I have to say, though, the seller jerked us around quite a bit throughout the whole process.  That wasn’t pleasant at all.  But we ended up getting the house, and they fixed the big thing that we asked them to fix:  the water heater.  So it wasn’t all bad.

But here are some of the big lessons I learned throughout the process:

• The seller’s addendum was extremely restrictive. There’s the part of the contract that we signed with our real estate agent, and then there was the part that the bank added on (an addendum) with their terms.  It was nine pages of very, very small print that gave every discrection to them and took all of ours away.
• We had to rush everything over to them, but they dragged their feet on their end. Games.  Nothing but games.
• We never met any of the parties on the seller’s side in the transaction. But that may be normal for foreclosure transactions.  I don’t know.
• We had to get an inspection, and have the report to them on very short turnaround, but they didn’t even have to acknowledge that they fixed anything. Again, very one sided, but they did let us know beforehand that they did fix the one thing we asked for.
• They called us the day of closing, after we had already given up hearing from them, at 2:30, expecting us to close that day. I still hadn’t done a walk-through, and the settlement agency’s office was 45 minutes away.  We got it done, but I was not amused by that little stunt.

The transaction moved quickly overall, but I did get the feeling that they were figuratively throwing the keys at us at the closing table.  But I’m probably not the only one who’s seen the very distanced view of banks and their foreclosed real estate.

It sticks a loss to the bank, of course, but banks aren’t taking this lying down.  Faced with over half a million borrowers (an estimate by Experian) banks are playing tougher:

• They recognize the likely patterns and encourage the at-risk-of-defaulting homeowners to tough it out.  This keeps the payments coming in.
• They go after defaulted borrowers with other legal avenues such as deficiency judgments to collect the difference between the sale price (after the foreclosure) and the amount owed.

Just because the foreclosure process is becoming more socially acceptable doesn’t mean that (a) there aren’t consequences, and (b) it’s not ethically wrong.  A house is a place to live first and foremost — not an investment first and foremost.  Cutting bait on paper losses is shortsighted, because the house still provides shelter.  It just hasn’t produced the double-digit gains investors were expecting.  Oh well.

Folks are buying St. Joseph (husband of Mary) figurines and burying them, upside-down, near the For Sale sign in hopes of bringing a quicker sale.

Prayer sure doesn’t hurt but this is a bit off the deep end.  I had heard about this practice several months ago as a woman in our home group knew someone who did this.  Heck, kits are available for sale just for this purpose!

About the only thing that will help sell a house in this kind of a down market is lowering the price and taking a loss, if needed, or holding out for a recovery.

The only people winning out are the people being paid to demolish the homes.  The banks are destroying the collateral for defaulted loans.  The local government, for its want of fines, now misses out on tax revenue.  A person who would have bought the home at the right price no longer can.

Banks and local governments are playing monetary chicken with vacant homes.  Banks must either maintain the homes acceptably — a cost they’ll likely never get back — or face fines.  Local governments turn up the heat and expend effort to get the banks to maintain the properties, or else they become run-down and desirability of surrounding properties goes down, squatters move in, etc.

In this town, the banks flinched.  But neither the banks nor the town will win here.

What may make the foreclosure situation worse is that some communities and homeowners’ associations are clamping down on owners’ rights to rent their properties.  Without the option to rent out, owners are forced to carry the full weight of their mortgage payments until they can sell — or until they’re foreclosed on.  It’s simply HOAs looking after their interests, but it’s at the expense of strapped homeowners.

The 700,000 REO properties is huge.  That will take a while to burn off, and home prices will go down when they hit market.

No one’s immune.  If you’re not being foreclosed on, someone near you probably is, and that affects the value of your house and your neighborhood.

Over the past few years I’ve seen people occasionally posting a place for rent or sale.  Usually not too often.  For the past couple of weeks, I’m greeted each day with four advertisements for property.  Three of them are looking for renters.

It might be just that lots of people have vacancies now, or it could be that the owners are in a pinch, have moved, and need to stop the bleeding because they can’t sell.  One way to stop the bleeding is to rent the house out.

I think there will be more need for rentals as people lose their homes to foreclosure.  They’ll need to live somewhere.  But renters can move.  They can find good deals.  They don’t have to settle for above-market rent just because the owner needs to charge them that to stay afloat themselves.

Workplace MLS is a cheap way to sell real estate.  Maybe it’s all people can afford to do?

This is a valid concern, and she’s wise to consider how to allocate her resources to protect herself against losing her house.  Being upside-down (owing more on a house than it would sell for) is not a problem by itself, as long as the payments can be made.  Being upside-down becomes a problem is when the borrower wants to refinance, or if the borrower runs into financial trouble and goes into default on the mortgage.

So, assuming there’s no immediate worry, what are some choices for preparing for this situation?

• Pay down the mortgage. This means paying extra principal each month.  The mortgage balance goes down more quickly, and fewer payments need to be made over the course of the loan.  The minimum payment doesn’t change (in her case, GBP 500 per month).
• Make some prepayments. This would mean paying, for example, GPB 1500 for February, March, and April, while continuing her GPB 500 per month payments.  This way, she could stop paying her mortgage for three months and still be current.
• Invest more or save more. This is setting aside a “job loss emergency fund” that can be drawn down to cover mortgage payments and other current expenses.

So, which would be appropriate?  If the concern is not being able to make mortgage payments within, say, the next few years, then paying down the mortgage (first option) probably would not alleviate these concerns.  It depletes her reserves, but does not bring relief from making payments.

The other two options will allow her to have a cushion if her income drops.  If she’s more concerned about dipping into the reserves prematurely, then it may be wiser to make a few prepayments.  If she can leave the money alone, saving cash is better, because she can earn interest on the money.

(Note:  Thanks to Taking Charge for including this post in the Carnival of Personal Finance!)

• Offer a deed in lieu of foreclosure. This is an option if the shortfall between your house’s value and what’s owed on it isn’t too much.  The lender can say, “Yeah, I’ll take the deed back, and you won’t owe anything.”  It’s similar to solving a disagreement through arbitration instead of going to court: It’s less costly for both parties.
• Negotiate a short sale. If the lender stands to lose a lot of money through a foreclosure, then a short sale may be possible.  The lender agrees to release the mortgage for less than what’s owed, and the deed is transferred to a third party.
• Allow the foreclosure to proceed. There may be no other option, and your credit rating will be absolutely trashed for a while, but sometimes it’s not possible to avoid.  Foreclosure is never the end of the world, though.

Be realistic.  A house is just a house.  It may have a lot of sentimental value but when all is said and done it’s just a structure and a place to hang your hat and store your stuff.  If this structure is costing too much, then getting out while it’s still possible to get out is wise.  I certainly wouldn’t want to pull myself away from my house, but when facing foreclosure being able to walk away with the credit rating intact is certainly a better option.  This might mean forfeiting some equity to sell the house, but in today’s market, selling and living to tell the tale is a win.

Get organized. Especially if you’re approaching your lender for a modification to your loan.  Weston writes:  “The lender will specify what it wants, but typically you’ll need to supply the details of your financial situation, a budget, documentation of your hardship (a letter from your doctor explaining an income-reducing illness, for example, or your layoff notice from your employer) and a ‘hardship letter’ that outlines, in heart-rending detail, the circumstances that led you to fall behind and the improved prospects that will allow you to get your financial life back on track.”  Even if this isn’t the case, organization helps, because maintaining the paperwork from the lender is useful for whatever negotiations you want to attempt. 

Sell the house. If you have enough equity in your home to pay off your mortgage and pay the real estate agent’s commission, this is the best outcome if you’ve reached the conclusion that you can’t afford the house anyway.  The bad marks on your record stop and the problem (your house) is gone.  If you’re actually in a position of positive equity, your lender will be less likely to make a deal with you anyway since their loss is probably covered.

• Make a budget.  If there are places that can be cut in your budget that will make the difference between losing the house and not losing it, this is the time to do it!  See if there are ways that you can do the little money-saving things again to make up the shortfall.  Depending on how short-term the shortfall appears to be, it may make sense to keep the mortgage current at the (temporary) expense of other bills.  If it doesn’t make sense to do this, then don’t.
• Consider getting help from credit counseling services associated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.  (Members of these organizations abide to standards and agree to oversight by the organizations.)  Additionally, HUD and VA loans have their own assistance and counseling programs.
• See if you can refinance.  This may be harder to do than it was last year but if you have enough equity it may be possible to refinance and to lower your monthly payment.  This works ideally before the first missed payment but it’s best to look into this before a notice of default has been filed.

The next post will talk about the next three steps in her list.