Scheming to save 'underwater' house

DEAR BENNY: We're badly underwater in our house. Our business is hurting and we are struggling to make the house payment. We owe $340,000 on a house that would maybe sell in today's market for $200,000. We think the only way it makes sense to stay in our house would be if our mortgage holder would take a significant principal write-down, which they won't do.

Is it legal for us to let our house fall into foreclosure and have a friend of ours buy it for us at the foreclosure price? Then he sells it back to us using a private mortgage via Virgin Money or similar organization. We'd pay him a premium over the rate he is currently earning on his $200,000 so that he even makes a little money and we maybe "keep" our house. We realize that there is no guarantee our friend would be able to buy the house; someone else might beat him to it or the bank might set an unreasonable price, but we don't see any other choice except walking away completely. --Cathy

DEAR CATHY: First, I am not familiar with Virgin Money and am not in any way endorsing or supporting them.

How is your credit rating? You indicate that you are having trouble making your mortgage payments, but my assumption is that you are still current. You should understand that even if your scheme is legal (which I will discuss shortly), once you let the property go to foreclosure, this will significantly impact on your credit standing -- and it will take a long time before you can get it restored.

Have you explored the many federal and state programs that are now available to help homeowners who, like you, are having financial problems? For example, in mid-May of this year, President Obama signed into law the Helping Families Save Their Homes Act, which may be beneficial to you. My bottom line: Foreclosure should be the absolute last resort.

But if all other avenues fail, I see no legal reason why your friend cannot try to buy the house at the foreclosure sale. What he does with the house after taking title is his business. And as you suggest, that may not even happen, if the bank's starting bid is too high, or if there is a higher bidder.

However, there is one issue that should be explored, namely whether the lender can go after you for the difference between what the house sells for at the sale and the amount of your outstanding mortgage. This is known as a "deficiency," and in many states, lenders can go to court and seek a "deficiency judgment."

To my knowledge, only 10 states (Alaska, Arizona, California, Hawaii, Minnesota, Montana, North Dakota, Oklahoma, Oregon and Washington) have enacted laws completely barring deficiency claims. If you are not in one of these states, the lender, especially if it learns that you once again own the house, may want to sue you for that deficiency. (Note: A full listing of all state foreclosure laws can be found in the "Foreclosing a Dream" report at the Web site of the National Consumer Law Center.)

DEAR BENNY: I am on the board of a large condo association with many absentee owners. Recently the board decided to fund an insurance payment out of reserves with the intention to pay it back later. In order to do this a majority vote of the owners was needed. The management company sent all the ballots/proxies out with a date to have them returned and with a set date for the meeting. I couldn't attend the meeting, and was told that not enough votes/proxies had come in.

About 10 days later I received an e-mail from our property manager saying more proxies are in and we have over 50 percent yes. I was confused but was told that not enough board members showed up for the meeting so there was no quorum. At that time I thought that the motion to fund the insurance premium had failed.

I was told "not so" and that the proxies are good for 90 days and that we probably needed an emergency board meeting to pass the vote. An emergency board meeting was called, and the issue was approved.

Is this legal? I thought if you follow procedure and you do not have enough votes on the set date the vote fails.

I must add that our board president is also working for our management company. They hired her after she became board president. The whole issue of conflict of interest has put additional strain on our board relations. --Lothar ...CONTINUED

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