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The Forclosure Epidemic
Are you stressed out about mortgage payments? Do you think your only option is a foreclosure? Are you considering walking away? Are you struggling with a loan modification? Is a short sale right for you? Millions and millions of homeowners are asking themselves the same questions. It is projected that over 20,000,000 homeowners will have negative equity in their homes by this time next year. In other words, they will owe more on their homes than they are worth. Over 2.9 million homes have foreclosed in the last three years and the number is only expected to grow. Expect the effect of the real estate recession to ripple for years to come.
What can you do now?
There is expected to be a massive tsunami of homeowners who are simply making the decision to sell their homes through a short sale vs. staying in a home hoping that one day it may be worth what they paid for it.
No one is safe. News stories from across the country tell tales of both celebrities and the average American who are all considering selling their homes through a short sale.
Selling your home through a short sale need not be a shameful, life-ruining experience. Sometimes short selling your mortgage simply makes smart economic sense, especially for homeowners who find themselves underwater — that is, they owe more on their mortgage than their house is worth.
Late last year CNBC Financial Guru Jim Cramer was telling homeowners to “Just Walk Away.” Watch the video on YouTube.com.
We are clearly in uncharted waters. The current housing crisis is different from all the previous housing recessions. It is now public knowledge that many financial institutions sold mortgages in a deceptive manner — for example, by approving people for loans they couldn't really afford. If that is the case, then why should homeowners feel obliged to honor their commitments? Skeptics argue there’s a moral hazard.
From the homeowner’s perspective, why should they remain in homes that are depreciating? Often times it’s possible to rent the same style home in the same area for half (or less) than their current mortgage payment. Assuming it takes years for the market to recover, the homeowner who sells his home via a short sale now will be further ahead financially than the person who stuck it out.
Here is an example:
Starting May of 2011 -
Homeowner paid $500,000 at the market peak in late 2006. Homeowner put down 5% and did a 7-year interest-only mortgage. Monthly payment including PITA and upkeep is $4200.
§ Property has depreciated 40% and is now worth only $300,000. Owner has negative equity or is underwater by $200,000.
§ Market is continuing to depreciate and is projected to possibly level off in mid to late 2012. In other words, months and months of more losses for the homeowner. Many economists are predicting prices will NEVER recover to boom-level pricing.
Option 1
Our homeowner can stick it out and keep the home. He will continue to make his monthly interest-only payment/house upkeep of $4200 per month. He will pay $50,400 per year to keep the home. He is deeply underwater in the home with massive negative equity. Somewhere in mid 2012, the home’s value has stopped depreciating. The market stays flat for at least a year thereafter, likely much longer. The inventory levels have to sell off. In late 2012 or early 2013, the market then starts to slowly appreciate again. Best case, the home starts to appreciate at 5% per year. Based on this rough example, it will take at least 10 years for that home to be worth what the owner paid in 2006. During that time, the homeowner will have paid $50,400 per year. Do the math. That’s $352,000 spent to stay in the home to stick it out. That’s IF there’s 5% appreciation and IF that’s consistent for 10 years.
Option 2
Homeowner lists the home with an agent trained in doing short sales. The home sells and the bank agrees to accept the loss in equity as the short sale. Bank loses $200,000. Homeowner moves to a rental home in the same neighborhood and pays rent of $2000 per month or less…That’s half of his previous house payment. Our homeowner no longer has to worry about repairs or property taxes while getting back on his feet. Our homeowner saves the difference between what he had been paying for the owned home and his new rent payment. That’s $26,400 per year. Yes, the homeowner does have significant negative credit ramifications as a result of his short sale. This negative credit will prevent him from buying a home for the next 18-24 months, if he is looking for a government-backed mortgage. With this option, he can sit out the real estate recession and jump back in when the market has hit bottom. If he times it right, he can buy at the bottom of the market and have a significant down payment resulting from the savings created by downsizing his house payment. Some homeowners even experience faster credit recovery due to a more favorable debt-to-income ratio by no longer having a huge mortgage. Remember that your payment history accounts for 35% of your credit score; it is not your entire score. 30% is your length of credit history, 15% has to do with new credit established, 10% is the type of credit used, etc.
Yes, there is damage to your credit.
According to national experts, a person’s credit will go down by 200+/- points and prevent them from buying using a government-backed mortgage for up to 24 months. With a foreclosure, credit is damaged for 7-10 years preventing someone from obtaining a government-backed mortgage and possibly any mortgage for a longer stretch. It’s not just the ability to buy a home that is affected. Remember, even mobile phone companies check credit before assigning an account or having you sign a contract. An individual may also pay more for insurance with a bigger credit ding from a foreclosure.
Many home owners who are now short selling their properties are going to want to buy houses again someday; and when they do, lenders are going to want to make money lending them money. So for many, it’s a matter of deciding how and when to exit a potentially toxic loan as gracefully as possible.
