4 Common Foreclosure Myths that cost Homeowners a Fortune

Common Foreclosure Myth #1: No matter what I do, I’m going to owe money to someone. On most short sales, the seller is able to walk away owing the bank nothing. Of course, it’s all up to each individual bank, but eight times out of ten, you can walk away owing nothing. A bank loses way less money on a short sale than a normal foreclosure. In return for you helping them out, they will help you out. Here is why there is this big difference between a short sale and a foreclosure.

On a short sale, the utilities are turned on and someone is living in the house. A vacant house is way harder to sell. The buyer knows the home is bank owned and will adjust their offer down because of that. On a bank owned house, the house sits there for 6-9 months empty before it sells. The bank has to pay to keep it up and insure it. They can’t loan that money out and collect interest. Also, there is the liability if some kid goes into the house and gets hurt. Because of that the banks want to do short sales and are very willing to work with you.

Myth #2: A Foreclosure will go off my record in 3-5 years. Yes, you might be able to get a loan after 5 years, but here’s the problem. When you walk away, the bank will come back and get a judgment for the money they lose, and also any money they have to spend. They’ll tack on attorney’s fees, late payments, interest, maintenance, lawn mowing costs, realtor fees, locksmith costs, title insurance, and all sorts of other fees. This judgment will stay with you until you pay it off. Let’s say you owe $200,000 on your home and it’s now worth $170,000. According to a study done on this, if you do a short sale, the bank will lose 19%. But, if the bank takes the home back and waits for it to resell, they will lose 41%. That means you’ll owe them $82,000 on average. That is the judgment amount.    

This deficiency converts to a judgment and, depending on your state, judgments last up to 20 years. Most of the time, the bank itself will not come after you. But, the bank will sell the right to collect the money to a third party collection company. That company will then attempt to collect from you.

The worst thing is that this debt purchasing company will be going after you for years. They will do whatever they can to collect what they think is “their money.” Even your current and future employment might be affected because many employers now require credit checks. 

Myth #3: Banks and lenders rarely accept short sales. We are able to get short sales accepted most of the time. Here’s why your bank may have already told you they will only take X amount.  But, let’s say someone owed you a lot of money and they wanted to pay you only half of what they owe. What would you say? You’d probably tell them to pay you the full amount, right? But, if the person came to you with cash and told you they just simply could not afford to pay you any more, what would you do? You’d probably accept whatever you could get, right? Well, it’s the same way with a bank.

The banks often tell you they won’t take a short sale. The reason is because they want you to pay them the full amount. Or, they want to get you to agree to pay them monthly for the rest of your life.   

Myth #4: A Short Sale is no less damaging to my credit than a foreclosure. I can tell you one thing. Fannie Mae and Freddie Mac, who hold the loans on about half of the loans in the country don’t think so. They recently changed their requirements. Fannie Mae only requires two years on a short sale before you can get a new loan. If you give the house back to the bank, you have to wait for five years. Several new requirements now apply that can drag this out to 7 years. These companies are the backers of more than half of the loans issued today. This makes foreclosure more damaging than even a bankruptcy, which requires a 4 year wait. 

Feel free to contact me with any questions about what you read here.

Best,

JLC

Short sales are here to stay for the next few years at least.  My goal is to function as a valuable resource for my clients so please feel free to contact me if you have any questions regarding your personal situation or what you have read here.

Best,

JLC

The debate rages on.  Is it time to step off the sidelines and buy or is waiting the better option since interest rates and prices may continue to fall?  Difference is, instead of local experts supporting one side while the national media suggests the other, national sources are standing on opposite sides of the fence.

In this post I will provide commentary on the following two articles:

For the MSNBC article click here:  The Argument Against Home Ownership by James Surowiecki

http://www.msnbc.msn.com/id/23439843/

For the CNN article click here: Housing: Best Time to Buy in Four Years by Les Christie

http://money.cnn.com/2008/03/04/real_estate/markets_less_overvalued/index.htm?postversion=2008030413

1. Argument Against Home Ownership  (all quotes taken from web copy of article)

The principle argument of this article is that in a falling market, the commitment of owning a home can tie down an owner limiting autonomy and cash flow.  The reasons for these limitations are threefold:

First, it used to be that a hefty down payment was required to purchase a home.  Averaging 18% for first time buyers in 1976.  In contrast, “a National Association of Realtors study of first-time buyers between mid-2005 and mid-2006 found that almost half put down nothing at all, and that the median down payment was just two per cent.”  Therefore, a borrower is in essence starting from zero and paying back their loan month by month.

Second, “homeowners took out more than six hundred billion dollars in home-equity loans between 2004 and 2005 alone — ten times as much as they had a decade earlier — and are spending much of it on personal consumption.”  So now, not only are many borrowers starting from zero equity when they begin paying off their mortgage loans, but also homeowners that do have equity are borrowing against that equity and depending solely on appreciation to pay off those loans.

Third, the article draws a strained correlation between  home ownership and unemployment rates based on a study conducted from 1960 to 1996 by British economist Andrew Oswald.  The research states that a “10% increase in home ownership correlated with a 2% increase in unemployment.”

While the article seems to denigrate home ownership in and of itself, it stands to reason, the true culprits of our current housing slump are the knockout collaboration of irresponsible lending practices and irresponsible consumer spending.  Currently, lending standards have become much more strident.  Moreover, borrowers with a 5 to 10% down payment that do not borrow heavily against their equity are well leveraged and safe.

2. Housing: Best Time to Buy in Four Years (all quotes taken from web copy of article)

There’s no way around the numbers.  Housing prices have dropped in the vast majority of the US over the last 18 months.  While this article illustrates that fact quite well, it also illuminates the silver lining of that downturn.  “Housing valuations are almost back to long-term norms,” said National City’s chief economist, Richard DeKaser. He called current affordability “the best in the past four years.”  He does caution that they could fall further.  The trade off here is that price decline directly increases affordability.  The article goes on to say that “there are still 21 housing markets, or 6% of those surveyed, that are severely over valued…That’s down from 56 overvalued markets at the peak of the housing bubble in 2006.”

As with all forecasting of markets, this article would not be complete without a source of ambiguity.  In determining market value the report “…compares actual median home prices with what the authors determine are proper home values based on population density, relative income levels and interest rates, as well as historically observed market premiums or discounts, to determine whether markets are over or under valued.”  Let me tell you why that makes me nervous, I count one control (median home price) and five variables in that sentence.  We all remember grade school science, it was all about many controls and one variable, right?  The only true source for determining market value is an agreed upon price between a buyer and a seller.  I’ll call it the elusive obvious.

The long and short is there is no clear answer.  A home buying decision must be made individually based on simple personal factors: budget, housing preference.  Each situation will vary so plan to consult with a professional.  A good realtor and mortgage lender can illuminate this murky market.

Best,
JLC

With all the new construction currently on the market, individual re-sales are forced to compete with homes that have never been lived in.  This puts a premium on condition.  Since you will have to compete with model homes in this market, here are some tips on making your home show like a model.

1. Remove Clutter – Any items that you do not use weekly should be moved to storage.  Considering hiring a cleaning service to give your home a full once over before you go on the market. 

2. Remove Personal Items – When viewing a home buyers want to be able to picture themselves living in the space.  This is difficult to achieve when surrounded by your wedding pictures, baby photos, and last years’ Christmas card starring Fido as Rudolph.  I understand they are keepsakes, but until your home is sold….storage.  Also, remove any small collectibles sitting on mantles, counters, or bookshelves.

3. Smell Matters – From the moment a prospective buyer walks through the door of your home they are forming opinions.  It is not just how your home looks, but how it smells as well.  Pet scents, exotic foods, and dirty laundry can all leave lasting aromas that you’ll want to counter act.  I would suggest air fresheners hold an aromatic oil.   You place reeds in the oil and over time the reeds soak up the oil and slowly diffuse the smell throughout the room.  They are perfect for maintaining a light fresh scent.  Keep it simple when searching for the fragrance, vanilla, light floral scents, and anything that is reminiscent of baking

4. Make it Easy to Show- Your listing needs to be accessible.  Model homes are open daily, in some cases for up to eight hours.  If you receive a showing request and tell the buyer “no, only Wednesdays at 3:15″ You are likely to never hear from them again.  There is simply too much inventory on the market.  While this is an extreme case, make showings as flexible and easy as possible.  Remember the goal here is getting your home sold at the best price possible in a reasonable time frame.  You just have to decide that the slight inconvenience is worth getting your home sold.

5. Professional Staging - Last but not least, hiring a professional stager can be well worth the expense.  Specifically if you are selling a luxury home.  Price, condition, and location are you major determining factors.  While you must price competitively, due to the type of competition, showing condition becomes a great predictor of a successful sale.

For more tips follow the link below:

http://realtytimes.com/rtpages/20080214_improvements.htm

 Best,

JLC

The two best measures of housing prices, the Office of Federal Housing Enterprise Oversight’s index (OFHEO) and the Standard and Poor’s/Case Shiller index, reflect discrepencies in the state of the current housing market.   

 A recent article from the Wall Street Journal Online states “Ofheo’s index says home prices rose nationally by 1.8% between the third quarters of 2006 and 2007.  But the S&P/Case Shiller national index of home prices was down 4.5% in the same period.”  While based on the same concept, such inconsistency exists because of a dichotomy in the home sales each index uses to calculate market conditions. 

 In Chicago specifically, “Ofheo’s index shows an increase of 2.16% in house prices; the Case/Shiller index shows a decline of 2.48%” – Wall Street Journal Online

 For the full article click the link below:

http://www.realestatejournal.com/buysell/markettrends/20080215-wessel.html?refresh=on

 Best,

JLC

It is projected that this stimulus could result in the purchase of a quarter of a million homes in just a twelve month period. 

The link below will connect you to the entire article:
http://realtytimes.com/rtpages/20080201_washingtonreport.htm

 I recently came across a disturbing phenomenon while doing some industry reading and thought it was worth sharing.  While the debate over precautions against inflation and undeclared recession rages on, it is more important than ever to have a quality mortgage lender in your corner.  The link below will take you to a post from a blog written by a mortgage lender.  I have been a loyal reader for awhile now and am consistently impressed by the content and poignance.  This specific post addresses the dollars and cents cost to a homeowner when their mortgage is “orphaned” due to either lack of follow up or a change in career of their lender.

http://www.themortgagereports.com/2008/01/homeowners-with.html

Kevin J Ferries
Trust One Mortgage
430 W Erie Suite #205
Chicago IL 60610
Office 312-587-7600
Cell 773-425-6276
Kferries@onetmc.com
 
Joe Burke
Mortgage Consultant
National City Mortgage
2021 N. Clark Street
Chicago, IL  60614
Office:  773-665-5290 x. 21349
Cell:  773-742-6707
joe.burke@ncmc.com

This blog is meant to serve as a forum for conversation so please feel free to post comments or questions and I will respond as quickly as possible.