Archive for December, 2010
Stiff Penalty Likely For Strategic Default By Affluent Homeowners
![santacruz-103[1]](http://movetoredding.com/files/2009/11/santacruz-1031-300x199.jpg)
A strategic default is defined as a homeowner who is capable of making their mortgage payment but elects to let the property go into foreclosure because the mortgage is underwater or the property is no longer wanted. Second homes and rental properties are examples of properties purchased by affluent property owners which are likely to be let go if they owe more than they’re worth in today’s market.
A recent article in THE NEW YORK TIMES claims homeowners who decide to stop making payments on a property they no longer wish to keep could be denied a new mortgage for 7-10 years. Not only will their credit be damaged for a lengthy period of time, they could put themselves in a situation where the lender is suing them for the amount of money owed or lost (termed a deficiency) by the bank. Laws allowing a lender to pursue an owner for a loan loss vary from state to state.
In so-called “recourse”states, the lender may go after the home owner’s assets including their primary residence. Maine, New Jersey and Hawaii are examples of recourse states.
In “non-recourse”states, a lender must look only to the value of the subject property to satisfy the outstanding mortgage balance if they take the property through foreclosure, deed-in-lieu of foreclosure or agree to a short sale. However, these laws may only protect the homeowner if the loans were used to purchase the property as the borrower’s primary residence. Refinance, Home Equity Lines of Credit or loans on second homes and investment properties may not have this protection from pursuit for deficiency losses by the lender(s). Florida, Connecticut and Arizona fall into this category.
California, along with Idaho and New York, fall into a third category referred to as “single-action” states which allows the lender to foreclose on the owner or file a civil lawsuit for the full loan amount. I have heard this referred to as judicial or non-judicial foreclosure. Most foreclosures in California are non-judicial and can be accomplished in 4-6 months from start to finish. However, if the lender believes the seller has substantial assets or has intentionally damaged the security through vandalism or stripping the property of fixtures, they may pursue a judicial foreclosure which allows a judge to award a deficiency judgement.
Anyone considering a strategic default should consult with an attorney to discuss potential consequences legally and financially before stopping payments to their lender(s). Since every home owner’s financial situation is unique, consulting with a qualified expert is critical to determine the best course of action to unload an unwanted property.
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL LIVING REAL ESTATE PROFESSIONALS
CORNER OF COURT AND PLACER IN REDDING
MORE THAN 27 YEARS LOCAL REAL ESTATE EXPERIENCE
Short Sales Short Circuited By “Game of Chicken”
INDUSTRY NEWS, SHASTA COUNTY, SHORT SALES
A recent article in THE WALL STREET JOURNAL highlighted a scenario I see in my day-to-day practice of real estate. A property seller, buyer and first lien holder all agree to accept a certain price only to have the second lien holder ask for more money. It’s noteworthy that the second lien holder would get wiped out and not recieve even a penny if the first lien holder forecloses, but nonetheless they demand thousands more than offered to sign off on the short sale deal.
The news article cites an example of a La Jolla condo owner with a cash offer from an investor. He was forced to try a short sale when the value of his condo sankwell below the amount owed to his lenders. He owed $260,000 to the first lien holder (now Freddie Mac) and $50,000 to the second lien holder, being handled by Specialized Loan Servicing, LLC. Freddie Mac has offered Specialized $3,000 to release their lien, an amount typical in the short sale transactions I’ve been involved with. SLS is holding out for $7,000.
The end result is a game of chicken, where the second lien holder tries to extract additional monies from the seller, buyer, first lien holder or real estate agents involved. Unfortunately, in many cases the game ends in a foreclosure, and the second-lien holder gets nothing.
Reasons cited by second lien holders for playing this game include:
- the mortgage payments are still current
- they wish to pursue the borrower for any deficiency but may relinquish that right by agreeing to a short payoff
- they believe they have nothing to lose since their loan is worthless anyways due to falling home prices
Here are some interesting stats quoted in the article:
- 11 million homeowners owe more than their homes are worth
- Another 2.5 million have 5% equity or less
- About 1/3 of the 1.33 million loans in some stage of foreclosure have second liens
- Second loans are typically owned by banks and credit unions
- Most first mortgages are held by Fannie Mae, Freddie Mac or investors in mortgage securities
- Loan servicers are overwhelmed trying to handle the short sale process
- Declining home prices create disputes over values used to approve short sales
- Lenders are wary of fraud, which the short sale process is subject to, by anxious homeowners
California law protects certain borrowers from being pursued by lenders who foreclosed or agree to a short sale. Purchase money loans for owner-occupied primary residences are usually exempt from lenders seeking deficiency debt repayment. However, California homeowners that refinanced or took out second loans usually lose all protections if they agree to a short sale. Lenders will release the lien so the property can be sold, but reserve the right to chase after the borrower for the loss they incurred.
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL LIVING REAL ESTATE PROFESSIONALS
CORNER OF COURT AND PLACER IN REDDING
MORE THAN A QUARTER CENTURY LOCAL REAL ESTATE SALES EXPERIENCE
Popular FHA Loan Program Changes Rules
FHA LOANS, HOME LOANS, SHASTA COUNTY, TIPS FOR BUYERS
Just a few years ago, virtually anyone could qualify for 100% financing even with stinky credit. Those loans evaporated after the bubble burst causing an upsurge in usage of FHA loans in the Redding/Shasta County real estate market. The reason is the relatively low down payment requirements (3.5%) offered by the FHA loan program. Due to its popularity, and defaults on loans, HUD is tweaking the program in hopes of stemming a tide of red ink.
The two primary changes involve the upfront fee collected from the borrower (being reduced) and the mortgage insurance premium (MIP) tacked on to the payment (being increased). The MIP is going up from 0.5-0.55% to 0.85-0.9% depending on the size of the downpayment. The upfront insurance premium is dropping from 2.25% to 1%. This fee is either paid in one lump sum at closing or rolled into the loan and paid over the life of the loan.
On the surface this does not sound too bad but in the real world this will cost the borrower dearly over the long run. Here’s an example provided by FHA and detailed in a recent article in THE NEW YORK TIMES. A borrower puts 3.5% downpayment on a purchase price of $154,000 (the median home price today) and finances the upfront mortgage insurance fee into the loan. The mortgage payment, including principal, interest, taxes, homeowner’s insurance and both mortgage insurance premiums goes up from $1,205/month to $1,238/month. The increase includes the drop of the upfront MIP from $3,344 to $1,486 but the monthly increase in the MIP from $68 to $111.
All FHA loans require mortgage insurance while conventional loans have a sliding scale for insurance rates if the borrower tenders less than 20% downpayment. The FHA MIP can be eliminated after 5 years if the loan-to-value ratio drops below 78%. This can be accomplished by paying down the principal, appreciation of the property value, or a combination of the two.
FHA has for the first time set a minimum credit score threshold of 500. Those with credit scores between 500 and 580 must tender a 10% downpayment. However, practically speaking, most lenders will require higher credit scores to assure they can get the loans insured by FHA. The financial meltdown has created a vast new realm of buyers that heretofore would have never considered an FHA loan due to the hefty mortgage insurance premiums. Company executives, teachers, and people with six-figure incomes are now applying for FHA loans!
The desire to leverage real estate purchases with a minimal downpayment is alive and well, despite the added cost for the opportunity to do so.
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL LIVING REAL ESTATE PROFESSIONALS
CORNER OF COURT AND PLACER IN REDDING
MORE THAN 25 YEARS LOCAL REAL ESTATE EXPERIENCE
HUD Launches Comprehensive Housing Data Website
INDUSTRY NEWS, TIPS FOR BUYERS, TIPS FOR SELLERS
Yesterday, the U.S. Dept. of Housing and Urban Development (HUD) launched a new website that consolidates data
from regional, state and county agencies. The economic and housing market data is derived from the Census Bureau, Labor Department, State and Local governments, housing industry sources and HUD’s own economists. Here are some of the reports available:
- Market At A Glance-includes economic and housing data trends for metropolitan areas and counties nationwide. This data will be updated monthly and HUD econimists will tweak the data to reflect regional information.
- Regional Housing Market Profiles-extracted from the U.S. Housing Market Conditions Report detailing employment statistics, population changes, and building permit activity, housing rental and sales activity.
- Regional Narratives-broad overviews of housing and economic trends for ten regions of the U.S. using information from state and local government economists, housing industry sources and from their own investigations.
- Comprehensive Housing Market Analysis-a historical perspective comparing three different time periods: 1990-2000; 2000-as-of date of the analysis; and from the as-of date to up to three years in the future.
HUD Assistant Secretary Dr. Raphael Bostic touts the new website as “…a powerful new tool that’s easy to use, and offers the public a remarkable look at their local economic and housing markets.” He goes on to say “current and reliable data should not be hard to come by“ believing this tool will be helpful to state and local leaders, developers, the real estate industry and the general public.
To visit the website, click here: http://www.huduser.org/portal/regional.html
For a sample of Redding market statistics, click on the “Market At A Glance” tab and select Redding, Ca. from the pull down menu under State/County. Some Redding/Shasta County housing data is missing, but there is plenty of relevant market data including economic, population and housing market trends.
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL LIVING REAL ESTATE PROFESSIONALS
CORNER OF COURT AND PLACER IN REDDING
MORE THAN 25 YEARS LOCAL REAL ESTATE EXPERIENCE
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