It’s amazing to think in terms like this. Nowadays we all have foreclosures dotting, peppering, or downright plastering our neighborhoods. We have grown accustomed to terms like ‘loan modification’ and ‘short sale’.

But if we looked at the number of foreclosures owned by just one entity such as Fannie Mae, the aggregate appearance is just pitiful. As Reuters put it:

Fannie Mae said on Monday that the housing finance company has taken over so many homes through foreclosures that if it were a town, it would be bigger than Dayton, Ohio.

It is also on track to pass Richmond, Virginia, this year in terms of the number of houses, and would crack the top 100 municipalities as ranked by DataPlace, a web-based source of housing and demographic data.

As a record number of Americans lose their homes during the worst housing crash since the Great Depression, Fannie Mae now owns 67,519 homes.

The company, which the U.S. government placed in conservatorship in September following record losses, said in its third-quarter earnings that its inventory of foreclosed properties rose by nearly a quarter in three months and more than double from a year ago.

That puts it on par with cities such as Chattanooga, Tennessee, and Providence, Rhode Island, in terms of number of households.

The company is working hard to clear the inventory. On its website it lists dozens of homes in Detroit selling for next to nothing. One listed at $1,900 entices buyers with “100 percent financing,” a ploy with what might be described as a tarnished reputation in the United States.

Yet it seems to be working. A two-bedroom, 1,900 square foot house on Seminole Street is listed as “under contract.” The price? $50.

Enter the world’s largest Ghost Town. Apply for your own zero-down, low-interest loan today! The home of other’s dreams can be yours today!

And if things keep up, someone else’s tomorrow.

Tags: Fannie, Mae, foreclosure, loan, modification

During a recent conversation, I was shocked to find that so many people were so far down in their 401k year-to-date totals. Having withdrawn funds and searched for a better way to invest a couple years ago, I’ve been somewhat sheltered from the hammer that’s smashed a lot of dreams for those either facing retirement, or hoping to in the near or near-distant future.

CDs and ING Direct “Orange” savings accounts have returned reliable returns for me, even if they paled in comparison to the people earning 10-15% or more on their 401k plans. Reading up on insurance investing (via “EIUL” plans or Equity Indexed Universal Life) and trying to decide whether a non-matching 401k would be best or something less conventional would be better, I’ve had my money in limbo so to speak.

It seems that the time I spent losing out on thousands in the market, has come to pay itself back in gold after the adjustments hits, the Dow crashed, and the bailouts started picking up steam.

But just like those who were shocked that a house could… LOSE value… I was no different when it came to 401k performance. I would have figured the smart guys in the expensive chairs had some backup plans to mitigate heavy losses, but it seems that my confidence was misplaced. My 3% interest on my savings account started looking very good compared to some of our below commenters.

So have you lost? Have you gained? How is the market treating your 401k, and will it affect retirement in your immediate future?

Tags: 401k, investing, economy, bailout, crash

However, what so many are forgetting about is that the crux of the issue regarding house pricing and the worth of derivatives based on home mortgages still revolves around one factor that is fixed and cannot easily change: Inventory.

If the goal is for house prices to stabilize so that folks so upside down on their homes they end up walking away will be able to stay in their homes, you won’t get there as long as there are empty homes littering every neighborhood out there.

If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

“It’s easy to forget amid all the fancy stuff — credit derivatives, swaps — that the root cause of all this is declining house prices,” Mr. Blinder [Binder is an economist at Princeton and a former vice chairman of the board of governors at the Federal Reserve] said. “If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it.”

…

Yet these institutions are deeply intertwined with the American economy. When the financial system is in danger, it stops investing and lending, depriving people of financing for homes, cars and education. Businesses cannot borrow to start up and expand. [NYTimes]

The credit crunch recently has definitely been a problem. With it being harder to make money selling a mortgage off to other markets, banks are less apt to help people with money to purchase that house. However, as we realize what caused this, we’re also starting to see an aversion to 100% no-money-down lending. That will not change for the most part. While banks may be willing to lend again, they still won’t repeat at least one mistake and lend to those with no money to put into the mortgage loan.

With inflation poised to explode as a result of this recent bailout, people aren’t making more to compensate, and thus the pool of folks obtaining mortgage loans will continue to decrease. The homes on the market that are currently empty will not be filled up by magic buyers. The fundamental problem is that many people today cannot afford their first house if it means having to put money down.

It is important to remember that at the peak of the housing market, there were enough houses built for every everyone–owner-occupiers, speculators, and even their dogs–and no one worried much about the credit worthiness of the dog. In addition, even though builder activity has slowed greatly– they continue to build.

…

A number of factors have slowed the housing market. One, a slowing economy and rising unemployment has slowed demand. Household formation has slowed. Also, we need to remember that the housing market isn’t the only consideration- there is also the commercial market to consider. The demand for commercial space has slowed as well. Two, lending standards have tightened- not only are the speculators and the dogs out of the market, but many owner-occupiers who couldn’t afford homes are in trouble also. Three, and I believe most importantly, there has been a fundamental shift in the way Americans view their homes. It is no longer an “ATM-retirement account-road to riches”. It is now a place to live. Granite countertops are no longer an “investment.” “McMansions” no longer make sense. This is causing a fundamental shift in the way Americans use their money and their credit.

The goal of the bailout is purportedly to allow credit-worthy borrowers access to the capital they need. Even if that goal is achieved, remember that our pool of homes was built for both the credity-worthy and the uncredit-worthy. There is no longer a financing plan in place for the speculators, their dogs, and the uncreditworthy. Even many of those who were formerly creditworthy are losing jobs and are facing foreclosure. Those homes are going to remain vacant and continue to go into foreclosure- and that will continue the downward pressure on prices. For commercial interests, even the credit-worthy are going to have a hard time justifying projects in glutted markets.

Home prices WILL continue to fall- this bailout will not stabilize the market- and I doubt it will even slow the decline. The same will hold true for commercial projects. Both of these have been built to excess. In an economy where businesses are failing and downsizing, it is clear that there will be a huge excess capacity of commercial space. All of this will weigh on the balance sheet of lenders.

This bailout is a bandaid – and an expensive one. [twist]

This point isn’t lost to everyone. On CNN the other day, Ron Paul exclaimed how this $700 billion bailout won’t be enough and we’ll see the government crawl back for their next fix. Being already invested, like with the Iraq War, we’ll give it to them because it’s too late to turn back.

When it’s worse to own a home than rent one, it’s time to let the market work and let the foreclosure process happen. If an limb has gangrene, you can’t fix it by putting some Neosporin on it. Sometimes the truth hurts and we need to be prepared to deal with that.

This is where Proposition 100 comes into play. Dubbed the “Protect Our Homes Act”, Prop 100 aims to prohibit the government from charging new taxes on the sale or transfer of real estate in Arizona. Arizona currently has no real estate transfer taxes (RETTs), unlike 35 other states which do.

Here’s a link to the official PDF which gives more details on the amendment:

Be it enacted by the People of the State of Arizona:

1. Article IX, Section 24, Constitution of Arizona is proposed to be added as follows if approved by the voters and on proclamation of the Governor:

ARTICLE IX, SECTION 24, PROHIBITION OF NEW REAL PROPERTY SALE OR TRANSFER TAXES

THE STATE, ANY COUNTY, CITY, TOWN, MUNICIPALITY OR OTHER POLITICAL SUBDIVISION OF THE STATE, OR ANY DISTRICT CREATED BY LAW WITH AUTHORITY TO IMPOSE ANY TAX, FEE, STAMP REQUIREMENT OR OTHER ASSESSMENT, SHALL NOT IMPOSE ANY NEW TAX, FEE, STAMP REQUIREMENT OR OTHER ASSESSMENT, DIRECT OR INDIRECT, ON THE ACT OR PRIVILEGE OF SELLING, PURCHASING, GRANTING, ASSIGNING, TRANSFERRING, RECEIVING, OR OTHERWISE CONVEYING ANY INTEREST IN REAL PROPERTY. THIS SECTION DOES NOT APPLY TO ANY TAX, FEE,OR OTHER ASSESSMENT IN EXISTENCE ON DECEMBER 31, 2007.

The key reason this is so important is because while the government’s bills have grown, the average Arizonan’s wallet has not. Rampant inflation, mortgage loan fraud, and a growing credit crisis, simply do now allow Americans to take on more debt at this time, even in the form of increased taxes.

Additionally, as difficult as it is to sell a house in this market and as difficult as it is to avoid foreclosure right now, increased taxation on the transfer of property will add one more bill you have to factor in when you’re already more than likely to be well upside down. Not to mention that “transfer” is a very broad term which will include estates and further burden the family house as it’s passed down to the kids or other family members. There are already burdens in that process and the government should never find it in its own interest to make losing a home easier.

Other agents in Arizona are also against this and are writing about it as well. As Jay Thompson put it on his blog:

A YES vote on Proposition 100 would amend the State Constitution and prevent the possibility of a real estate transfer tax from being implemented. A no vote means state and local governments could implement a RETT at just about any time (in fact, it has been discussed across the state. A bill was introduced in the Legislature last year proposing a RETT).

There is additional information on Prop 100, also known as the Protect our Homes Act, at www.ProtectOurHomes.com.

I won’t be so bold as to tell you how to vote. That is a personal decision only you can make. My vote will be YES on Prop 100. Some states are attempting to repeal existing real estate transfer taxes. Good luck with that. My opinion is it will be a whole lot easier to prevent such a tax before it happens than to repeal it once enacted. The 342,000 that signed petitions to place the initiative on the ballot seem to agree. But signing a petition and pulling the lever in the voting booth are two different things. If you signed the petition, thank you. Just please don’t forget to finish the job.

For an example of how this tax affects families both trying to obtain their first home, or get out of a bad situation without going through bankruptcy or foreclosure, a real estate agent in Connecticut grants some insight:

Home sellers in Connecticut pay a conveyance tax when they sell. The median home in CT sells for about $250,000 and the real estate conveyance tax on the median home would be about $2000, more if you live in one of the 18 towns that can charge you an extra .25% or an extra $500.

The tax was raised a few years ago, temporarily, to help solve a budget shortfall but keeps getting renewed. Municipalities are desperate not to lose this tax because it’s easy money and most home sellers forget about it until the closing table.

The increase in the tax is supposed to sunset, rolling back to its original amount – saving future home sellers around $400 based on the median sales price of $250,000. It’s not a lot of money but the principle is simple:

If the tax was supposed to be temporary, legislators have an obligation to roll it back.

And with all the talk about rescuing homeowners these days from subprime mortgages, what about rescuing homeowners who are responsible enough to sell their homes before the bank forecloses on them but have to walk away owing the bank and the government money?
From whom do they need rescuing?

In Tuesday’s Hartford Courant, a letter to the editor appeared from the Executive Directors of the CT Conference of Municipalities and the Capitol Region Council of Governments – two groups that lobby for town and municipal governments. Here’s what they had to say:

“…the special-interest real estate lobby which seeks to portray itself as the homeowner’s friend by lobbying to deprive municipalities of up to $40 million in needed revenue next year.

That’s right – the same for-profit Realtors who take up to a whopping 7 percent cut of any home sale want to slice $40 million in non-property-tax revenue by reducing the municipal share of the conveyance tax. That means a direct shift of that amount onto the back of the property tax – Connecticut’s most overused and income-insensitive tax.”

Well, I was pretty mad so I wrote a letter to the editor and it appears in the Hartford Courant today, May 29. Here is most of my letter:

‘Although Mr. Finley and Mr. Wray tried to dismiss Realtors like me who disagree with them as part of the “special-interest real estate lobby” and “the same for-profit Realtors who take up to a whopping 7 percent cut of a home sale,” Realtors are leading the fight to protect our clients’ home equity.

Note: Realtors are often the only professionals involved in a real estate transaction willing to negotiate their fees, which, for the sake of accuracy, are not typically 7 percent of the sales price.

However, I would like to present the only opinion that really matters – that of the homeowner and, in particular, the homeowner selling today.

In today’s market, more and more homeowners owe more on their homes than the homes are worth. More often than not, these are homeowners in areas with a high rate of foreclosure, a declining median sales price and a shortage of qualified buyers. These homeowners face some tough options: come to the closing table with money, negotiate a short sale, which affects their credit, or allow the bank to foreclose, which affects their credit even more.

…

The real estate conveyance tax should be rolled back to its original amount – not because it will help Realtors but because it will help homeowners.’

Currently, Arizonans don’t have to fight these fights (although we do have our own battles). As someone who has been through the scary process of almost losing their house, I don’t see this as a fight we should have to undertake.

To use a food analogy, it is always easier to simply eat LESS. Finding MORE food to eat, however, is what starving families all over the world die trying to do. With illegal immigration and a growing housing problem, I say Arizona already has plenty to worry about.

Tags: arizona, property, tax, foreclosure, fraud

In a much smaller political battle, one where presidential candidates are replaced by smaller city positions like the Mayor of Lathrop, California.

It’s going to be curious, especially with the housing problem gaining more momentum and grabbing more national attention, to see if these sorts of events will continue to be used as weapons in heated political campaigns.

Tom Sayles makes no bones about it. He isn’t proud that one of his investments has gone south with the foreclosure mess.

The home that tripped him up in the 400 block of Gardner Place wouldn’t probably have earned even a footnote in the crush of bank foreclosures as well as big developers in Lathrop reengaging on their signed deals with the city due to the housing slump.

But because Sayles is married to Lathrop Mayor Kristy Sayles coupled with the fact she has become a target of a well-oiled attack machine this election cycle that has private investigators snooping into every aspects of her personal life is making the house the target of a lot of inquiries.

It doesn’t surprise the mayor who has had formal inquiries made requesting any personal e-mails she may have sent using city devices as well as a private investigator checking with animal control officials to see whether their family dog is licensed.

Someone – an individual, organization or even possibly a corporation – that doesn’t like Sayles has gone as far as to create a cutting edge website loaded with personal data on her divorces and personal life including civil cases that have absolutely nothing to do with her tenure or performance as mayor.

The house – which has a mortgage at 12 percent with Indy Mac and is headed for foreclosure – is already part of a whispering campaign especially since the couple had secured a $40,000 loan from her uncle, former Mayor Steve McKee, in an effort to fix-up damage done by a tenant and save it from foreclosure.

McKee, for his part, doesn’t want to go on record saying anything about the loan or the house.

The Sayles are current on their payments to McKee – about $850 a month – and vow to honor that obligation until it is paid off.

What tripped them up, though, is far from the typical story of greed connected with the current mortgage mess that includes people buying homes and trying to flip them or getting liar loans and then ending up not being able to meet their obligations.

The home – which now has a value of about $110,000 in today’s depressed housing market – was bought for $312,000.

…

The first renter in the home stopped paying rent. It took them months to get that tenant out. Then the next renter broke water pipes and did extensive damage.

Tom Sayles opted to not just to repair the damages but to expand the size of the home. He has dumped closed to $70,000 into the home including the $40,000 loan.

“It’s embarrassing to admit, but I lost my (behind) with the house,” noted Thomas Sayles who has had a number of investments in homes go well. But they didn’t get caught in the severe downward slide of the housing market

…

But her husband noted there is a time when it no longer makes sense to keep tossing money into a losing proposition.

“You need to honor your obligations but you’ve also got to provide for your family,” he said.

He pointed to new homes west of Interstate 5 in Lathrop that are selling at auction for $275,000 or less.

“Nobody is going to pay $312,000 for the home no matter how much more money I put into it,” he said.

At the same time, many of those homes west of Interstate 5 are being bought by investors who can – after buying them at foreclosure prices – rent them for less than Sayles could afford to rent the Gardner Place home once he got it back into shape.

Ironically it is the market condition created by some of those developers west of Interstate 5 – pay-as-you-go growth that Sayles has consistently opposed – that got those homeowners in trouble and depressed prices in Lathrop lower than in other comparable areas of the South County. It is some of the same developers who have orchestrated candidates to run against Sayles in the upcoming Nov. 4 election.

…

The loan on their home – held by the bankrupted Indy Mac – was not the standard fare that has gotten most owners of foreclosures in trouble in the past two years. It was a conventional adjustable rate mortgage.

It is a type of loan that the couple has used on other investments since 1999. In each case, they were able to buy homes, fix them, rent them and/or sell them without problem.

They also used an adjustable rate loan for the mortgage on the home they bought from McKee – his former residence in Lathrop – for their family to live in.

That was also an adjustable rate loan. When it got up to 14 percent, they were able to work with Chase Bank and renegotiated it into a 6.5 percent, fixed rate, 30-year mortgage. Indy Mac, on the other hand, did not want to work with the couple, which means the home is going into foreclosure.

“I never had problem with an adjustable rate loan before,” Kristy Sayles said.

Sharing such fine details of their personal finances is unusual for any candidate, but Tom and Kristy Sayles life has become an open book thanks to those who apparently do not like her voting record as Lathrop’s mayor.

…

“I have $98 in my campaign account right now,” Sayles said.

Tom Sayles said he has a thick skin and that he doesn’t pay much attention to the “garbage” that is being circulated about him and his wife by those who don’t like her voting record at city hall.

The mayor, for her part, said she will not stoop to the same level of those who are going through her personal life with a fine tooth comb and twisting basic facts in an attempt to make her look bad.

She also noted that she will readily denounced anyone who does such a thing to any of her opponents.

Just like the McCains and Obamas face criticism for side ventures like successful books, income from spouses, or businesses and investments, it’s likely that home ownership will be brought into many other heated battles fighting for a single political spot.

This was then:

“First Magnus Financial Corp. still is not sending out paychecks to its former employees. But the Tucson-based mortgage lender announced it is creating an assistance fund of more than $1 million to ease the burden.”

“In a news release, the company said paychecks have been delayed because its accounts were frozen by investors that provided capital to First Magnus to make loans. The company was forced to shut down operations last week because it could no longer sell the loans it originates on the secondary market.”

“Earlier, the company told employees to expect their checks by mail rather than direct deposit. Under both state and federal law, checks were due to employees on Monday.”

Seems things have caught up with them. Just released today, this is how things are looking for them now:

Defunct mortgage lender First Magnus Financial Corp. broke a federal law by providing incentive payments to mortgage brokers, according to a report.

The U.S. Department of Housing and Urban Development’s report issued July 14 said Tucson-based First Magnus violated the Real Estate Settlement Procedures Act by providing volume-based incentives for Federal Housing Administration-insured loans.

HUD found that First Magnus paid $58,571 in incentives from Jan. 1, 2003 to Dec. 31, 2005 to seven brokers for the origination of 169 FHA-insured mortgages totaling more than $24 million.

First Magnus collapsed and filed for bankruptcy during the credit crunch last August. It is currently being liquidated.

Company executives have founded a new company, Stonewater Mortgage Corp., that is operating out of First Magnus’ old headquarters in Tucson.

No doubt, it likely came as a surprise to those who have been involved with the lender…

Tags: tucson, first, magnus, mortgage, lender, illegal, federal, law

And for the most part they were right. But the economy didn’t stabilize (even for agents) as hoped, mortgage rates were already too low, and many mortgage loans were wrapped into tricky packages like Option ARMs and other types of non-standard formats, some that enticed buyers solely on discounts. As these events took their toll, it was only a matter of time before the foreclosure creep started moving inland affecting larger metro areas of Phoenix, Tempe, and other long established markets.

Foreclosures across metro Phoenix number 16,647 for the first half of the year compared with 9,966 during all of 2007 and 1,070 in 2006.

Last summer, when foreclosures were just starting to climb, the highest rates of home defaults were found on the Valley’s more affordable fringes. The problem worsened, hitting a wider swath of homeowners who bought at the peak of the housing boom through subprime loans. Although some of the Valley’s fringe areas such as Surprise, Anthem and Buckeye continue to have high foreclosure rates, the problem has moved inward.

“It has become more of an equity problem than a subprime problem,” said Tom Ruff, a real-estate analyst with Information Market.

An equity problem is exactly what this is too. Many new home builders immediately started undercutting recent buyers by adding large incentive deals to buy new rather than slightly used. Added to price cuts, there was no way for a new home buyer to sell their home without already having put in 20% or more down as a down payment or taking a loss on the house.

Many of the homes going into foreclosure were bought or refinanced during the peak of the housing boom in 2006, according to property records. Home prices are down almost 30 percent from that time, so many people struggling now owe much more than their home is worth. The median resale price today is $210,000.

Notice of trustee sales, or pre-foreclosures, also continue to climb. There were 35,111 pre-foreclosures filed in Maricopa County through July. That compares with 30,166 for all of 2007. When pre-foreclosures stop climbing, foreclosures could peak a few months later, Ruff said.

Other parts of the country have already hit their foreclosure peak.The troubling trend of homeowners walking away from homes they are upside down on also persists and is pushing up foreclosure figures in the Valley, according to real-estate agents and housing counselors. These are homeowners who may be able to make payments but don’t want to continue to pay a mortgage for $50,000 to $100,000 more than their house is worth now.

As long as foreclosures continue to rise, home prices are likely to fall.

Indeed, home prices are starting to fall. But there are some very important things to remember about buying a home in this new market. Many homes were picked up off the foreclosure block, in an auction, or on the other side of a short sale. Many of these homes have sat dormant for months if not years, and may have problems that don’t appear obvious on first glance. One more reason a home inspection pays for itself in today’s market. Buyers would be wise to make sure they have something to cover their rears when something breaks. It’s no secret the banks won’t be there. They’re having their own problems.

Tags: foreclosure, arizona, mortgage, loans, prices

It’s official: Bank of America has acquired Countrywide Financial, marking the completion of an audacious rescue of one of the most troubled lenders in the United States. The deal will expand Bank of America’s reach in the mortgage business — but, in the current environment of rising defaults and delinquencies among American homeowners, the expansion obviously comes with serious risks.

Countrywide was among the largest lenders in California and Florida, two states hit especially hard by the housing downturn. Both states have sued Countrywide alleging it engaged in unfair and deceptive lending practices. What’s more, Countrywide has a big portfolio of home equity lines of credit, which some fear will be hit with a rash of defaults as borrowers run short of cash.

Some analysts had urged Bank of America to abandon the deal. And judging from the swings in Countrywide’s stock in the six months since the deal was announced, the markets have been questioning Bank of America’s commitment to buying it.

And yet Kenneth Lewis, Bank of America’s chief executive, has been resolute that the purchase would go through.

One of the biggest problems is that while Bank of America has said that the combined mortgage branch will no longer originate subprime mortgages and stop making Option ARM loans (which can be deadly), the amount of those existing loans it absorbs from Countrywide put BofA at considerable risk.

Wachovia recently made an unexpected announcement that they were removing the pre-pay penalty from ALL Option ARMs implying that they see the massive liability to be great enough to forgo profits that can be made on it.

It may seem like a small step, but it’s a rather significant one for a bank like Wachovia.

With BofA mum on any details of it doing the same, we’re lead to believe that they’re chasing the dollar, even if the dollar is veering every close to that gigantic cliff off in the distance. Bank of America might be wise to consider evaluating its footing before getting too close.

The tremors from the existing banking and economic crisis are enough to move giants and it’s not a time to be caught with your pants down.

Bank of America is assuming that losses from lawsuits, now worthless Home Equity Lines of Credit, and Option ARMs, will be much less than they can make for the bank, so we’ll see if their bet pays off.

Tags: countrywide, option, arm, mortgage, bofa, lending

It doesn’t seem to be without merit either. If there’s a reason that it seems more real here in Arizona than in other places – it’s because it is.

The foreclosure crisis continues to gather steam, as April filings—defined as default notices, auction sale notices, and bank repossessions—spiked almost 65 percent from the same month last year, according to RealtyTrac’s most recent U.S. Foreclosure Market Report.

All told, 1 in every 519 American households received notice of a foreclosure filing in April, up from 1 in every 538 households in March.

RealtyTrac CEO James Saccacio had this to say in a statement:

The total number of U.S. properties with foreclosure activity in April was the highest monthly total we’ve seen since we began issuing the report in January 2005…. Areas of California, Florida, Nevada, and Arizona continue to be particularly hard-hit.

Here’s the official breakdown:

Top 10 Foreclosure States

1. Nevada – 1 filing per 146 households
2. California – 1 filing per 204 households
3. Arizona – 1 filing per 224 households
4. Florida – 1 filing per 242 households
5. Colorado – 1 filing per 349 households
6. Maryland – 1 filing per 380 households
7. Georgia – 1 filing per 422 households
8. Ohio – 1 filing per 432 households
9. Michigan – 1 filing per 440 households
10. Massachusetts – 1 filing per 539 households

Tags: foreclosure, arizona, filing

Additionally, banks have yet to figure out how to handle the declining market and their financial loss on the loans made to those unable to pay.

Having been through a short sale myself, there is a lot that goes into one and they can be scary. Here’s a related story.

Homeowners unable to afford their mortgage payments can sometimes negotiate an agreement with lending institutions to sell their home for less than their mortgage debt — preventing foreclosure, a harrying process for both lenders and sellers — and, in many cases, absolving debt while preserving credit.

“Both short sales and foreclosures are considered ‘negative information,’ so they stay on the credit report for seven years,” said Patricia Guertler of Consumer Credit Counseling Services (CCCS), a nonprofit organization offering free counseling to homeowners. A foreclosure, however, is more damaging to credit than a short sale, she said.

While a short sale is still a mark against a homeowner, “credit is something that can be rebuilt — and if the damage is only on the mortgage and if [the homeowner is] in good standing, it is not going to destroy credit completely. … It will drop your credit score but not [to] the point where it is completely irreparable,” Guertler said.

As mentioned above though, this next part seems to have been the hardest for many. Getting the bank to accept the short sale isn’t always easy if they’re slow or require more information than you are able to provide in the time given:

For a short sale to proceed, the homeowner’s lenders must accept the buyer’s offer. Lenders may refuse a short sale, particularly when a homeowner is behind on payments and the lender has taken steps toward a foreclosure.

“It is always up to the lender. It is the golden rule. The people with the gold make the rules. If they want to give the borrower a break, then they can do it. That is why … what you want to do is contact the lender. That is the easiest and most efficient first step you can make. The lender may be willing to help you,” said Dave Lang, real estate attorney at the law office of Peter N. Brewer in Palo Alto.

…

“People need to be honest about whether they can afford their homes or not because the longer they wait, the more devastating the financial consequences,” Herzberg said. “Even if you don’t get approved for a short sale and you go to foreclosure, at least you won’t be losing your life savings, going into your 401(k) plan, losing other property, or your IRA” by trying to make payments, he continued.

“Ideal” short-sale candidates are homeowners with credit ratings worth preserving who are still making mortgage payments, Mariwyn Evans wrote in “How to Succeed at Short Sales.” But according to David Knight, Wells Fargo vice president and home mortgage manager, evaluating candidates for short sales involves more than Evans’ statement suggests.

…

Common financial disclosure includes a homeowner’s income and assets, verified by copies of bank statements, savings and investment forms. Additionally, lenders evaluate homeowners’ personal circumstances, described in a “hardship letter.”

Whereas evidence of homeowners’ financial security convinces lenders to offer mortgage loans in the first place, circumstances of dire hardship make short sales more compelling from the lender’s perspective. “The investor will say, why should I do the short sale if there is no challenge for the mortgager? … The investor will be more willing [to accept a short sale] if it is clear that the mortgager cannot afford the property,” Knight said.

Lenders more readily forgive debt for homeowners with modest salaries, who lack assets such as stocks or savings, and who recently experienced traumas such as illness, job loss, a spouse’s death or divorce.

Though executed more quickly than foreclosures, short sales are time-consuming — for lenders, homeowners and real estate agents. To hurry the process along, Herzberg said he and other agents make sure paperwork is organized and submitted in a way that will get the sale approved.

“If one page is filed incorrectly, it can cause the whole short sale to be thrown out. So it is very meticulous work,” he said.

…

Some of the “back and forth” occurs because homes with second mortgages require both lending institutions to approve the short sale. “If the home has a second mortgage, you have to get the second mortgage institution to release lien,” Knight said.

To speed up the short-sale process, Knight’s “number one recommendation or request” to homeowners and their agents is to “let the [bank's] servicer know when you are listing properties… We can order the appraisal ahead of time; we can knock 17 days off. As soon as you know you have that contract to sell that property, let us know and we can start action that will shorten your time to get a decision,” he said.

Short sales can result in discounts to the buyer between 8 and 20 percent below the home’s market value, according to Evans. Second-mortgage lenders heed offers for a few thousand dollars on their loans, “cents on the dollar,” because the alternative — foreclosure — could bring in even less return on their loan, Knight said.

Traditionally, second-mortgage lenders accounted for the risk of default by charging homeowners elevated interest rates. Many banks, however, were unprepared for the current housing crisis. “We’re going through an unprecedented environment,” Knight said. “A lot of smaller banks have closed because they are not getting paid,” Piano said.

However, you’re not out of the fire yet. The IRS will always want what is owed to them:

After successfully cancelling thousands of dollars of debt, a homeowner may rejoice — only to discover that, to the Internal Revenue Service, the forgiven debt represents taxable income. “A nonrecourse loan may not necessarily give you the [tax] protection that you think you have, if you took equity from the property going into foreclosure to put into other properties; if you refinanced,” said Alan Olsen, managing partner at Greenstein, Rogoff, Olsen & Co., an accounting firm with an office in Palo Alto.

Given the complex financial and emotional challenges faced by homeowners who cannot afford their homes, CCCS’ Guertler says homeowners’ best bet is “to get as much information and to act as soon as they realize they won’t be able to make their payments to their lenders.” Though she advises homeowners to act swiftly, she also offers a warning:

“Be careful of fast or easy solutions companies may offer — because there are no easy or fast solutions. The only one that can help them at this point is the lender because they are the ones who hold the loans.”

Tags: foreclosure, short, sale, credit, IRS