New Government Programs to Reduce Home Foreclosures

According to the article U.S. Sets Big Incentives to Head Off Foreclosures on the New York Times website the Obama Administration unveiled two new plans that will help many in people in foreclosure.

In my opinion neither plan will not solve the foreclosure problem.  The problems with the plans are as follows:

1. Investors are excluded.  Since many foreclosures, particularly in Florida, Nevada, Arizona and California were from investors (actually speculators) those foreclosures will continue.
   
2. Second homes and vacation homes are excluded.  Since many people not only purchased too much home for their budget, but also too many properties (i.e. second homes and vacation homes) they got into financial trouble.  Since the plans do not cover these owners the foreclosures will continue.
3. Many people who are in foreclosure are there as a result of not being financially responsible.  I have personally seen people with combined incomes of almost $100,000 not be able to pay mortgages payments of $2,000 to $2,400 per month (includes principal, interest, taxes and insurance).  The Obama plans allow for mortgage payments to be as low as 31% of a person's income via paying matching funds to the lenders.  The numbers I show above are less than 31% yet those people still did not pay.  The reality is that the housing payment is only one part of the problem.  Typically, these people had a lot of other debt and just spent recklessly.
4. Both plans require that the home owners have enough income to pay the modified payment.  This is meaningless if the people have lost their job due to health issues or the current economy.  For a while now health issues which cause a person to lose their job have been a big factor in foreclosures.  Since the plans require that people have a job people in this position will not be helped by the plans.
5. Plan 1 (Refinancing for Strong Borrowers) limits the total new loan to a maximum of 105% of the home's current market value.  Since many people now owe far more than their home is worth even if they are current on their mortgage payments they will not see any help from Plan 1.  The result will be that these homeowners will eventually slip into foreclosure as the market value of their home declines.
6. Plan 2 (Loan Modifications for At-Risk Borrowers) does not place a limit on the loan amount with respect to the market value of the home, but it limits the reduced modified payments to a term of 5 years.  After 5 years the interest rate will probably reset to today's market rates.  The problem is that for may people they still will not be able to pay the market rate in 5 years.  Also, this Plan fails to address the issue of what happens when the people cannot pay the modified mortgage and the loan amount is still greater than the market value.  In short, this plan is betting that the market values will substantially improve in 5 years.
7. Neither plan addresses the core reasons of why we are in this mess to begin with.  The core reasons are: (1) Homes and real estate just got too expensive as a result abnormal demand caused by what I call "housing euphoria" which resulted from an increase in the homeownership rate that was enabled by loose credit standards.  (2) People started buying homes that they could barely afford even with a 2 income family so there was no room for any job loss.  (3) People purchased homes with risky adjustable rate mortgages in order to allow them to buy more home in the short run without regard for any rainly days or "what if's".  (4) People just borrowed and spent too much in general.

Top 5 Reasons to Pursue a Short Sale versus Letting Your Home Be Foreclosed

1. Stress - A short sale is less stressful than a foreclosure.  With a short sale you have some say in the outcome.  With a foreclosure you are at the mercy of 3rd parties.
2. Credit - A short sale is less damaging to your credit.  Either way you will have late payments on your credit report, but with a successful Short Sale the debt will usually be listed as satisfied.  A foreclosure will show up on your credit report.
3. Time - If you notify your lender that you are trying to sell your home many times they will give you more time to stay in your home while you are trying to sell it.  You will likely not have to pay your mortgage during this time.  You should use this time to save your money so you will have some money to move and find another place to live.
4. Release - If you successfully close a short sale you will usually be released of remaining unpaid debt.  In many states, with a foreclosure the lender can continue to legally pursue you after the foreclosure proceedings are over in order to try to recover the amount of the debt they were still owed after the lender sells the home (it is called a deficiency judgment).  Walking away without having any further obligation to repay a debt is reason enough to pursue a short sale.
5. Responsibility - The responsible thing to do is to pursue a short sale.  Most homes are foreclosed simply because the owners refuse to face reality and will not deal with the situation.  This hurts the homeowner and the lender.  There is no reason for this.  The responsible thing to do is to mitigate the lender's loss and give yourself a chance at a future without that remaining mortgage debt weighing you down.

Foreclosures now hitting previously untouched areas of the US

The foreclosure problems in California, Florida, Nevada and Arizona continue to batter those markets.  This has been well covered.  However, now foreclosures are hitting areas previously spared from the problem.  I recently came across this article on the website of the Nashville Business Journal.  According to the article approximately 25% of the Middle Tennessee are home builders are either out of business, or bankrupt and that buyers have been able to buy foreclosures that previously sold for almost $600,000 for only $250,000.  The article also states that part of the problem is "equity calls" (similar to a margin call) that lenders are hitting home builders with that are a result of the declining market value of the builders' inventories.  Based on some research that I conducted it appears that this market is still significantly overbuilt due to a boom in new construction from 2005 through 2008.  It will take some more time and some larger price declines before hitting bottom.

Top 10 Things to Do When You are or Will be Behind on Your Mortgage Payments or are already in Foreclosure

The purpose of this blog is to help people who are or will be behind on their mortgage payments, or are already in foreclosure.  I know that being in that situation is very stressful.  I have seen it first hand as I have helped many clients through those difficult times.  I welcome questions and comments from people needing assistance.

 

As a first attempt at providing some assistance, I came up with the following list of the “Top 10 Things to Do When You are or Will be Behind on Your Mortgage Payments or are already in Foreclosure”.

 

1. Take a step back to reflect - Take a deep breath and regain your composure.  Getting behind on your mortgage payments or being in foreclosure is a difficult problem.  You cannot solve any problem if you panic and are not capable of reasoned thought.
2. Relax - What is the worst that can happen?  You will lose your home and possibly have to move in with relatives, or into an apartment at least for some time.  It might be embarrassing and even humbling, but it is not the end of the world.  No one is going to throw you in jail.  Your life is not over.  You can and will rebuild your life after you get through this.
3. Gather information - Put together a monthly budget of all your income and expenses.  Use your net take home pay (i.e. after taxes).  Be sure to include all your living expenses (i.e. food, health insurance, housing payment, vehicle payments, gas and vehicle repairs, meals, grooming, pet expenses, entertainment, child support, alimony, etc.  You need to know exactly where your income is going and how much you are really short each month.
4. Be honest with yourself - Ask yourself some difficult questions and be honest with yourself.  How did you get here?  Did you buy more home than you could reasonably afford?  Do you buy too many things on credit?  Are you a shopaholic?  Can you do without things?
5. Analyze - Put together your monthly budget (income and expenses).  Analyze your budget to see if you can eliminate things from your budget.  After cutting your budget see if there will be enough money left each month to pay your mortgage/housing payment?
6. Make your plans - If you cannot afford your home with your current mortgage even after you have trimmed your budget, you have 2 basic options: (1) contact your mortgage company to see if they will modify your loan terms.  (2) Sell your home.
7. Decide - If you prefer to try and stay in your home then a loan modification is your first option.  Call your mortgage company and tell them that you cannot afford your housing payment and that you need a loan modification.  They will likely send you to their loss mitigation department who will then fax or mail you their loss mitigation package, which you will need to fill out.  Your mortgage company will then review the information to see if a loan modification is desirable for them.
8. React promptly - If the mortgage company does not offer you a loan modification (or offers one that still will not help enough) then you need to sell your home.
9. Decide - You will need to make a decision to agree to the loan modification, or accept the sale of your home.  If you need to sell your home price it lower than any other home to get it sold fast.  Buyers will not pay retail prices for homes in foreclosure, or homes where the mortgage balance is greater than the market value (a short sale) due to the “as is” risk or to the lengthy time involved for a response in the case of a short sale.  In either case, you will need to price your home with this in mind.
10. Act – Regardless of what you decide to do you need to act quickly and decisively.  Letting the bank foreclose on your home will severely harm your credit for several years and in many states the bank can still come after you for their net loss after liquidating your home as an REO (this is called a deficiency judgment).  If you opt for the short sale you should be able to lessen the impact to your credit and eliminate the threat of a deficiency judgment.