What to do with all these foreclosures

So inventory is high with all these foreclosures and, therefore, property values are down.  So what does the government want to do about it?  According to the Wall Street Journal, they have two interesting options to help drive home values up again.

The first scenario is to sell packages of foreclosed properties in batches of hundreds or thousands to investors who would in turn agree to rent them out.  At the end of June, Fannie Mae, Freddie Mac, and the Federal Housing Administration owned about a combined 250,000 homes.  There’s about 830,000 that are still in the foreclosure process that would eventually land in their laps.  

 The second option they’re looking at is to “let investors enter joint ventures with Fannie or Freddie to invest in a pool of converted rental homes. A national property-management business would handle day-to-day landlord responsibilities. Investors would pay for rehabbing and maintaining properties and would share revenue from monthly rental income and the ultimate sale of the property.”  So they basically figure they can rent out the homes in order to keep them from being listed currently and to earn some money back.

Since there’s a lot less buyers today qualifying for loans or even willing to purchase, it’s investors who are picking up some of the inventory.

Both scenarios are interesting propositions.  I worry about the second one since that basically would make the government the landlord.  And that’s just another controlling factor that they shouldn’t be a part of.  And then on top of all the foreclosed homes they’re so slow to deal with already, how are they going to handle late rent payments or problems in the property?  They mention that a national property manager would deal with it, but that’s a huge influx of properties they will need to take over.  So can they really handle it?  I appreciate what they’re trying to do, but I don’t know if this is the best solution.

I’m definitely interested in hearing more about the first scenario, selling foreclosures in bulk.  By offering a package deal, that would also keep a lot of foreclosures off the market. 

I’d love to hear your thoughts on these scenarios and if you have other suggestions for how the government can or should be involved.  Please leave me a comment or visit me online.


In great reversal, Bank of America foreclosed upon

Now this is irony.  I read this article, and I just had to share it.  A homeowner has foreclosed on Bank of America.  Yes, that’s right.  They foreclosed on the bank, not the other way around.

So here’s what happened.  A couple in Naples, Florida bought a home with cash (no mortgage) in 2009.  In 2010, Bank of America began foreclosure proceedings against them.  This was Bank of America’s mistake, of course.  This couple, the Nyerges, hired an attorney to help defend them against this foreclosure, and then Bank of America realized their mistake and dropped it.

Well, it’s great that it’s been dropped, but the Nyerges are out $2,534 in legal fees.  So they’ve requested that Bank of America cover the cost multiple times over the phone and in writing.  They finally get a judge to order that Bank of America pay the fees.  When they still haven’t gotten their check after five months of more calls and letters, they obtained an order of foreclosure against the bank.

Their attorney “then reported to a local branch of the bank with sheriff’s deputies, who he instructed to remove cash from the tellers’ drawers, furniture, computers and other property.  Approximately one hour later, the Naples News reports, the bank manager produced a check for $5,772.88 to satisfy  fees and additional costs.”

 ”I talked to branch managers, I called anyone who would listen to me,” the couple told the Naples News. “And I wrote a certified letter to the president (of the bank). No response, nothing.”

Can you imagine what the bankers thought when they showed up to work that morning?  I think this is great.  The banks are so quick to foreclose on properties, yet when it comes to them paying a fee (a very small fee comparatively) for something they didn’t pay, it ends up that they can’t do it.   So I can only imagine how many foreclosures that are taking place behind the scenes are incorrect because of paperwork errors.  

Reading this article just puts a smile on my face.  I’m glad that it turned out for the best for everybody in this situation, but it’s fun to see the bank get a taste of its own medicine.

What do you think?  I’d love to hear your comments.  Please be sure to visit me online.


Mortgage confusion still high

Zillow.com’s Mortgage Marketplace recently conducted a nationwide survey about what adults know about mortgages.  The Chicago Tribune posted a column about the results, and they were pretty surprising to me that a lot of adults don’t know much about mortgages.  So I wanted to post some results here and discuss to make everyone more knowledgeable.

1. 57% of prospective homebuyers don’t know how ARM (adjustable rate mortgages) work.  Most thought that they will always reset at a higher rate.  First of all, a definition.  An adjustable rate mortgage is one where the rate can change after a certain number of years.  For instance, you’ll hear the terms 5-year ARM or 10-year ARM.  That means the rate will reset after that number of years.  So if you lock in at 5% interest for a 5-year ARM, in 5 years, the rate will go up or down (not always up!) depending on what the current market conditions are.  And ARMs also have limits to how much they can go up or down.  The difference between this and a fixed rate loan is that your interest rate will not change on a fixed rate.  So it’s important to discuss ALL conditions with your mortgage broker prior to signing a loan.

2. 33% believe that being prequalified for a loan means you have financing secured.  This is very misleading.  Oftentimes when you go to make an offer or begin looking at homes, your Realtor will want to make sure you’re prequalified for a loan.  That means you’ve spoken to lenders who will talk to you and find out the maximum purchase price you have.  The lenders should pull your credit and get some other documentation from you to know the amount you can spend.  This, however, does not mean the loan is done.  Once you’ve found a home, you will submit your contract to your lender who will go through the underwriting process.  This involves an additional credit report sometimes, paycheck stubs, tax returns, etc.  You’ll also make sure that the title is clear on the home, all prior to you actually signing any closing paperwork.

3. 55% think that mortgage rates are set per day.  In fact, rates can fluctuate all throughout the day, just like the stock market.  It’s important to know this because sometimes your lender will quote you a rate of 5%, for example, and by that afternoon, that rate could be up to 5.125%.  So you’ll want to talk to your lender about “locking in” a certain rate, which you can often do but are given a timeline on it to go under contract on a home for that rate to stick.  And while missing the deadline can mean your rate will go up, it’s also possible that the rate will be lower.

I’d love to know what other mortgage questions you have.  Please always speak to a financial representative prior to signing any paperwork on a loan so you understand the process.  I can be reached  online.

Forgiven debt can send IRS calling

I felt that this is important to write about because so many people don’t realize that forgiven debt is taxable income.  So what is forgiven debt and how does it relate to real estate?  Let’s say that you short sale your home in order because you have to move and the house isn’t worth as much as it used to be and you can’t get for it what you still owe on the loan.  Say you owe $250,000 and you do a short sale for $200,000.  That $50,000 difference is forgiven debt.  You don’t owe it anymore and the bank has taken the loss for you.  Well, in walks the IRS.  They believe that forgiven debt is taxable income.  Whoa!  You lost money, you’re out of your house, and now you owe the IRS?

Yes.  It’s that simple.  However, in 2007, Congress created legislation to avoid this in some circumstances.  As long as the loan was used to purchase or improve the home owner’s primary residence, the IRS had to exclude up to $2 million of that forgiven debt from taxes.  So that’s the good news.  But beware: This legislation is currently set to expire in 2012.  So if now begins the time that you’re starting to fall behind on payments, unless the legislation is renewed, you could owe on it in 2012 or further into the future.  And if the bank sends you a tax form 1099-C because of forgiven debt, it’s crucial that you inform the IRS that you’re eligible for this Congress-enacted exclusion.  Otherwise, they can tax you for it.

It’s also important to realize what else is considered taxable debt and IS NOT included in the exclusion.  This debt will be taxable:

1. Credit card debt.  If you negotiate with your card company to reduce the amount you owe, any amount that gets forgiven is taxable.

2. Mortgage debt from a second home.  The exclusion only applies to your primary residence.  If you lose a vacation house, income property, or second home because of foreclosure, the difference is taxable.

If you’re really in a bind, you can choose to file for bankruptcy.  Any debt that’s forgiven that stems from a bankruptcy is not taxable.  If you have further questions, please contact a CPA to guide you through that and any other tax process.  I can be reached via my Web site.

Foreclosure delays help underwater owners

It’s good news for those who are underwater on paying their mortgages.  Because of the volume of defaulted mortgages, it’s taking banks and lenders a lot longer to complete the foreclosure process.  On average last year, it was about 12 months from the first missed payment until the bank took over and evicted the homeowners.  These days the average is 17 months that a payment hasn’t been made.

Aside from the volume that’s causing the delay, banks that are trying to do home modifications for borrowers is taking up time as well as incomplete paperwork that courts have ruled in favor of borrowers.

So now experts are saying that these delays might push price points of foreclosed homes up a bit because inventory will be declining.  And this would only be true of foreclosed homes.

Diane Pendley, managing director of Fitch Ratings, a bank researcher, estimates that delinquent borrowers now stay in their homes an average of 19 to 20 months without paying before they’re forced to leave. By year end, the average will rise to 22 to 23 months, the longest on record, she says.  So this is good news for those who are having trouble paying.  It gives them more time to find alternative living or to try to complete a loan modification.

The bad news is this is going to delay the return of a good housing market in that it’s going to take longer to get rid of this inventory since it’s taking longer to process.  This is why credit checks and loans are harder to come by, so this doesn’t happen in the future.

More information can be found in this USA Today article. I can be reached online.

Keep your HOA bills current

I know it’s just another thing to worry about.  You’re struggling in this economy to keep up with your mortgage payments.  Now you’re having a hard time paying your homeowners association dues.  You may be surprised to find out that your HOA can foreclose on your home if your dues aren’t current.

HOAs have the ability to move a lot faster than lenders when it comes to foreclosures.  As I mentioned a few blogs back, it can take a lender (especially in IL) months to start the foreclosure process and can be more than a year before it starts until eviction.  Well, HOAs don’t have to deal with all that paperwork.  They can come in, take title, and remove the borrower from the home.  And they can take title for the cost of those delayed dues and attorneys’ fees, a very small amount.

Many borrowers believe they’d rather sacrifice HOA dues to throw extra money into their mortgage payment.  Be very careful.  Make sure to read the declarations and bylaws provided by the association so you know all the rules.  By you not paying your dues, the HOA doesn’t have the money they need to pay the vendors responsible for your lawn care, snow removal, garbage removal, etc., and then they can’t cover their bills.  So it’s an endless cycle.  Find out if your state is one of the 34 that allow HOAs to foreclosure on homes by judicial foreclosure.  Florida, for example, can do it in 10 days.  Texas allows for 180 days for the borrower to become current.

And if the HOA is having trouble paying their bills, it might be hard for new buyers to obtain mortgages for that community.  The banks want to make sure the HOA isn’t having any financial trouble before they approve a loan for a new buyer.

More information can be found here. And I can be reached online.  But this is just a friendly reminder to you to be careful in choosing what bills to pay and what bills to not pay if you’re struggling.  It’s best to contact a HUD-approved counselor for help.

Extreme Makeover in need of extreme makeover

The premise behind Extreme Makeover: Home Edition is a good one.  ABC’s reality TV show has a construction crew rebuild a home for a family well in need of a massive makeover.  It’s a great charitable cause, right?  It seems that way.  Unfortunately, a lot of the families on that show have had trouble paying the property taxes that came with their new homes.  What happened is the IRS looks at any prize winnings (a completely new home) as income.  So they’re now charged higher tax on the winnings.  And their property taxes could cost more, too.

Six families that have appeared on the show have had trouble keeping their new homes.  Three of them are facing foreclosures.  More on the individual stories can be seen here.

So the producers are now trying to find a way to build more sensible homes for the winners.  These homes would be ones that they are more able to afford.  The problem is that aside from the tax increase, if your square footage on your home recently doubled or tripled, you now have utility bills that can cost you a lot more per month.  Think of all the extra space you have to heat and cool. 

So what are some other solutions??  Maybe they can offer a stipend of a few thousand a month for the first year to help cover some unforseen costs or even more beneficial, maybe they can have the family sit down with a financial planner to budget more effectively. 

Or is the idea of this show just not meant to work given the current housing market?  I’d love to hear your thoughts via comment or by visiting me online. You can also view more about the problem in this article.