Housing in a nutshell: Foreclosures up. Sales up. Prices down.

Housing in a nutshell: Foreclosures up. Sales up. Prices down.

New research by Paola Sapienza of Northwestern University and Luigi Zingales from the University of Chicago, provide interesting insight into the foreclosure tsunami.

In the 1990-91 recession the study found that very few people who could afford their mortgage walked away from their homes. The magic number was 10. When equity declines exceeded 10% of the value of the home, owners started to waiver. A 10% loss and the default rate begins to rise. A 50% loss of home value and 17% of all owners preferred default to staying in the game.

The study concludes that in this cycle, a large segment of foreclosures were driven by a different metric. One in four recent mortgage defaults are strategic. Buyers of property make a business decision to walk away because they no longer like the deal. For 25% of all foreclosures, today, its not inability but unwillingness to make payments.

The study makes an interesting observation. The Obama administration is focused on cash flow to owners to keep them in their homes. This study points to a different reason for a large segment of foreclosures. Many people wont stay in their homes when the value of their mortgage exceeds the value of their home by 10% or more.

If the study is correct, then writing down the loan would significantly stem the tide. Since lenders are unlikely to do so, Im betting we will continue to see foreclosures for quite a while.

7 Options to Avoid Foreclosure

Falling behind on your mortgage payments? Here are 7 options you need to know about to avoid foreclosure.

It is all too often these days that I am talking to people who are in a bind with their mortgage. They usually fall in to one of 3 groups:

* They have taken on too much mortgage debt with a large home or previous cash-out refinance
* They have fell on some hard times, either through a loss of a job, injury or loss of a spouse
* They have recently had their mortgage payment adjust and they can no longer afford the higher payment

The first option that they look for (and that we try to consider) is a refinance out of the existing mortgage and in to one that is more manageable in terms of the monthly payments needed to keep the debt in good standing. While this may not be the “best” option it is the one that people gravitate towards initially. Refinancing was easy over the last few years:

* Sky-rocketing property values ensured that consumers could count on home appreciation to help them pay off debt and pull cash out of their homes
* Interest rates continued to drop or remain low
* Credit guidelines became looser and made qualifying for loans easier than ever

However, today things are much different.

* Home prices are falling
* Interest rates are rising
* Equity is tapped out
* Credit guidelines are tougher

All of this means that refinancing is not always an option for homeowners who suddenly find themselves unable to handle their mortgage payments. If you are in a situation where you have missed-and are likely to miss future-mortgage payments, here are 7 options you need to know about and explore to avoid foreclosure and keep from losing your home.

1. Refinance - If you can. This may be the best chance you have to get a mortgage while rates are still reasonably low and programs are still available. If you are a subprime borrower in a short-term loan that is coming adjustable shortly you need to take advantage of this last window of opportunity. With Wall Street set to devalue billions of dollars in subprime loans you can bet that subprime lenders are going to become more strict in their guidelines and more expensive in terms of interest rate. Take advantage of the rates and programs today – they probably won’t be there tomorrow.

If you can’t refinance and are late on your mortgage here are 6 other options you have to help avoid foreclosure on your home.

2. Reinstatement – You may be able to have your loan reinstated by contacting the loan servicer and agreeing to repay the past due amount of mortgage payments plus any fees and penalties by a certain date. This will bring your loan current and stop the lender from initiating foreclosure proceedings. If you are having a hard time making your mortgage payment this option may be impossible for you; however if your inability to pay was based on a temporary situation or one-time expenses this may be viable.

3. Repayment plan – You may be able to stop foreclosure proceedings by establishing a repayment plan with your loan servicer which adds additional money to your currently monthly mortgage obligation to repay the amount of delinquent mortgage payments outstanding on your loan. Again, this will only work if you have a few mortgage payments delinquent as adding additional dollars to your monthly payment may make meeting these obligations impossible.

4. Forbearance - Forbearance is where your loan payments are either suspended temporarily or the amount of the monthly payment is drastically reduced for a short period of time. The length of time is negotiable between you and the loan servicer. The deferred portion of the payments can either be due upon completion of the forbearance period or they may be added to the outstanding balance of the loan. This depends on the loan servicer. Remember, the loan servicer is not going to agree to a forbearance agreement unless you can prove that the situation leading to your inability to pay is a temporary one that can be resolved shortly. If you can’t afford your home simply because the debt is too expensive there is little chance that the loan servicer will approve a forbearance request.

5. Loan Modification - A loan modification is a change to the terms of your loan to keep the loan affordable and to help you keep your payments current. A loan modification may reduce the long term interest rate, adjust the length of the fixed period of the loan, or adjust the loan balance to add missed payments on to the principal balance of the loan. Typical loan modifications include reducing the interest rate of loans that have recently adjusted out of their teaser rate period. This makes sense if you are able to remain current on your loan with slightly better terms than you are currently obligated to through the loan documents.

6. Selling Your Home – This may be the best option if none of the above solutions will work for you. While it may be painful to sell your home; it is far better than losing your home outright via a foreclosure sale. You may have to sell your home at a loss, called a “short sale,” in which your lender approves a sale amount that is less than the amount of your existing mortgage. If your lender approves a short sale you will be issued a 1099 for the difference between your mortgage amount and the sale amount. This amount is taxable as “debt relief” under existing laws. There is some pending legislation to change that tax that is working its way through Congress.

7. Bankruptcy – Bankruptcy is always a last resort; however, it may be the only thing that will let you keep your house out of foreclosure. If you are in foreclosure and the lender or servicer will not stop the proceedings for any of the above remedies consider filing bankruptcy. Once bankruptcy is filed foreclosure proceedings are halted immediately. While a bankruptcy will have a large negative impact on your credit for a long time to come, so will a foreclosure. But with a foreclosure you lose your house too. Talk to a bankruptcy attorney about specific pros and cons to filing bankruptcy if your lender or servicer will not consider any other options.

Remember, while your loan service collections department can be aggressive and downright unfriendly when trying to collect past-due mortgage debt their tune will change quickly if you inform them that you are unable to repay the debt. If you are late and need to consider one of the above options take the following steps immediately:

1. Talk to a trusted mortgage professional about refinancing options.
2. Talk to your loan servicer’s collections department and ask to be transferred to the “loss mitigation” department
3. Fully disclose to them your current situation and reasons for delinquency
4. Discuss your options to cure your debt and manage future mortgage payments
5. Become more informed about foreclosure prevention options
6. If you have a FHA or VA loan you may have other options – contact those entities directly (www.fha.gov)

For more information on staying out of foreclosure visit the Federal Trade Commission’s Facts for Consumers on the foreclosure process. Much of the information here is based off this valuable resource.

A few things not to do if you are facing foreclosure (we’ll cover these more in-depth in a future post):

1. Do not sign on with a foreclosure rescue firm
2. Do not add anyone to the title of your property who promises to bring you current or otherwise repay your loan
3. Do not agree to any impossible debt repayments such as borrowing $40,000 with a guarantee to repay $80,000 in 6 months.
4. Do not let anyone charge you an upfront fee for foreclosure advice and assistance (it’s illegal in California).

Feel free to email me if you have any questions or concerns about your existing mortgage. I am more than happy to help if I can. ronalpert@att.net

Reposted by Morgan on July 11, 2007

Some Good News about a Recent Post

I have been notified by several Title and Escrow companies that the State of CA has backed off its ruling to prevent lenders and agents from searching the public files through their services for comparable sales. This is Huge and allows the business of lending and selling to continue in a more efficient manner.

Give a toast to Reason...it won this round!

Interesting Thoughts for July 7th

There has been quite a bit of upset over the latest HUD and State of California rulings that are intended to place a barrier around appraisers from 'undue influences' by realtors and lenders. You've probably heard about this from friends and family who were unable to obtain financing because the property couldn't carry the value in today's marketplace, or may have experienced it yourself.

Realtors are particularly impacted, and as of July 1st lenders are also affected. The situation now is that in our efforts to know the market and what has sold, we have been denied access to the very information we use to compile CMA (Client Market Analysis) and provide BPO (Broker Price Opinion) which are the mainstay of property valuation to the market. The job of a realtor is to list a property 'at market value' and then conduct Marketing activities to get it sold. That has now been made ever more difficult...and that is undesirable for the consumer.

Below are two good articles you can link to that give some insight into the situation.

Letter to Change Current (New) Appraisal Act

How California is Screwing Up the Foreclosure Situation

Both of these actions by government and regulatory officials to 'protect' the public are a bit like closing the barn door after the horses got out. Perhaps it reflects more on their notion of CYA (you know...cover your arse) and placing themselves in the public's eye for future elections.

However, the practical applications are onerous at best, and at odds with the proclaimed intention of President Obama, FHA and HUD to clear up the foreclosure mess.

On a more positive note, interest rates have stayed level these past several days and it is a good time to refinance, or purchase a home. Take a look at the Ten Year Treasury's to get a sense of what the 30 yr. interest rate ebb-and-flow has been at www.bigcharts.com (Ten Year Treasury)

Mortgage Refis Extended

Here is a new announcement that is important to you if you have been told you are upside down on your mortgage. Again, this is from my favorite local news source, Voice of San Diego:

For San Diego, one of the big sticking points on the federal homeowner-help refinancing program has been a restriction on how far underwater borrowers can be.

The plan announced in February was initially offered to homeowners whose mortgages were worth 105 percent of their homes' current value.

Now the option to refinance will be extended to homeowners who are even further underwater.

Today, HUD Secretary Shaun Donovan announced in Las Vegas that the plan will expand to include those 125 percent underwater on their mortgage but still current on their payments.

(More than 30 percent of all homeowners in San Diego County who have mortgages are underwater. Note: We're not talking about the loan modification, payment-reducing part of the federal Making Home Affordable program here, but the option to refinance the loans if you're underwater.)

There is a catch: The borrowers' loans must be owned or guaranteed by Fannie Mae and Freddie Mac. Both agencies have loan lookup programs (Fannie Mae and Freddie Mac) to determine whether you qualify. I'm checking to find out what other restrictions might apply to the refinancing program and I'll let you know what I hear.

I called a couple of people for their takes on the new restrictions.

"That's good, that'll help a lot of people in San Diego -- that makes a lot of sense," said Mark Goldman, a local mortgage broker and SDSU real estate professor. "If somebody is upside-down, and can't refinance, they're more likely to walk away from their house."

Gary Laturno, a local real estate attorney and recent host of our Savvy & Sage series, said he'd heard many criticisms that the 105 percent guideline didn't do enough. "This will certainly make a lot more refis possible," Laturno said.

Here's more on the plan, from the HUD press release:

Making Home Affordable, a comprehensive plan to stabilize the U.S. housing market, was first announced by the Administration on February 18. In just a few months, more than 200,000 borrowers have received offers for trial loan modifications, tens of thousands of refinances and trial modifications are under way, and informational mailings about the program have been sent to more than one million borrowers who may be eligible.

-- KELLY BENNETT

If you have any questions, or know someone who is looking to refinance or purchase a property, please let them know. My business comes from referrals and I have the best loan prices in town!

-- Ron