Foreclosures are Exploding...values are Down...homeowners are Stressed...rates Still Low!
A homeowner holding this hand looks around the room to see if there are any players to help. Personal self-defense is based on fight or flight. The decision then is to stay and fight or choose flight and run away and take off to a safer place. When a borrower is faced with this situation there are three options for additional cash flow. Make more money, reduce expenses or do both. Once a decision is made to keep the home then the strategy must be developed to make that happen. If flight is the choice, decisions must be made to make that happen while perhaps downsizing and reducing the monthly housing expense. One of the best options, IF there is any equity at all, is to refinance to a lower fixed rate, which is now available. This is one of the great positives of the current market, low interest rates can save the day and give borrowers a chance to get into a stable payment situation. If a borrower can't do that then other alternatives must be considered.
Although there is major hand wringing going on with these high risk hybrid subprime (higher credit risks) mortgages there is also an opportunity for many to finance to a lower fixed rate loan. There will be heavy refinances going on with those who can qualify and move into the lower fixed rate loans. This will be an answer for many. If the credit must be tweaked and improved to make that possibility a reality, then so be it. Pay off credit cards, settle collections, pay off judgements, put time and distance from any past bankruptcy actions while improving the debt to income ratios all as a means to better qualify for a low rate fixed rate loan. If a borrower is behind on their payments a lender may offer a "forbearance" option where the payment arrears are set up on a parallel pay back schedule while the normal payment is being made. This is a catch up mechanism. All of these options invoke the stay and fight decision, which comes to the front by selecting these choices. This selection must make sense and there must be a reasonable chance of making it happen. Employment needs to be solid and dependable income steams must be in place. If a part-time job is necessary, it must be done. As far as reducing expenses, trading down cars with large car payments to free and clear transportation may be necessary in the reducing expense mode. Gym memberships may need to be cancelled and settled, any ongoing sundry expenses can be eliminated until the mortgage crisis situation has passed and settled down in a year or two. Cable extras may need to be pared back. Dial up service versus a more expensive high-speed service may need to be likewise pared back. Cell phones may need to be converted to pay as you go throwaways to further cut expenses or eliminate them entirely. Eating out will be a thing of the past for the short term. Packing lunches may be an option. These are all tough options. If after all of this takes place and there is still a desire to stay and a borrower is still under the gun, a Chapter 13 Repayment Plan may need to be selected. This will not cut any mustard with the mortgage lender or other secured debt, but the non-secured debt such as credit cards can be lumped into the BK option. A Chapter 7 Bankruptcy may be selected if the borrower(s) do not make too much money per the new Bankruptcy Law restrictions. This would wipe out all the non-secured debt. It may take a few years to reestablish credit to the point where a new lower rate fixed rate mortgage can be put in place. Over time, values MAY appreciate a bit to assist in qualifying for a loan. If a borrower is not up to any of this, then the flight option can be selected.
The flight option basically comes down to selling the property and taking whatever equity is available and possibly renting or finding a lower priced opportunity in a market populated with the same disparate sellers all begging for offers. When a homeowner gets beat up on the price in selling there is a real possibility in making up the loss on the purchase of a depressed value property. When borrowers select to buy a lower price property then the family budget may be positioned to make a comeback with saving opportunities to stabilize the asset side of their financial statement.
When the stock market is in the full "Bull Market Mode" and keeps running up unabated until finally the "Bear Market" shows up then major corrections are experienced. When the chickens come home to roost and stocks with weak fundamentals, high price earning ratios, low or no dividends, and perhaps bad sales and profit news the stocks fall big time. Some stocks will get pounded more than others. Perhaps it was just a weak quarter or extenuating circumstances with big one time write downs, or it might be a big problem like a Chapter 11 Bankruptcy filing like many of the airlines and other companies are dealing with. When this happens in mass, the Dow Jones Average together with other stocks fall as a group due to fundamentals and consumer perception and confidence. Now, the spill over from the defaults in the Subprime, Fannie Mae and Freddie Mac are impacting the financial markets as well. Investors are nervous. It will be a period of adjustment until this "problem" is handled one way or the other. Much like the RTC fiasco of the Savings and Loans debacle, serious and painful resolutions will be required until these troubled properties get folded back into the housing stock through new family ownership. Supply and demand principles are in full effect.
Much is the same with housing. Stable and steady increases in some communities in the 3% to 5% appreciation ranges have had minor effect in the market depreciation fall with all other things being equal. In other areas where appreciation was hitting 12%-20% per year where investors were flipping left and right and making major hits it was the "new wild west gold rush" of money making opportunities. Many property flippers (buy, fix up and sell) were making $50,000 to $100,000 per deal. Buyers were camping out at builder's offices to get in on the property gold rush. Builder concessions were non-existent. Builders did not have to offer anything to get buyers through the front door, so they didn't. Then "It" hit the fan. Reverses occurred. New homes sat vacant. New and resale inventories swelled. Builders were gone with many seeking Bankruptcy protections. Existing homeowners selling their homes remained mired with no sales activity. Sales prices were adjusted down where homeowners absolutely had to sell and move. If owners found themselves in a situation of being upside down (owed more than the home was valued) only a few options were available. (1) Walks away and move out and let foreclosure take its course. (2) Stays in the house until the foreclosure happened and let the sheriff put them out on the curb. (3) Consider "deed in lieu of foreclosure" where the lender takes the property back and avoids a foreclosure action and moves out and moves on. (4) Consider structuring a lease-option with a buyer at favorable terms with hopes of appreciation that will kick in over a two or three year period. (5) Offer sales concessions to buyers paying all their closing costs and prepaid escrow and even hold a second mortgage for any shortfall behind a new first mortgage. (6) Propose to the lender to consider a "short sale" where the mortgage amount is reduced to accommodate a new buyer that puts a new mortgage in place. This particular option does not put one penny in the seller's pocket, but the property is sold and the buyer can move on. The lender takes the hit, BUT it may be less of a hit for the lender then going to the full foreclosure option. This is by no means an exhaustive list of options but is a few of the more prominent ones.
On the positive side, this is a great time to buy with great interest rates in play. Values are down and good buys can be found. Sellers are motivated and flexible terms can be negotiated. Lenders holding loans on "upside" down properties are willing to make deals to mitigate the loans hanging on the books on a non-performing basis. Much like in the Dot.com era, many investors chasing the "good story" stocks lost big time. Likewise, buyers chasing the "good story" properties with multiple offers on listings and builder inventories will lose as values in many areas have fallen. A real estate value correction is underway. Warren Buffet has made billions seeking out values and taking long term positions. A little of this philosophy will go along way in profiting from future real estate cycles. No one is good enough to determine the absolute bottom or top of the market, but good values will always pay dividends with proper due diligence of the underlying elements. A deal is a deal is a deal. When a deal is found people of action can find rewards and long term returns. There is no reward for overpaying for real estate in the near term. This is a time of incredible opportunities to make sense out of the madness and profit during this period of market correction in this real estate arena.
Related Tags: foreclosure, chapter 7 bankruptcy, chapter 13 bankruptcy, short sale, forbearance, lease option, seller held second mortgage, upside down, subprime, fannie mae, wage earner plan, seller paid closing costs, seller paid prepaid escrows, seller holds, freddi
Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.
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