I have been seeing on the news quite a bit lately how the economic recovery is underway (I read something about Green Shoots months ago now, so logic dictates we are on our way to recovery, right?) but I am still being asked the question of “So what exactly is keeping me current on my mortgage?” more than just a few times a week from people living in many different states, not just here in Arizona.
http://www.flickr.com/photos/dr_j0nes/354386695/
Consider a local business leader here in Arizona who posed this question earlier this week as he thought about this problem. Derek is a local community leader, small business owner and has an abnormally large dose of common sense loaded into his neocortex:
The above person might qualify for the Obama 125% refinance plan, but at best that might only make their payment $1300/mo. Not to mention that the banks are not just making the refinances happen. They refuse to live up to their side of the bailout. If instead a plan was in place to force lenders to readjust principle balances (not interest rates) to a point where the home owner was not completely underwater then perhaps the home owner might full well consider staying in their home. At this point, I think someone in the above situation has NO SENSIBLE reason to stay in the home. They have far more to gain crushing their credit and walking away.
Regardless of your loan amount, if you are having trouble making your mortgage payments and contact your lender about what your options are, these are generally the options you have in front of you:
- Continue paying as agreed
- Apply for a loan modification
- Start the process of doing a short sale
- Negotiate for a deed-in-lieu of foreclosure
- Foreclosure
If your loan balance is below 417,000, the Making Home Affordable plan has pretty well outlined what can and cannot be done. You can read through it (or hire help if needed) and know what to reasonably expect as an outcome. But keep in mind, each situation will be different – and each outcome will be different.
And if your loan balance is above $417,000 – this means that there is not currently a standard set of guidelines as to what to expect – which means anything can happen.
Regardless of what your loan amount is – or what your overall personal financial situation is…
I haven’t seen a plan that can help you if you find yourself in a situation where your house is worth 50% of what you bought it for and you now owe 150% or more of what it is worth.
But I will keep you posted if I hear of anything.
About the Author: Justin McHood is a mortgage broker with VanDyk Mortgage Corporation. You can find him at Arizona Mortgage Team, on the Zillow’s Mortgages Unzipped Blog, and at most East Valley Friday Nights gatherings. He’s the one in the blue shirt.
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{ 26 comments… read them below or add one }
Sounds like your local business leader has the right plan for them. Dump it and rent there will be plenty of housing choices to go to. Besides it seems as if a lower credit rating is going to be the norm which leads me to believe they will be able to get credit much faster than any other time in history with that lower score.
There is another challenge here that I have been hearing about and that is that the 125% refinance program incurs a substantial cost to doing so. So much that for homeowners who would like to take advantage of it, the extra costs mean that the payback period for the program is too far into the future for homeowners to find it attractive and useful.
@davidlorti,
I have heard that too… and most of the time, you will only be able to go to the lender that has your mortgage to get a 125% done. So if your current bank is BofA, you have to go to BofA to get a 125% done.
And if there is not a free market, but a forced one where a borrower *must* go a certain place to get a loan done…
It might not be too far of a stretch to imagine such a lender to take advantage of “opportunity pricing” which is a close corollary to the all-too-familiar “predatory lending”.
But of course, they will probably use the all-too-vague-and-important-sounding “risk layering” when trying to explain why they are charging so much.
Just a thought.
More and more homeowners are walking away from their homes Some are are forced to, some make an analytical financial decision to do so (stratigic foreclosure). The foreclosure prices keep the market pressed down at the bottom of the barrel. If we are able to do more short sales, it will help bring prices up and help people recover their credit standing more quickly. In my area of N. Scottsdale / Rio Verde, home values have dropped 50% since 2005.
It is unreal with the hundreds of congress men and women that a sensible way out of this mess can't be found… oh yea the government is horrible at this!
The leads that come into my office are looking to do a loan modification or a short sale. By far, the better option is doing a short sale. Unless you think your home's equity is going to rebound in the next 2-3 years (hint, it won't) a short sale is your best option. If you owe $250k and it's worth $125k it would take 7 years at 10% appreciation to have enough equity to sell your home and break even. I don't know anybody who thinks that is a possibility of happening. If you did a short sale now, rented for 2-3 years, your credit will probably be at a point where you can buy again. And since prices will still be low at that time, it makes sense.
Yeah, in my market it doesn't make good financial sense to stay in our home. The market won't appreciate to what we owe for 10 years…If I bail, I'll be able to buy in 3 years and be well ahead while readjusting my expenses in the process. If the principal loan amounts could be adjusted, it would be a different story. FreddieMac isn't doing that and that's our investor.
Oh well.
Well something needs to happen, we already spent all of our money bailing out the banks and wall street who didnt deserve it, there is nothing left to bailout the people with mortgages that are larger than they can handle.
-Tyler
@datadude,
Yeah, that is one thing I like about Derek – he pretty much gets right to the point.
Thanks for stopping by and commenting!
Justin
It is amazing – pretty much no matter where the people I talk to live – if they are in AZ, their home values have dropped about 50%. In certain parts — 60%. And as a result, people are left with tough decisions.
Or, at least I think they are “tough decisions” — even though some people say that it is “easy and clear what you should do…”
Agree. Government = full of bad ideas.
Agree. For 90% of the people I speak with, a short sale just makes more sense.
Thanks for commenting — from the data that I see, principal reductions are few and far between. Sounds like your market is about like the AZ market.
If anyone finds a bag of money that we didn't know about, please let us know right here on the TPREG.
Chances are the readers of the TPREG could do as well (or better) at deciding how to spend that found money to fix this sort of thing than Congress could.
After all, no one here has to worry about running for re-election!
Finally, a realtor who hasn't discussed how unethical this is like you see on many of the group sites. It is a business decision at this point. If you're in a jumbo loan and your house is worth 40-50% of what you paid, due to the fact that we will never again in our lifetime see a spike in values like we did – this house isn't coming back to the value of what was paid IN OUR LIFETIME. And, you're right – some people put 20% or more down payment and a slew of cash into making it perfect and are left holding the bill at the end of the day while they introduce themselves to all of their new neighbors who just bought the same deserted floorplan from a lender for a fraction of the cost. You're right: Good Credit? Who gives a hoot – what did that get this homeowner? A kick in the arse, that's what. Go Strategic Foreclosure. Cut your losses short and get a smokin deal on a new house while you can.
Lovely, good post. I just bumbled upon your blog and wanted to say that I have really enjoyed reading your blog posts. Any way, I will be signing up to receive your feed and I hope you post very soon.
You truly make it look so simple with your presentation, but I find this matter to be really something which I think I would never understand. It seems too rarified and very broad for me. I am looking forward for your next post; I will try to get the flow of it.
Government is coming up with bad policies, which leads to downfall of real estate rather then a help. Today's situation is high demand but mortgage rate is all time low. Also, inventory is too low in comparison to demand, may be this thing can work for increase in rates of properties. But nobody is sure of this too.
Justin,
I believe that the people that say such a decision is “easy and clear” are likely thinking in the short term. Family to feed now? Check. Can't make payments now? Check. Big problem now? Check. Why not foreclose and rent a place so you can survive in a “better” position in the short-term.
I think the current climate simply makes it more difficult for many to think long term.
They did have a good idea to fix the mess. Allowing judges to modify principal balances. Cramdowns.
Agree. In my opinion, there are no easy and clear decisions for this kind of situation.
Anyone significantly underwater in a non-recourse state like Arizona should probably just go ahead and walk away. After the largest housing bubble in American history, bubble price highs will not return nominally for a long time, and adjusted for inflation, will probably never return.
If you had asked me what to do in 2005-2006, I would have said sell any bubbly RE and rent a modest house in the same area (what I did). Now, same advice, except the side benefit is a damaged credit score instead of a large savings account balance. With Arizona's anti-deficiency laws, no legal judgments will haunt you and the social judgments have largely evaporated.
Some might ask why. Because walking away/shredding your credit is the only way to fix the mistake of overpaying for/over-borrowing on a house. A life event is likely going to occur that requires a sale of the underwater house long before it gains six figures in value. Might as start the credit healing now.
Excellent point — before you walk away, be sure to check your state laws! In some states (Colorado for example) the lender can go after the borrower for any shortfall… which puts an entirely different situation into play.
So be aware of your state laws!
What I find disturbing are those that try to equate making a difficult business decision such as walking away from a hopelessly underwater loan with some kind of grevious moral failing. Things like “do the right thing, work out payments” and so forth. A bad business position is just that – business, and that's why remedies such as foreclosure and bankruptcy exist to begin with.
Erick
——
subcontractor agreements
I’ve been surprised at how many people are doing anything imaginable to hold onto a home severely under water. They are stressed, their personal life has become a mess, their home life is a disaster. All this to save a home to keep up appearances? It could take 10+ years of living this way to get back to even!?!?
The sooner an owner of a severely under water home can see their home as a liability, the sooner they can make the business decision to cut ties and move on with life.
The government can radically turn things upside down. They are the big bad wolf of the world.
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