Home Loan Focus

Archive for the ‘foreclosure’ Category

In many areas of investments and accounting when a company has an assets on the books and the market value of the asset drops below the original cost of that asset, the company must write down the value of the asset on their books.  Writing down that asset requires taking an expense which can result in a loss for the company involved.  Good accounting principles require this move as it does most companies and especially investors no good to keep a fictitious value on their books.  Plus, the recognition of the loss can enable the company to save a little on taxes, a small condolence for losing asset value.

Fed Chairman Bernanke is essentially calling for something similar to help solve the mortgage crisis.  He’s calling on Treasury Secretary Paulson of the Bush Administration to take action to push lenders to write down the value of the mortgages that you might hold.

Bernanke said “more can, and should, be done” to limit foreclosures. He added that principal reductions “may be a relatively more effective means of avoiding delinquency and foreclosure” than renegotiating interest rates. … “the current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions.”  Bloomberg.com: U.S.

For example, if you have a mortgage in San Francisco for $800,000 and the real value of your property is now $650,000.  People are not companies and do not keep a lower of cost or market basis in their homes.  Banks however, take those mortgages and sell them to investors in a process known as securitization.  Banks would have to decrease the value of the mortgages they hold before the sale to investors and possibly after as well.  Think of it like Wal-Mart providing you a credit on a receipt if the price of a TV goes on sale within 30 days of buying it at their store.  Banks would essentially, have to give investors a credit on their investment, take a loss and let mortgage holders off the hook for the loss in home value and readjust the monthly mortgage payment downward.

That is definitely a tough pill to swallow for banks, but they may have no option. If they do not make such an adjustments, a homeowner that holds a property worth $650,000 with a mortgage of $800,000 might quite logically make the investment decision themselves to walk away from the house and allow a foreclosure to happen.  Every day they stay in that over mortgaged house, they are essentially making the decision to over pay for their own house by $150k.  That’s a bad financial move for a home owner thinking like an investor.

This same process could unfreeze credit from investors too.  If they get a refund on their investment, they could conceivably invest in new mortgages at more appropriate values.  Investors need to see that foreclosures are stopping, that people are buying houses, that the real estate market correction is over and most importantly that banks can be trusted again!

The Fed, the Treasury Secretary, banks, investors and home owners are all essentially trying to find a way to put some baby clothes back on the baby after throwing the baby out with the bath water.  The downside to this proposal is that it essentially puts the blame and the cost on bankers.  Except in the cases where banks created or contributed to fraud, homeowners are the ones that made the initial bad investment decision of buying a house that subsequently later devalued.  The fraud of the banking industry does appear substantial, but buying into a bubble can not be ignored either.  This will definitely be a difficult concept to pass through Washington DC during an election year.

This morning you might hear about President Bush’s Tax Cut stimulus plan.  He is releasing a newly revised stimulus plan today that would provide $800 for individuals and $1600 for married couples.  Bush hopes that this tax cut will achieve the same results that tax cuts in 2001 achieved as they helped to stave off a recession.  Back then the checks rolled in August and people spent the checks right away, buying lots of goods to help boost the economy either out of recession or in a way that cut it off before it really began.

I for one can and will use the money, but the reason why I will use the money is the same reason why this tax cut will not help the US avoid a recession.  I am going to take that full check and drop it on one of my credit cards.  That is the area where I have a need for an expense reduction both in monthly interest charges as well as in monthly payment requirements.  I am not going to go buy a new Wii or TV or clothes or any other stuff.  The reason is that I just bought a bunch of stuff for our household last month.  It was called Christmas and many Americans are going to do the same exact thing.

January is typically the month where people buckle down to pay off their holiday debt, bills, travel expenses etc.  This is not a spending month, this is a paying off debt month.

In the long term this tax cut is actually no tax cut at all.  Its more like a 1 year wash 2nd year tax increase.  That is because the tax cuts Bush wanted to make permanent are being completely abandoned to push this deal through.  So the money that we might benefit from today, basically comes out of our own pockets next year.  The year after that we pay more as well.

Now as  a general rule of thumb, when it comes to the government I’ll take a bird in the hand any day as its rare when the government actually delivers two in the bush, even when its Bush that is the one delivering.

How to Use Bush’s New Tax Credit to Save Your House from Foreclosure

Now I am going to put this money on credit card debt.  If you are working to save your own home from foreclosure, you should consider a different option.

A couple years ago if you had been given $1600, the smart money would have been to put that money into a directbuy home improvement, boosting up your kitchen, adding a bathroom or anything that might return you a home sales price of another $10k.  This year we are looking at falling home prices and possible foreclosures.  If you have a closing that is in trouble and the buyer is asking for some extra stuff, you might use the money to save the deal.  Unfortunately, that’s not likely for most people.

Odds are that if you are trying to save your home, you are better off using this money to make another payment and negotiate a refinance deal under one of the new FHA plans that is designed to help people on the cusp of trouble that have not yet defaulted.  If that isn’t an option, you might use the money to pay closing costs on an old fashioned (non-government backed) refinance. 

If you are not in trouble, you might invest the money in the stock market.  At about 12,000 the stock market is looking like a value play.  If stocks are not your thing, you might use the money to make an extra principle payment on your home or home equity loan.  This could save you money over the life of your mortgage.

Use the money to Get Green

If you wanted to remain true to the spirit of the tax cut, you might even use say $300 to go invest some money in LED light bulbs.  Upgrade the bulbs in your house with these energy saving bulbs and you will decrease your electric bill for the long term.  You can still use the remaining money to pay down debt, or just park that money in a rainy day fund.  Heck you could even bury some of that money in the back yard!

The history of renting property may possibly go back as far as the history of buying or owning.  Over the last few years, many many more people that would historically rent a home have been purchasing homes or condos.  For some of these people this has been a great opportunity.

Credit was easier, sub prime mortgages were easier to qualify for and some of these people had the resources financially to make the purchase work.  For some buyers, easy credit was a trap and the easy credit may have set them back more in time and credit ratings than if they had followed a traditional route working their way up through rentals first  until their finances were strong enough to buy.

During the credit boom and real estate bull market, many people completely forgot about renting as an option unless they lived in Manhattan or were looking for nyc apartments for rent with New York’s notoriously high property prices and rent control pricing opportunities.

So now Sub prime and the mortgage companies that offered them are at some of their lowest points ever.  Credit has dried up considerably and people are looking to rent again, not by choice but by necessity.  Along the way they might even learn that renting can be the right financial choice for their future as well.

Politicians are hoping to help some of those people that took out loans that they could not afford.  Many people took on mortgages with teaser interest rates.  Essentially the mortgages started with interest only payments, or teaser payment rates with escalating payment levels as the loan advanced.

Many of these same loans were also Adjustable Rate Mortgages (ARMs).  As the loans start to include principle payments later on in the life of the loan, the interest rates sometimes start to increase as well.  This serves to hit homeowners with a much higher payment that too many cant afford.

Lawmakers are considering legislation that would lock these payment amounts at their current level, so that people could stay in their home.

How to lock these rates though is problematic.  If banks do not receive a principle payment, the homeowners will never take control of their home and finances.  Some legislators are considering options that would make renters out of homeowners.  Essentially looking at those interest payments as a rental contract and updating the mortgage to reflect this reality with out pushing a homeowner into bankruptcy, foreclosure and a canvas tent.  Its unfortunate that these same lawmakers could not have protected homeowners and borrowers from the predatory lending practices of recent years and even more tragic that lawmakers could not protect US citizens from their own actions when they instituted tougher bankruptcy laws in 2005 that essentially made credit card debt more important than a mortgage in the eyes of the courts and as an indirect result in the eyes of debt holders.

With the collapse of the sub-prime lending markets over the summer, many homeowners have found themselves up the creek. The jury is still out in regards to any “predatory lending” claims however many of the prime suspects have boarded up their shops and left for higher ground. Questionable practices aside, affected homeowners now find themselves locked into overbearing financial commitments.

Many homeowners who are faced with the prospect of foreclosure tend to hit the panic button without taking a look at their options, yes there are options. The first option I would suggest is to contact your lender. You have to remember, banks and credit unions DO NOT want to have an extensive property portfolio. A foreclosure can look just as gloomy to your lender as it does to you. My second recommendation is to contact a local Realtor or licensed professional. Enlisting the help of a professional is never a poor decision especially when searching for foreclosure information. Remember, even if you choose to go it alone, most Realtor’s offer free consultations and have extensive contacts in the lending industry.

Whether you are a homeowner facing California foreclosures or a potential buyer looking for distressed or Florida foreclosures, remember that there are many hazards and pitfalls associated with a purchase and sale of foreclosed property. There are many licensed professionals who have the experience and expertise to help you, take advantage of their knowledge. As I mentioned earlier, there is generally little to no cost associated with a consultation, but there can be a lifetime of cost in an uninformed decision.

This year has become the year of the F Word.  There are home foreclosures setting new records in almost every state of the country.  Foreclosures are a terrible experience for anyone that has to go through the process, but there are ways to prepare yourself so that you can avoid this process or at least mitigate the problem as much as is reasonably possible.  All does not have to be lost.  Furthermore, there is a flip side to foreclosures.

First, if you are or ever get behind on your mortgage or start to run into financial trouble there are things that you can do to avoid foreclosures.  You can renegotiate with your mortgage holder, refinance, possibly even refinance under new governmental programs that are being revamped this fall to enable people in trouble to convert their mortgage to an FHA loan.  You could even attempt to sell your home to pay off the mortgage.  Taking a loss on a sale might be better than foreclosure.

Even as a last resort you might opt to turn your home over to your mortgage holder.  This does not save your home, but it is better for your credit than a foreclosure and might make it possible for you to buy another home sooner than if you go through foreclosure.  Its not pretty but lets you survive to fight another day.

Finally, from a systematic perspective there is another perspective.  To keep the real estate market alive, someone has to buy up those foreclosed homes.  Right now, the real estate market is correcting from a number of bubbles in real estate prices.  Foreclosed homes typically sell at a discount and overall this process helps to reset and correct home prices.  Investing in foreclosed homes is not as simple as it sometimes made out to be on late night infomercials, but for people with the means and possibly with the capabilities to do light renovations, purchasing foreclosed homes could be good for business and good for the economy.  As a final thought, neighbors might even come together personally or through home associations to purchase foreclosed homes to keep neighborhood homes safe and help maintain property values.