webLOGfor.US

As people who read this blog may know, I am a contributor to the Yahoo! Answers message boards.  I have seen many questions come up on should I let my home go into foreclosure or not lately.  I'm posting one question here along with my answer to that question.

Question:  I have had a fixed rate mortgage for the past 5 years and it is set to start adjusting soon.  I spoke with my mortgage broker and he said that my payment will go up by about 40% at that time which I can't afford.  He ran some comps and told me that I owe about $100,000 more for my house than it is currently worth.  His advice was for me to buy a new, cheaper home now then stop paying on my current mortgage and let the home go into foreclosure.  Should I walk away from my home since I can't afford it and I am upside-down on my mortgage?

Answer: Absolutely Not! The only thing you should walk away from right now is your mortgage broker.  The advice you are getting from him is clearly not the best around.  I see a possibility for you to benefit on this (by getting out of the mortgage) and I see him definitely benefiting on this (since he will get to sell you a new mortgage).  My first thing to look at here would be how did you end up in this situation?  Was it the mortgage broker who steered you toward this type of loan?  If so, ask him why he did it.  If not and it was you who were going for more home than you could afford then you need to take responsibility and fix the problem.  Walking away from it is not fixing it.

    First, let me say that it is great that you are conscious of your mortgage and trying to resolve any problems before they hit you in the face.  I’ve seen far too many people just sit back and not take action until it is too late.  Those people who wait until the adjustment has already happened end up in desperation and panic.

    Owning a home brings with it a great deal of responsibility, and if you are sufficiently mature to own a home then you are certainly mature enough to deal with the consequences of some questionable mortgage decision-making. There are many options you have for proactively dealing with your coming mortgage adjustment short of abandoning your home to foreclosure.  It would be a major step in the right direction for your relationship with money and your personal financial and emotional maturity for you to take responsibility for the consequences of your past decisions and pursue those options before throwing in the towel.

    Your mortgage broker's advice is intended to position you against the worst-case scenario.  I would suggest you try to project the best-case scenario and do everything in your power to manifest that outcome.  That requires a big mindset shift, but I've seen homeowners do it, and end up keeping their homes or selling them — both of which are preferable options to walking away.
Foreclosure is your worst-case scenario.  The cost of a foreclosure is greater than just losing your current home.  Foreclosure has tentacles that reach into many other places in your life.  Whether you walk away from your house or try to resolve things with your lender, foreclosure will result in a major decrease in your FICO score.  This drop in your FICO score will be large enough to prevent you from buying another home for several years and to cause your credit card companies to start closing your accounts.  Additionally, many landlords now look at credit reports when gauging the acceptability of prospective tenants.  If you allow your home to go into foreclosure expect to have your current credit reduced and be denied future credit for many years to come.

    The answer to this is not to simply buy a new home ahead of time; frankly, if you are that overextended, I'm not sure how feasible it is for you to obtain financing on a home right now, and it is a morally reprehensible to plan so strategically to abandon your obligations under one mortgage and attempt to avoid the consequences of doing so in one fell swoop.  When you accepted the mortgage, you accepted the responsibility for paying back a loan.  The home was just used as collateral.

    The ethically, morally and responsible move is to put into play a foreclosure avoidance plan, and then work that plan. There are homeowners out that are having success avoiding foreclosure.  You should join their ranks and follow your plan to avoid foreclosure before just throwing up your hands in defeat.Homes are not disposable. The fact that you currently owe more on your home than it is worth is not sufficient justification for abandoning your home. I know many homeowners who once were upside down, but stayed in their home for another 10 or 20 years, and now that same home is worth three or four times what they paid for it. Homes are items that appreciate over a long term.  This is one reason that mortgages are tied to security terms and not the short-term rates that the fed adjusts.  Take a long-term view on the value of your home, and don't toss it away like you would a bad stock; unlike those shares, your home's value will usually come back over time.

Here are some things to do to get things rolling and keep yourself from having a foreclosure.

1. Try to refinance. If you are worried about being upside down on your home you might need to assess how sustainable this home is for you. If you simply bought way more home than you can ever realistically afford with a reasonable mortgage, you should jump straight to #3 and try to sell your home. If other events, like a temporary loss of income, are making it difficult for you to afford your home now but you think you can afford it over the long haul, work with an ethical mortgage broker (obviosuly not your current broker) to see if it makes sense for you to refinance your mortgage, and whether any affordable mortgage options that are sustainable over the long term are available to you.   
2. Loan modification. Call your lender!! Ask for the loss mitigation department; put together the hardship package they request (usually a bunch of your financial paperwork to show that you really can't afford the upcoming adjustment); and then try to negotiate a few months with no payment, a reduction in the balance of your loan based on fair market value, an extension of the low-payment period for several more years, a reduction in interest rate, etc. Lenders vary widely in their amenability to making these sorts of arrangements.
3. Get extreme about increasing your income. If you truly want to keep your home, consider going to extremes. I've seen people avoid foreclosure by renting out rooms, taking second jobs or taking in freelance work on the side.  
4. Short sale. If you just bought way more home than you can ever realistically afford, trying to liquidate your home through a short sale is a great option. Work with a Realtor who has experience successfully representing sellers in short sales. I've even seen homeowners have real estate investor friends purchase their home through a short sale, which may give the seller the opportunity to lease and later buy the home back.    

    Responsibility is the ability to respond, not the ability to run from your problems. The savvy way to respond to your situation is to exhaust the above ethically and financially responsible options before your mortgage adjusts

    I can't help but thinking that everyone wants to claim victim here.  Sure, these people are in a bad spot, but a victim?  I don't think so.  These people who are renters have not lost their jobs, have not fallen on hard times.  they simly have to move.  Agreed, it is a hassle, and there may be times where they will lose a security deposit, but they are still on their feet.

    I see this as a way for the market to correct itself.  As an investor I am waiting for the good deals to come along.  Once they do I will grow my portfolio as much as possible to take advantage of the market conditions.  Some of these "victims" can easily turn the situations around to become investors themselves.  My first property I woned came because I was a renter in a place that went into foreclosure.  I ended up buying it from the bank at a deep discount.

    One thing that renters will face is higher demand for apartments.  This will cause rent prices to rise but this is simple economics.  I didn't see any government agencies talking about all the landlords that were lowering rent or having units sit unoccupied for long periods of time in the recent boom market of sales?  When all you needed to get a loan was a pulse the rental market slowed considerably.  Now there is a correction.  I say, let it correct itself!

http://finance.yahoo.com/real-estate/article/103718/Mortgage-Turmoil-Hits-Renters

The mortgage mess is claiming a new group of victims: renters.

Across the country, a rising number of landlords are falling behind on mortgage payments, sending their properties into foreclosure, according to legal-services attorneys, local officials and financial experts — and in many cases, their tenants are being forced out of their homes. Often, the tenants' first inkling of trouble occurs when they get a letter from the bank directing them to leave the premises.

"They just don't know what to do — they leave town, move in with their mothers, end up in shelters," says Janet Merrill, an attorney with the Massachusetts Justice Project, a Worcester legal-services agency that runs a hotline for low-income people.

Strong demand and a tight supply is making for a competitive rental market in San Francisco. And experts say it will be January before the full impact of the mortgage crisis on the rental market is known.

Ms. Merrill's group gets four to five calls a day from renters facing eviction resulting from foreclosure. One caller recently received a letter from a bank saying her six-unit apartment building had gone into foreclosure and ordering her to vacate her unit by Oct. 31.

The woman, says Ms. Merrill, had lived in the apartment with her two sons for a month. Before that, they were in a unit in another building that also went into foreclosure. In that case, the woman accepted a "cash for keys" offer of $800 to leave the apartment. When she called the hotline, she told Ms. Merrill, "I want to stay here. I'm so sick of moving."

The scope of the problem recently became clear to Judith Liben, a housing attorney at the Massachusetts Law Reform Institute, a Boston legal-services center. After hearing about tenants' evictions in Massachusetts, she asked other housing advocates across the country whether they were seeing similar problems. The response — from Nevada, California, New York and other states — was overwhelming, she says.

In many cases, the homes and apartments entering foreclosure are owned by investors who got low-rate teaser mortgages and intended to hold the buildings for a few years and then sell them at a profit — before their mortgage rates rose. Now, with the housing market badly depressed in many markets, the owners can't sell the homes or afford the higher mortgage payments. Many are defaulting.

In most states, says Ms. Liben, foreclosure voids leases, and banks move quickly to get tenants out. "Depending upon the state, tenants get between three and 30 days notice," she says. A few states have laws protecting tenants from eviction in the event of foreclosure, and others are moving to give renters more notice, Ms. Liben says.

Renters' woes are beginning to attract wider attention. Yesterday, Eric Rosengren, in his first speech as president of the Federal Reserve Bank of Boston, said that the high number of foreclosures on multifamily homes in parts of Massachusetts "highlights a potentially serious problem for tenants, who may not have known that the owner might be in a precarious financial position."

Ms. Liben summed up the problem in testimony last month before the House Financial Services Committee: "It is now clear that, nationwide, tenants who did nothing wrong except to rent from a defaulting owner are suffering harsh collateral damage from the mortgage fallout." She added that foreclosing banks often refuse to pay the utility bills or make repairs on the properties.

In Hennepin County, Minn., which includes Minneapolis and its suburbs, there were more than 3,000 foreclosures last year — nearly twice the 2005 number. "You just wouldn't believe it here," says Amber Hawkins, an attorney with the Foreclosure Relief Law Project, part of the nonprofit Housing Preservation Project based in St. Paul. "There are areas of [North Minneapolis] that are just decimated. House after house is boarded, vacant and abandoned."

Ms. Hawkins says that banks have traditionally pressed renters to leave quickly so that they can resell the property. But, she adds, "nothing is selling right now." As a result, empty buildings end up sitting on the market and become "magnets for criminal activity."

That also means there are fewer homes to rent — even though the number of renters isn't declining.

Danilo Pelletiere, research director at the National Low Income Housing Coalition in Washington, says that in the short term, the number of renters is going to rise faster than the number of available units. "What do you do with the foreclosed homes?" he says. "[Low-income renters] can't necessarily move to a vacant McMansion somewhere out in the suburbs."

Ms. Merrill says the lack of affordable rental units is a huge problem in her area of Massachusetts. "People are applying now for public and subsidized housing," she says, but the waiting lists are long and the alternatives are bleak. Even if Ms. Merrill can find her twice-evicted client another acceptable apartment, she says, "how does she know another place won't be foreclosed on too?"

    Countrywide Financial tapped into an $11.5 billion line of credit Thursday to "weather the storm" and address its looming liquidity crunch.  Countrywide Financial is the #1 writer of mortgage loans in the United States.  

    During the period that Countrywide was securing it's $11.5 billion in financing the Chairman and CEO, Angelo Mozilo, cashed out 672,000 shares of the company he owned netting him just under $13 million.  Mozilo still owns almost 500,000 shares of the company directly, and has about 850,000 shares held in trust or his 401(k).

    Investors have begun to refuse to buy many loans that are less than "prime".  These include the Alt-A loans, which I've written about here, as well as the subprime loans.  With Countrywide and other companies unable to sell these loans they have to keep them in-house.  This increases their risk if the borrower defaults.  Every default will now come stricky from their bottom line.  They can't help but make sure they cross all their t's and dot all their i's when making loans to those who are riskier.  This will directly affect anyone trying to get a loan from Countrywide.

    I've written in the past what I think is happening to the housing market and the ability of the average Joe to get financing for his house.  I believe this further proves the point.  The ultimate ones who will lose out because of this is the average Joe/Jane.  They will lose on multiple fronts.  

    The cascading affect of this will be less people to buy homes.  With less people buying homes, those homes that are on the market will sit longer.  Those people who have to move for any particualr reason will have to lower their price if they want to sell quickly.  This will in turn cause others to lower their prices.  It's a cascading effect that will casue a correction in the market.

    Another place to lose is the investor market.  Those that had money invested in Countrywide wither directly by owning stock or having a mutual fund that owns their stock has seen the invidual stock price go from $35.14 one month ago to hitting a low of $15.00 today.  Any stock losing more then half it's value in a month can hit the average person hard, especially if they bought high.

    Countrywide is a company that has diversified itself among the competition.  They have separated many parts of their business into separate comapnies and have leveraged the selling of security backed loans as a way to protect themselves.  Will they survive this mess?  I believe they will.  Will they take a hard hit?  I believe they will.  Will I be buying their stock?  Eventually.  I think that it will hit around $11 or $12 as a low then start to rise.  If it hits that low I will be buying.

    How will this affect those who have rental properties?  As I stated before, I hope everyone lined their financing up previously for the future.  There will be a lot of people losing their homes.  I may sound like a vulture, but I am not hoping for this to happen.  I believe it will just be a fact.  Too many people got in over their heads and the correction will cause them to lose their homes.  With this will come a great deal of short sales and foreclosures.  Those that have their financing lined up can use this to get ahead.  Market corrections for rents are already happening.  Here in Philadelphia rents have risen and applicants are aplenty.  

web log for us – those that see the calm before the storm as a time to plan for it's coming

10/30/07 EDIT:  5 days ago Countrywide hit it's 52 week low of 12.07.  Today, 5 days later, it has jumped back up to $16.31.  I guess I wasn't the only one that had an eye out for the $12.00 mark to start buying this stock up. 

    "It is with great sadness that American Home has had to take this action which involves so many dedicated employees," Chief Executive Michael Strauss said in a statement.

    Those words echo true for the nearly 7,000 employees that will be laid off today from American Home Mortgage.  AHM has been rocked by creditors who have lost faith in their business.  AHM's business is ALT-A loans.  Alt-A loans are loans to people with less than perfect credit.  These people usually have credit scored from 600 to 660.  This accounts for around 40% of the United States.  

    A couple days ago I spoke of the impact that the failing mortgage industry will have long term.  I want to reiterate that here.  The impact of this companies fall, and others like it, will hit home to almost every American.

    These 7,000 people are now unemployed.  With the latest report that job growth is weaker than expected these people can expect longer time away from the job market than in recent history.  You must also take into account the investors who will lose money on the AHM closure.  The average Joe will feel that harder than the larger pocketed investors.  

    I don't consider myself a naysayer.  There is a positive in all of this.  Those investors who have all their ducks in a row have good times coming.  If you have the cash available to purchase you will make out in the coming 18 months.  If you have your cash tied up in investment equity, I would try to leverage it out now as the standards for lending are going to tighten up severely.

web log for us – those that can keep an eye on the future to leverage it to our favor

    Many people are poo-pooing the mortgage fallout.  Everyone is concentrating on the effects of these subprime loans and how the rate reset will affect scores of people.  You can see my personal feeling on the matter in this post.  Barring that, I am not here to discuss the issue of the mortgage fallout and its impact on the loan holders, originators, etc.  I am here to discuss the further implications of the problem to the Average Joe (or Jane).

    The most recent casualty is American Home Mortgage.  They have been unable to make $300 million in loans on Monday and missed another $500 million they were scheduled to make on Tuesday.  Their stock price has fallen over 90 percent from its 52 week high of $32.77.  the chances are pretty good that this company will either go bankrupt or materially restructure.  Either way it will leave little value to any shareholders.

    You may be considering AHM just another casualty of the subprime meltdown, but they aren't.  American Home Mortgage held a roughly 2.5 percent share of the U.S mortgage market.  They dealt with "Alt-A" mortgages which while not prime, were not subprime either.  These types of mortgages fall in between the two.  These are people with roughly a 600 to 660 FICO score.  We're not talking deadbeats here.  These are people with either a few blemishes on their credit history or are carrying somewhere around a 50 percent debt load.  The people in this range are roughly 40 percent of the United States.

    This cascading effect will affect everyone.  Those who have invested directly or indirectly in mortgage backed securities will lose.   Those who have invested in the companies that originate these loans will lose.  If you have 401k or mutual fund investments, check to see if you will be affected by this financial crisis.  If you are invested in any REIT's real estate prices will be falling.

    Looking further into the issue, many Average Joe’s and Jane’s will be affected as well.  Without originators to make loans to the Alt-A crowd, more homes will sit on the market longer.  Greater inventory with fewer buyers will not be good for the market.  Prices will fall.  People who can get prime loans will be unable to move or get the asking price for their current home.

    As a Real Estate Investor get your money lined up now.  If you have a lot of equity tied up in any properties that you think you would need in the near future you may want to pull it out.  Loan standards will shoot through the roof and some investors may get caught up in the tightening.  Housing prices will be falling.  Look for the deals that are out there and remember the number one rule with investing in real estate.  Make your profit when you buy…..get the property for well below market value.

    As with everything, the Real Estate market is cyclical.  Things will turn around, but I believe that it will go down quite a bit more and many more people will get hurt before it starts getting better. 

web log for us – those that plan for the future to capitalize on it