Ask HN: Startup founder - should I default on my mortgage? | Hacker News Reader

Ask HN: Startup founder - should I default on my mortgage?

9 pointspkmehta18 comments

I wanted to get advice from fellow HN founders who may have faced a similar situation.

Background... I am the co-founder of a profitable but young tech startup (<3 years). My wife and I own a home currently with a 6+% 30 yr fixed rate mortgage. We've had this rate for 6 years and have never been late on a single monthly payment. But since rates are much lower, we want to refinance. Based on the math with current rates, refinancing to a 7/1 arm will knock our monthly payment down by 40% (big savings).

When the startup was making nothing, I opportunistically called our mortage provider (Wells Fargo) to see if I qualified for any of the gov't relief programs for mortgages, and I was told I had too many assets to qualify. I was not distressed enough I guess. This wasn't surprising.

Fast forward to this week... I went back to Wells Fargo since I am now paying myself a salary and coupled with my wife, our income is good. The Wells Fargo team asked if I was an owner of the company after reviewing our personal taxes, and then asked for the company returns in addition to all the personal financial details (bank accounts, paystubs, 401ks, tax docs, etc).

And the verdict was... Our income (meaning my income since my wife works at big co) is not enough or stable enough to qualify for a re-finance.

The 'perverted' part of this whole equation is that if my mortage payment fell by 40%, I'd think that would make my wife and me much better credit risks to Wells Fargo. But oh well, I was too credit-worthy to qualify for distressed programs and not credit-worthy enough for a refinance.

But enough woe is me...My current debate/questions are:

- Should I call Wells Fargo and tell them that I'm going to stop paying my mortgage. Basically engage them in a game of chicken. - Try to goto banks with looser standards? - Or do something else altogether?

Anyone who has been in or seen a similar mortgage dilemma who can share some wisdom? Or if you work in the mortage industry and know how to beat the man, pls share that as well :)

I'm counting you on HN. And of course, this ain't my real HN account.

Here's what really happened: Wells Fargo checked out your income and determined that you'd likely keep paying them 6+% if they said no.

Yes you should check out lots of other banks. After all, you're paying them nothing right now, so you're worth more than zero if they sign you up as a customer. You should check out a mortgage broker, who could give mucho assistance.

If that path fails, you should actually stop paying your mortgage, not just tell them. After it's late, tell them there will be no more payments unless you can refinance at a lower rate. Don't do it unless you're serious about walking away. If you do walk away you'll save a boatload of money of course, and the worst hit to your credit rating will last 3 years tops. But you shouldn't need credit during that time, due to the savings. You'll be mortgage-free rent-free for at least a year, or two if you take steps to drag it out. Let Wells Fargo know that you know that.

Thx. This is the "ballsiest" suggestion of all of these so after I expend other options, I will def explore this.

I'm praying it doesn't come to that. Thx.

You could also sell your house. If you skip a payment or two, the bank will probably start begging you to do a shortsale. In which case you rent for a year or two to fix your credit, and then buy another place.

Try a mortgage broker who specializes in refinancing, not a bank.

There's no reason whatsoever to stick with Wells Fargo for the refinance, because they'll probably still charge you closing costs, appraisal fees, etc.

I have no idea if defaulting on your mortgage will get you distressed mortage rates, but it will most likely make getting a refi or another mortgage a lot more complicated.

It seems to me that the last thing you want to do is to torpedo your credit rating.

I think Mz has the right idea. If Wells Fargo doesn't want your business, find someone who does.

You could also try a mortgage broker.

Make some calls. When I refinanced a house many years ago, only one bank in town had terms that worked for our situation. You only need one.

Often this is not a good idea, but depending upon family circumstances, if you can't get past the "too unstable" portion of lenders' analyses, you might want to consider whether you or your wife have well-off family who might be willing to co-sign (or even take over the property and issue their own loan to you).

An area fraught with emotional (et al.) landmines. But just if it might, contrary to prevailing wisdom, really fit your circumstances.

However, the circumstances would indeed have to be somewhat exceptional. Residential real estate is not a good place for someone senior to be devoting a significant portion of their assets -- or risk exposure.

P.S. I'm no financial guru, but I would really hesitate to take an ARM, at this time. You can go down two or more points while staying with a fixed-rate product.

Also, I agree that "chicken" is not a good idea. Especially at a place like WF, I think you're basically fighting an algorithm. As they say, good luck with that.

I work in the mortgage industry (short sales), and from my experience you can't deal with banks as if you're dealing with rational people. You're dealing with a computer system that spits out verdicts based on an algorithm. Threatening to not pay your mortgage to someone in the call center in India will get you nowhere..

Good point. So far, the midwestern call center folks I've been dealing with have been nice but utterly useless so your point is spot on. Thx.

Wells Fargo probably doesn't actually own your current loan, but are being paid by Fannie Mae to service it. I know Bank of America unloaded my loan to Fannie Mae a week after they gave it to me.

If that is true, their negative answer to you is probably not predicated on the interest income stream you are giving them now, since they are receiving only some of that.

As for withholding payment, here is what I believe.

If we assume that Wells Fargo does actually hold your loan, and you stop making payments, the bank has two choices. Foreclose or negotiate. If the value of your house is less than what is currently owed on it, it makes sense for them to negotiate. This is the situation that has allowed this "stop making payments" meme to spread. However, if the value of your house is more than what you owe, and after 6 years, I suspect it is, than I believe they'll foreclose and flip the house.

Thanks to you folks for the responses/suggestions. I think I was pretty ticked at Wells Fargo for what seemed like a non-sensical result. But was also "cutting off my nose to spite my face" with my idea to play chicken with them.

Thanks for talking me off the ledge :)

Do NOT engage them in a game of chicken. Trust me, it's not worth ruining your credit over.

DO speak to a local credit union(s) to see if they can qualify you for a better rate.

In my experience, dealing locally has been more beneficial than Wells, etc.

Good luck!!

Credit unions. Hadn't even thought of them as I thought you had to be a "member" or something. But that's prob just ignorance on my part. Thanks much for putting me on to this as an option.

Things have changed, with Harp 2.0. Harp was the government program to allow underwater homeowners with good credit and no late payments refinance. It ended up being a flop because Bank's dragged their feet. Enter Harp 2.0, which started Fall of last year, but had a good number of bank's participating since April of this year.

Go google Harp 2.0, and then go ask your bank about it. And then go talk to other banks.

This is really really helpful. Thanks a ton.

Isn't it though? Glad I could help.

Try other banks for the refi. Also, see this website http://danielamerman.com/ regarding the value of a 30yr fixed mortgage in today's environment. The govt is broke and when (not if) inflation hits you will pay back that debt for pennys on the dollar (assuming you can afford to continue to make the payments, even at 6%). Good luck.

Get in contact with a mortgage broker and have them shop you around. If they can't find a bank for you, no one can.

They can be shifty guys, but unlike in most instances they usually lie to the bank and not to you.

Reply on news.ycombinator.com