If we look at the components of how this is to be structured it is largely dependent upon banks willingness to reduce the principal amount of the mortgage, thereby taking a loss which would enable the borrower to reduce their liability resulting in a more affordable monthly payment. That’s pretty darn altruistic of our government to strongly suggest that banks need to pony up and help bail out the unfortunate homeowner. Barney Frank, the Chairman of the House Financial Services Committee stated in the Wall Street Journal this week that he just might introduce additional legislation if loan servicers and investors don’t work together to prevent foreclosures. Is his title House Chairman or House Thug?

First of all, if the homeowner acquired their mortgage through the stated or liar loan process, they need to go back and provide the supporting documentation showing that they indeed earned the income that was indicated on the loan application. My guess is that many of these people could not produce the required evidence, and thus took out loans for much more than their income could support.

Since we are supposed to be a nation of equal protection, with blind justice and no impartiality, I would suggest the Congress also notify all of the consumer credit card companies and immediately instruct them to reduce everyone’s balance by 25%. Before you make that MasterCard or Nordstrom payment this week, give customer service a call and let them know that in the issue of fairness, you feel you are justified in having them take the burden of your irresponsibility. After all, it’s becoming the accepted American way to deny any responsibility you might have.

Consider the following scenario. Since this bailout is costing the American taxpayer $4 Billion, wouldn’t it just be easier and cheaper if the government issued every homeowner a 30 year fixed rate mortgage at 5% interest? Home ownership would increase, due to rising affordability, there would be fewer foreclosures, we would eliminate adjustable rate mortgages and also secure our banking system. This just could not work, it is far too simple.

There is one salvageable provision in the new Housing Bill. First time home buyers can qualify for a credit up to $7500. However this must be repaid over the next 15 years. It’s only a loan.

Too bad first time home buyers do not have the opportunity to overstate their income. They would be receiving a much bigger piece of cheese.

Hillary Clinton also popped into town to unveil her economic stimulus program and what a magnificent state to do it in. Record foreclosures that are outpaced only by the number of electoral votes. She is proposing a $30 Billion Emergency Housing Fund. Her plan would give money to states, cities and communities to help prevent what her website calls “unnecessary foreclosures”. If I remember what I learned in real estate school, there is no such thing as an “unnecessary foreclosure”. You don’t pay your mortgage you face foreclosure, if you don’t make your car payment you face repossession, if you walk out of Target with a cart full of merchandise and don’t pay, you face going to jail. Undesirable, yes. Uncomfortable, probably so. But unnecessary, I don’t think so. I know, its tough being an adult.

 Anyway the problem this presents is putting money and responsibility in the hands of government, it’s not needed. There are some policies that would be very easy to implement and administer if we could just get past this idea that government programs are our sole salvation.

The up2daterealestate Stimulus Proposal

I have come up with some ideas and no matter how many times I add them up, I can’t even come close to $30 Billion.

1. Increase the Conforming Loan Limit – this currently stands at $417,000, however Alaska and Hawaii have higher limits posted at $625,000. California should be categorized as a higher limit state.
2. Allow access to IRA Accounts – people should be allowed to make withdrawals from either a IRA or SEP account without having to pay a penalty or tax. A few bad days in the stock market can wipe out a years worth of gains. Allowing unfettered access provides a much needed individual stimulus without having to rely on government.
3. Modify Flexible Spending Accounts – these programs should only apply towards medical costs, they should be adapted to include financial hardship
4. Allow Deductibility of a Loss on a Personal Residence – If we allow homeowners to deduct up to $500,000 in capital gains on the sale of a personal residence, then we should also allow homeowners who sale their home for less than they paid the opportunity to deduct the loss on their income tax.

I also happen to think this program is fair. It allows individuals to address their specific problem. It does not reward a careless action with taxpayer money. I would love to live in Beverly Hills, except I cannot afford it. If I had bought a house in the 90210 zip code, should the taxpayers pick up my tab for supporting a lifestyle which I cannot afford, simply because it would have slipped into foreclosure?

Negative Equity

If a home was purchased in the last couple of years, there may be a chance that the house is worth less today than it was at the time of purchase. Or if someone has refinanced several times and removed the equity, they may find that they now owe more than the house could sell for. Before a lender will consider a short sale, they need some evidence that the borrower cannot meet the financial obligation previously agreed to. This usually means that their must be some indication of a “hardship”. Some people mistakenly see a short sale as a panacea to get them out from a financial burden. A lender may be less likely to consider a short sale if you own multiple properties, have sizable assets or indicated that you were going to occupy the property you now want to sell when you never lived there. A hardship may be due to a divorce, job loss, death or disability of a spouse or some other loss of income. At this point the lender is going to decide if they will accept the offer, not the home owner. The prospective offer has been submitted to the lender. The ball is in their court.

The lender has sent out the appraiser who has submitted the report. A decision is anxiously awaited. The lender has the required information to either approve or disapprove the offer.

Tell Us Something, Anything, A Simple Yes or No

With all the talk and press lately about the declining real estate market and pending foreclosure’s, wouldn’t you think that banks would be eager to get rid of a property and reduce their rising inventories? I would think so too, but apparently not.

The typical foreclosure timeline starts when a “Notice of Default” is filed, usually after a homeowner misses about three payments. In this specific instance the bank was aware of the situation. They were even communicating in advance which seemed to be a positive sign. I used to have a friend who worked for a consumer products company and the inside motto among the salespeople was that things were just fine until a customer placed a purchase order, then the company had to deliver it which created all kinds of internal problems. Isn’t this what they are in business for in the first place? Nothing happens until someone sells something!

Week 5, Still No Word

An offer on the property was submitted which seemed to be in the guidelines for approval. Uh oh, trouble ahead. Now someone with some authority will have to make a decision and approve a sale along with a loss of $130,000. Hello, is anyone home?

In case your wondering the time from presenting the offer until today has been six weeks. The buyer who was very qualified and able to close the transaction within two weeks of approval has bailed out. The buyer’s frustration and impatience was communicated to the lender regarding their inability to make a decision. They were quick to call what they perceived as a bluff and reply “if the buyer decides to walk away then we will just have to cancel”.

Game Over

The buyer canceled. Seems that there are just too many opportunities out there with prices coming down daily. And why wait for the never ending supply of Vice President’s to add their initials of approval? A classic case of Texas California hold em. Now everyone has folded and the cards are being reshuffled. Nobody won, in fact everyone lost.

If curiosity killed the cat, I am convinced that procrastination kills real estate.

As you can see from the chart below, many adjustable rate mortgages are about to reset and foreclosures are expected to increase as these loans adjust to higher interest rates. Adjustable rate mortgages have been around a long time, and we have never experienced this amount of properties that are in some stage of foreclosure.

Why Are So Many Homeowner’s in Distress?

What haven’t been around a long time were subprime loans. The chart indicates the majority of these loans are the high risk loans which are about to increase. Plus the industry introduced new products such as the option arm allowing borrowers to make the smallest of monthly payments. So when you provide 100% financing to someone who has less than ideal credit, and then allow them to make the minimum of minimum payment’s you have the recipe for disaster. It’s like providing an all you can eat buffet at a weight watcher’s meeting!

Notice how subprime loans diminish as part of the overall lending portfolio. Someone finally said “Oh my God, What Have We Done?”

In California we use a deed of trust. Other states may use a mortgage. The deed of trust provides collateral for the debt. There are three parties involved which are the Trustor (borrower), the Trustee (neutral 3rd party) and the Beneficiary (lender). The Trustor transfers the property to the Trustee to hold in trust until the debt is repaid. When signing your documents at the closing table you provide the Trustee the right to foreclose on the property if you become in default.

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The Notice of Default

This document starts the foreclosure proceedings. When a homeowner becomes 60 – 90 days late on the house payment the notice of default is filed. The homeowner is put on notice that unless the debt is cured, the property may be sold at public auction.

Notice of Trustee Sale

This document serves as public notice as to the date, time and place of the trustee’s sale. It cannot be published until at least 90 days after the notice of default has been recorded.

Auction

The property can be sold at auction in as little as 14 days. If it is not sold then the bank becomes the owner.

Is There A Redemption Period?

In a non-judicial foreclosure the debt can be paid up until 5 days before the property is sold. However some articles now state that most lenders will allow the back payment’s to be made up until the gavel falls at auction. By now there may be some hefty late fees and legal fees that may have also accrued.

What Impact Does Foreclosure Have on Your Credit Score?

According to the article from Ray Martin your FICO score can drop from 100 to 250 points. A short sale may produce a less drastic hit to your credit score than a foreclosure. If you happen to find yourself in this unfortunate situation and feel overwhelmed, assistance can easily be found. A real estate professional can help you determine the amount of equity you may or may not have in your home. Once that’s decided, then the other options may become clearer. Unfortunately many people go into ostrich mode and stick their head in the sand hoping the problem will work itself out. It won’t.