There are situations where due-on-sale provisions are legally not enforceable (legal loopholes):
This can be found in the US Code, Title 12 (Banks and Banking), Chapter 13 (National Housing Act), Section § 1701j–3. Preemption of due-on-sale prohibitions. Mainly subsection D.
Some examples are transfers to relatives upon death, transfer to spouse/children in general, or certain family trusts
　

　
http://www.real-estate-online.com/articles/art-071.html
　

FDIC Law, Regulations, Related Acts - Miscellaneous Statutes and Regulations

[ChrisC]

Quote:

Originally Posted by honobob The lender is upside down, why would the LENDER try to sell the house when there isn’t anything in it for the LENDER? I can think of "way more" (not a legal term) reasons for an heir to want to continue to make prompt payments on an inherited property than for a lender to allow a short sale or force a foreclosure.

Hmmmm, because the lender wishes to mitigate additional losses in the property, because it wishes to recover something on its loan against the property (as opposed to having this loan-asset on the balance sheet of the lender completely extinguished by the local taxing authorities who will tax sale the property and wipe out the lender's interest in some cases under state law), or because the lender might be severely criticized by its outside auditors or regulators if it didn't pursue foreclosure or loss mitigation. The property isn't completely worthless; it's just that the borrower is upside down on the property: his debt exceeds his equity or, in other words, he has negative equity; the property might still have value to the lender, unless it's environmentally toxic.

Quote:

Originally Posted by honobob I did go to law school but never practiced but I would have to ask you if you think everything in a contract is enforceable? I would also NOT advise a personal representative to default on the mortgage payments. What if the property doubles in value before the probate is complete. Imagine the liability to the heirs. Marty, when you think about this stuff I suggest reading up on the concept of enforceability. Most states have passed laws that say that a death does NOT trigger the "due-on-sale" clause of the mortgage. You just keep paying. You are not really assuming the mortgage since you didn't fill out any paperwork. You are taking the property "subject to" the mortgage. There are situations where due-on-sale provisions are legally not enforceable (legal loopholes): This can be found in the US Code, Title 12 (Banks and Banking), Chapter 13 (National Housing Act), Section § 1701j–3. Preemption of due-on-sale prohibitions. Mainly subsection D. Some examples are transfers to relatives upon death, transfer to spouse/children in general, or certain family trusts 　 　 http://www.real-estate-online.com/articles/art-071.html 　 FDIC Law, Regulations, Related Acts - Miscellaneous Statutes and Regulations

Hmmmmm, I guess we need competent counsel to figure out which contractual provisions are enforceable in general and which contractual provisions might be specifically preempted by federal banking laws or regulations especially in light of this case as well: CUOMO v. CLEARING HOUSE ASSN., L. L. C..

[Martha]

Quote:

Originally Posted by honobob If someone who held their selves out as a practicing attorney told me I’d "likely" go to jail, I’d be making a "dating" plan! I’m afraid I’d "likely" be popular. You remember I was a model. The lender is upside down, why would the LENDER try to sell the house when there isn’t anything in it for the LENDER? I can think of "way more" (not a legal term) reasons for an heir to want to continue to make prompt payments on an inherited property than for a lender to allow a short sale or force a foreclosure. I did go to law school but never practiced but I would have to ask you if you think everything in a contract is enforceable? I would also NOT advise a personal representative to default on the mortgage payments. What if the property doubles in value before the probate is complete. Imagine the liability to the heirs. Marty, when you think about this stuff I suggest reading up on the concept of enforceability. Most states have passed laws that say that a death does NOT trigger the "due-on-sale" clause of the mortgage. You just keep paying. You are not really assuming the mortgage since you didn't fill out any paperwork. You are taking the property "subject to" the mortgage. There are situations where due-on-sale provisions are legally not enforceable (legal loopholes): This can be found in the US Code, Title 12 (Banks and Banking), Chapter 13 (National Housing Act), Section § 1701j–3. Preemption of due-on-sale prohibitions. Mainly subsection D. Some examples are transfers to relatives upon death, transfer to spouse/children in general, or certain family trusts 　 　 http://www.real-estate-online.com/articles/art-071.html 　 FDIC Law, Regulations, Related Acts - Miscellaneous Statutes and Regulations

Are you mad at me or something?

[honobob]

Quote:

Originally Posted by Martha Are you mad at me or something?

No, not at all. I did think your answer was very flip and could see where the OP would be startled to think it was likely that the property would be forced into foreclosure. Then there was talk of a tax sale, I figure a IRS lien and the threat of eminent domain would come up shortly. I just pointed out some facts that I hoped would relieve their apprehension. Can't we just git back to the comfort of biscuits n gravy before Grandpa's farm is taken away. Plus, you know it makes me crazy when people only see real estate in the most negative light.
Peace.

[Martha]

Remember Hono, the question was about what may happen if an owner dies and there is no equity in the property. I stand by my answer that most likely the lender will end up foreclosing. I gave no advice as to whether someone might want to make the loan payments. You aren't in any position to give such advice either. Personally, if I was an heir I likely would not like to see a PR making payments on an upside down mortgage, especially if the lender was not entitled to a deficicieny claim on floreclosure (which is a state law issue).

FWIW I know personally of some situations where a person died owing more than their home was worth. In one case Dad died owing more than his house was worth. The only other assets were junk in the house, a car with a big loan on it, and a retirement plan with his daughter as beneficiary. Daughter took the retirement plan money, cleaned out the house (more to be nice than anything else) and walked away from the house and the car. Seems reasonable to me. No probate so no personal representative.

I also knew a person who died leaving his home subject to a mortgage and federal tax lien. His son, who was his only heir, tried to sell the house and get the IRS to settle. No luck and he walked away too.

Now of course, there can be close questions about whether or not there is equity. But if no one makes the payments, the mortgage is going to be foreclosed at some point.

How is your claim that a PR should make payments on the debt because the property might double in value going to relieve anyone's apprehension? I think that is just speculation.

As far as the side issue of due on sale clauses, you may very well be right that federal law has validly preempted state law on the issue. I don't know. But it is not really relevant if the mortgage is upside down. I suppose you could be an heir and really want to keep the property even though it is worth less than what is owned. In that case, maybe the better bet is to try to negotiate to buy the property from the lender for its true value and not make payment of the entire debt.

Again, see my signature.

[chinaco]

The estate has a debt. Generally, the executor of the estate is supposed to settle debts (assuming the estate has assets). I suppose there could be a number of outcomes. But if there was enough money in the estate to pay off the debt, then the executor would likely take care of the debt and then sell the property.

If the house is worth less than the debt on the mortgage, then there might be some negotiation to lower and pay the debt by the executor... or the bank may foreclose and hold up the closing of the estate to recover money as a legal debtor.

[Bestwifeever]

Quote:

Originally Posted by honobob If someone who held their selves out as a practicing attorney told me I’d "likely" go to jail, I’d be making a "dating" plan! I’m afraid I’d "likely" be popular. You remember I was a model.

You were a model? This post is most definitely useless without photos.

[Brat]

Were I the PR I would look closely at the mortgage(s) on the house to determine if the estate had any liability. Then look to see how the other estate assets were held. Next I would consult an attorney in the local area to determine if any of the mortgage(s) had a claim on the estate.

If the house is also the home of an heir there may be more than a financial decision on the table. Remember, the lenders will play hard-ball to maximize their return on the loan. The heir needs to be prepared to walk away to make the threat of abandoning the house a risk to the lender. My reading from housing bubble boards is that some lenders are so overwhelmed that they can't respond to offers to negotiate. The PR might just sit tight and not pay the mortgage. Once the lender notices then make an offer to compromise.

If there is no heir who wants the house then I would do what Martha's client did, aka "Jingle mail."

There is no way I would offer to help the bank market the house unless they offered its occupant free housing during the process.

[Westernskies]

The mortgage is secured by the property, not the value of the estate... The bank would have to foreclose on the property pledged as collateral against the loan, sell it short and then initiate a separate civil action against the estate for the difference.... which might not be worth the effort in todays legal and political mortgage climate. IMO

Good hypothetical question, ha...

[Brat]

If the first mortgage was a purchase mortgage in most jurisdictions there can be no claim on the estate. If I were the PR I would want to know if the mortgagor(s) could tie up the estate until any shortfall is determined, or if the PR had any liability should the estate be disbursed before a claim was filed.

[honobob]

Martha
I’ll respond because I feel there is interest and I have something to say on the subject. You already seem defensive and entrenched in your opinion and I have no interest in changing your mind but to offer a different take on the OP’s question. If you are not comfortable with what I write feel free to request the moderators to delete my post. I won’t get mad, unless perhaps if you go out of your way to make a personal attack on me.

Quote:

Originally Posted by Martha Remember Hono, the question was about what may happen if an owner dies and there is no equity in the property. I stand by my answer that most likely the lender will end up foreclosing.

Because?.........of nonpayment or due on sale clause? My contention was that as long as payments were being made it was very unlikely that the lender could or would initiate foreclosure. I provided some backup for that contention.


Both of you anecdotal examples resulted in foreclosure because the heirs “walked away”/”did not make payments”. I agree with that!

Quote:

Originally Posted by Martha Now of course, there can be close questions about whether or not there is equity. But if no one makes the payments, the mortgage is going to be foreclosed at some point.

No brainer!

Quote:

Originally Posted by Martha How is your claim that a PR should make payments on the debt because the property might double in value going to relieve anyone's apprehension? I think that is just speculation.

I took the view that the OP/heir was concerned about the disposition of the property and would be relieved that there would be liability issues if the PR did not act properly in their capacity. If they petitioned the court for permission to default on the mortgage then fine but the heirs also would then have an opportunity to protect their interest in the property. As an officer of the court I’m surprised you’d be so quick to encourage a self help course that could result in disaster for all, whether that be loss of 10% or 100% increase in equity or just the property itself.

Quote:

Originally Posted by Martha As far as the side issue of due on sale clauses, you may very well be right that federal law has validly preempted state law on the issue. I don't know. But it is not really relevant if the mortgage is upside down.

Totally disagree! How did you come to this conclusion? I've got to believe that a lot of VA mortgages are underwater at one time or another in their first couple of years. And what about all those 125% financings. Underwater to start. Did that make the property worthless and subject to foreclosure?

Then we got to the questionable assumption of the value of the property to the heirs. Talk about speculation!.

“he has negative equity; the property might still have value to the lender, unless it's environmentally toxic.”

But we don’t have the facts on this specific property but we can present both sides. As an heir the value might very well be emotional. It was the old homestead, it’s where I always dreamed of retiring. It may very well be financial. Maybe the property is only underwater because of a comparable that was a distress sale and nobody else is selling because they would not be willing sellers for what a willing buyer is offering or can get financing for at this time. It takes both for a TRUE market value. Or it may be a $500,000 property say mortgaged for $525,000 with 20 years left of a 4.5% mortgage. As an heir with lousy credit but a good paycheck I can “buy” this property by “taking over payments” with NO MONEY DOWN! And it possibly rents more than the Piti!! I’m thinking a new chapter in my book, Know When to Walk, and When to Talk, Taking Advantage of Inherited Underwater Property. Here in CA it could also have a ridiculous low tax base where the State is subsidizing taxes to the tune of $10,000 per year. If you plan to hold long term then even if you’re $100,000 upside down this property is starting to look like a gold mine. OR the property could be in Minnesota where NBHDScout reports mean appreciation in Pillager of 25.04% a year since 1990 and Littleton 17.78%,Dexter 17.75%, Pineriver 17.64% and Sacred Heart 17.42% each and ever year, on average. Since 1990! 4% my *ss.

Quote:

Originally Posted by Martha As far as the side issue of due on sale clauses, you may very well be right that federal law has validly preempted state law on the issue. I don't know. But it is not really relevant if the mortgage is upside down. I suppose you could be an heir and really want to keep the property even though it is worth less than what is owned. In that case, maybe the better bet is to try to negotiate to buy the property from the lender for its true value and not make payment of the entire debt

Nothing wrong with trying to get a better deal but I do not believe in encouraging cavalier attitudes towards commitments to debt.

Or the lender could try to foreclose. It's happened to me three times. Of course, I had tons of equity and the last one cost Wells Fargo Bank $15,000 to me plus their expenses. Maybe that's why I'm a little nuts about BOTH sides keeping their commitments to a mortgage.

[Martha]

Hono, the heirs have no obligation for the debt so walking away could hardly be thought of as cavalier.

Otherwise, fair enough, your point is taken: if the due on sale is not enforceable (and at best, it is only not enforceable against relatives who inherit the property) maybe that relative will want to try to keep the property and keep up with the payments even though there are other options.

As far as your constant cherry picking of appreciated properties and trumpeting of "4% my ass," it is tiresome. As a result I tend to discount what you say even when you do have a point.

[honobob]

Quote:

Originally Posted by Martha Hono, the heirs have no obligation for the debt so walking away could hardly be thought of as cavalier. Otherwise, fair enough, your point is taken: if the due on sale is not enforceable (and at best, it is only not enforceable against relatives who inherit the property) maybe that relative will want to try to keep the property and keep up with the payments even though there are other options. As far as your constant cherry picking of appreciated properties and trumpeting of "4% my ass," it is tiresome. As a result I tend to discount what you say even when you do have a point.

Are you mad at me or something?

[ChrisC]

Quote:

Originally Posted by honobob My contention was that as long as payments were being made it was very unlikely that the lender could or would initiate foreclosure.

Actually, I think you're revising your contention here. There was no implication in your original point that payments were being made by the estate; in fact, I made the inference that the estate would not be making payments.

Indeed, this is all pointless drivel if payments are being made!

[honobob]

Quote:

Originally Posted by ChrisC Indeed, this is all pointless drivel if payments are being made!

Ding! Ding! Ding!

But if you look at my first post to this thread you'll see that I disagreed with a death provoking a foreclosure. Death plus no payments equals foreclosure. No payments equals foreclosure. Death equals only a possibility of foreclosure or possible unenforceable attempt.

Second paragraph of my second post I stated "I can think of.....reasons for an heir to want to continue to make prompt payments"

[ChrisC]

Quote:

Originally Posted by honobob Ding! Ding! Ding! But if you look at my first post to this thread you'll see that I disagreed with a death provoking a foreclosure. Death plus no payments equals foreclosure. No payments equals foreclosure. Second paragraph of my second post I stated "I can think of.....reasons for an heir to want to continue to make prompt payments"

Your point is well taken. However, look at Bubba's post that immediately came after your first post, which basically answered your post. And the initial post that started all this blathering could easily be read to inquire about legal responsibility for payment and legal conseqences of nonpayment.

I mean, really, the OP didn't seem to inquire about whether payments should be made, but rather what happens when someone dies and payments are not made. That's the way I read this exercise in blathering.

[honobob]

Quote:

Originally Posted by ChrisC I mean, really, the OP didn't seem to inquire about whether payments should be made, but rather what happens when someone dies and payments are not made. That's the way I read this exercise in blathering.

ChrisC Please review HaHa's first post. I don't see anywhere that he mentioned payment or not. Bubba seemed to answer his own post in that if payments were made foreclosure was not likely so I did not respond to him but expand on it to Martha's statement that foreclosure was likely whether payment was made or not.

Had Ha said payments were not to be made I would be on the side of pending foreclosure!

[Bestwifeever]

Still waiting to see those model photos, Hono

[honobob]

Quote:

Originally Posted by Bestwifeever Still waiting to see those model photos, Hono

Who said the medium was photography? Or even that I was the "after" or the "before". Quit flirting with me.......eventually.

[RunningBum]

I assumed the question was whether the estate has a legal obligation to pay off the mortgage before making distributions to the heirs. I would think it does, just like (I think) it must pay credit card and other debts.

But if not, who makes the decision whether to walk away from it? I wouldn't think the executor would. But if there are multiple heirs, who decides? If the house is only somewhat upside down, and the house has some sentimental value, I could see this being a contentious decision.

There seems to be agreement here that if the mortgage isn't repaid and payments aren't made, either because the estate doesn't have the assets to cover the loan, or they are allowed to walk, the bank will foreclose. Certainly a bank won't give up an asset that has some value, even if it's not enough to cover the whole debt.