From the Inbox:
Unfortunatley my wife and I bought a home in Maricopa at the height of the real estate market back “06″, moved from Long Beach, NY and are still here and are trying to get out of Az. We are misreable where we are. The builder we bought from still has aproxximatley 30 homes to build in our subdivison, Basically the construction stopped as soon as we moved in. If we rent it out it will not cover our mortgage payment. We totally feel stranded and are actually thinking of walking away. The hard part is we worked so hard for the excellent credit we have and do not want to throw that out the window. We keeping asking ourselves whats more important our happiness or our credit? Tough question especially in this day and age when credit is everything!
Any suggestions?
Maricopa is one of the hardest hit areas in the Phoenix real estate market (Arguably the hardest hit, along with Queen Creek).
Basically, you have six options:
Six options:
1) Wait it out
2) Rent it out
3) Short sale
4) Walk away
5) Foreclose
6) Loan modification
1) Stay where you are and wait it out. The question is, of course, how long until recovery? Unfortunately, no one can answer that question. Personally, I think we are heading toward market recovery, but I think we’re at least two years away from returning to a “normal market” (with gradual appreciation rates). It will probably be longer before your home value gets back to where you purchased. And I could be completely wrong on the recovery time frame.
2) Try to rent your home. This can be difficult in Maricopa due to it’s distance from metro Phoenix and the number of homes currently available in Maricopa (and elsewhere). Unless you put a significant amount down, it is unlikely that you could rent it for what your payment is (in other words, you’d be in a negative cash flow situation). There are some tax advantages to holding rental property that could offset some of the expenses. You should consult a tax advisor.
3) Sell the home. Without knowing more details (your purchase price, loan terms, down payment, etc) and the current value of the home, it’s impossible to say how viable an option this is. Given the time frame you purchased in, and the general condition of the Maricopa real estate market, it is quite likely that you are “underwater” on your mortgage (owe more than it is currently worth), perhaps significantly. This means you would be in a short sale situation. Whether the lender would even accept a short sale, assuming a buyer could be located, depends on many factors such as:
- Your loan amount
- Whether you have any secondary lien holders (a second mortgage, HELOC, etc)
- The purchase price and purchase conditions
- The investors in your loan
- The apparent whim of the lender’s loss mitigation department
4) “Walk away” — also known as a “Deed in Lieu”. Fold up shop and hand the deed over to the lender.
5) Let the home go to Trustee Sale (foreclosure).
6) Loan Modification. Another option might be to discuss a loan modification with your lender. SOME lenders are appearing to be more open to this. Typically it requires you to provide proof that you can not make the current loan payments. Just because you don’t like making them, or don’t want to make them won’t be sufficient reason for the lender to modify your loan terms. If you can prove financially that you can’t make the payment, the lender may be open to modifying your loan. Don’t expect them though to just lop off tens of thousands of dollars from your loan balance. In the lenders eyes, declining home values aren’t a reason to adjust loan amounts. They may however, adjust rates and terms to provide a lower payment.
Options 3, 4, and 5 will all have a negative impact to your credit score. The actual change in your FICO score is impossible to know. The general consensus seems to be that you will not be able to get another mortgage for at least two years if you complete a short sale, three years for a deed in lieu and five years for a foreclosure. These are very general time periods and are dependent on many factors including your current credit history, future credit performance and future lending requirements and regulations.
What is more important, your happiness or your credit? That’s a really tough question — and one I can’t answer for you. What compounds the difficulty is that for many, your credit is a component of your happiness.
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I have had about 4 sellers call me with the same situation- just no easy answer for any of them and my neighbor came over the other day, same answer for him. It is a very tough time for sellers in the outer areas.
Indeed it is Jamie. And it’s really hard to sit there and say that basically there isn’t much I can do to help you…
Jay and Jamie I couldn’t agree more how tought it is. I just had a neighbor in my neighborhood walk away from their home(short sale attempting but probably foreclosure) and it was so hard to see their little boy sitting on the curb and them waiting for him to get in the truck because he didn’t want to leave. There is more to houses then just credit and many people are affected by this. The other side of the coin is responsible buying and planning for the future but I am sure that discussion will come up later as the market changes.
I too have people ask the same questions of what to do? It’s a tough one but I would say 95% of the people wondering what to do will just end up giving the home back (in one way or another). The market is just brutal and for most that’s the best choice because at the end of the day they could conceive repair their credit and re-buy the same type of home for much less then the original go around.
As far as I know the lender can’t get a deficiency judgment in Arizona. So, the homeowner should be in a better position to negotiate a full remedy release and keep the credit rating intact.
I can’t believe that options 4-6 would even be mentioned.
They need to stay where they are. To walk away from a home and leave the lender hanging is wrong.
At some point Lenders may require a letter of explanation as to why the foreclosure happened. The explanation alone might disqualify them from getting a new loan.
“I can’t believe that options 4-6 would even be mentioned.”
Matt - the question mentioned walking away. I’m not saying it’s a good option, but it is an option (that more and more people are doing every day — not that that makes it right).
For some people just staying where they are isn’t an option.
As far as leaving a lender hanging between a foreclosure and a short sale, I sure wish some lenders would see the difference and quit foreclosing on homes that have viable short-sale offers on them. Happened to one of our clients TODAY. Lender promised postponing foreclosure to determine if they wanted to accept a short sale offer. Reneged on that promise and foreclosed — at thousands LESS than they would have received in the short sale.
If someone is having a life event, yes, the lenders should work immediately with the borrowers for a temporary loan modification. The Mortgage Broker as well should be accountable for someone with a life event to help them through the process. I don’t read that this is the case with these folks.
“The builder we bought from still has approximately 30 homes to build in our subdivision, Basically the construction stopped as soon as we moved in.”
What appears to have happened is they bought the top of the market and now are upside down in their house. Given that they bought new construction, this could be a calamity of bad decisions.
I’ve spoke to many people in my area that are in the same position. Not only did the builder screw them, but also the appraiser, Mortgage Brokers, Title Company and Realtors. They are all equally guilty of putting good people in bad situations. We have all seen and read about this situation many times in the past couple of years.
Trust me, I have a great deal of compassion for all of these people and feel horrible when I talk to them and don’t have a solution to bail them out.
The real question is who is accountable, and who should bail out who? Who should go to the people and have to make it right? The lender that purchased their loan or the people that facilitated and encouraged them to make a bad decision?
There needs to be a lemon law for Real Estate I suppose. They do it in other industries, why not in Real Estate?
Kris Berg wrote a great article on her frustration with short sales, I hope that every Asset Manager at every Servicer reads it. Different subject though that maybe I’ll editorialize on another blog post.
I could write volumes about this subject.
its a tough time for the sellers out there. when people ask you as a seller that what to do then it’s even more tougher!
Laguna Niguel Real Estate
“Not only did the builder screw them, but also the appraiser, Mortgage Brokers, Title Company and Realtors. They are all equally guilty of putting good people in bad situations.”
Maybe I’m misunderstanding something here, but how is this anyone’s fault, except possibly the buyers? The entities you mentioned above did nothing other than help the buyer purchase the house they wanted to buy. The fact that the buyer has had a change of heart over the past two years certainly shouldn’t reflect poorly on any of those.
Though I have no affiliation with the world of real estate, it really bothers me when people blame lenders, realtors, etc. for buyer’s woes, simply because they helped the buyers purchase the house they wanted to buy, at a price they were willing to pay, and at terms they agreed to.
Unless any of the above willfully misled the buyers (and I’ve heard of precious few instances where that was actually the case), the buyers have no one to blame but themselves. In the case here, it sounds like it’s just an unfortunate situation, since the buyers don’t like where they live, but they can’t sell their house because of the poor economy. It sounds like the buyers in this situation are still capable of paying their mortgage, which is more than can be said for many buyers who apparently were living in some sort of dream world where home values always increase exponentially, and variable interest rates never increase.
Though this isn’t an example of such, I’m really tired of hearing sob stories about home buyers that bought a house they couldn’t afford, at a variable rate they knew would increase, in a market that was clearly primed to draw back at some point, and now they’ve been foreclosed on, and they’re blaming everyone but themselves. They rolled the dice and they lost, and now they shouldn’t have to lie in the bed they made? For some reason, most people agree with this sentiment, and I just don’t understand it.
Robert - very well said. “The Blame Game” is rampant. At the risk of alienating some folks, I have to say that no one held a gun to anyone’s head and forced them to buy a home.
Yes, some people were mislead by lenders, agents, and even family. But the vast majority of people I’ve had exposure to went into the transaction willingly, on their own accord.
I can’t begin to tell you how many people asked me (and continue to ask), “What’s going to happen to home prices?” The simple fact is, I do not know. Know one does.
Oh, we can look at trends, and analyze stats until we’re blue in the face, but NO ONE can predict the future with any certainty.
I told people repeatedly that there was NO WAY the ridiculous appreciation rates of 2005/2006 could continue. I wrote a post in November — of 2005 — saying there was no way home prices could continue to rise like they were.
That doesn’t make me smart, or able to see the future. It just means I can do very simple math.
I’ve been telling my two teenagers for years to accept personal responsibility. Sometimes they get it, sometimes not. But I think they will by the time they leave the nest.
Blame? No one has mentioned the real culprits, Wall Street Greed. Local mortgage companies don’t set underwriting guide lines, the mental giants of Wall Street do. The money lent to purchase homes is international money coming from investors everywhere. That money is pooled and processed by the likes of JP Morgan, Bear Stearn’s, Merill Lynch and others who set underwriting guide lines the money lent is to adhere to. THEY were the people suggesting that they could bundle the mortgages, knowing they were risky, at a higher yield via Freddie Mac and Fannie Mae. Even they thought this was a never ending rising market. So Federal Tax dollars bail out JP Morgan(s) and others because they are “too big to fail”. BULL! Let ‘em fail. Then we will never have this happen again, and buyers will not be in this dilemma. True, no one made anyone sign loan docs. but we ought to be blaming from the top down, not the bottom up. Had the federal government not bailed out Chrysler and it failed, don’t you think that would have been the biggest wake up call in the world to GM and Ford to get their act’s together? But no, we bailed Chrysler out and now all three automakers are burdened with huge losses because they decided not to act with speed relative to the competition from the Asian automakers. Now who rules the world of automobiles. Wall Street Greed makes the world go ’round and has put a ton of people in a world of hurt.