No matter how dire your situation has become, there are options. Banks and the Federal Government have a number of programs for those facing foreclosure. However, you’ll never take advantage of these options if you don’t know what they are.

Deed-In-Lieu of Foreclosure (DIL)

In some states, banks can seek payment on your mortgage debts even after you’ve lost a house in foreclosure. If you want to avoid financial recourse from losing your home, you should seek a deed-in-lieu of foreclosure. In a DIL, you voluntarily turn over the deed to your home to the bank, but in exchange, all of your debts and obligations are released. Unfortunately, you still lose your home, but it is better than paying debt long after you’ve moved out.

Short Sale

One of the biggest challenges due to the recent housing bust is that mortgage prices have hit the floor. It has left many homeowners owing more on their mortgages than the property is worth. It also makes it hard to sell if you need to list a home over market value in order to get the mortgage company to release their lien interest.

In a short sale, the struggling homeowner gets an offer to buy for a price below their mortgage balance. The seller then submits a hardship packet to the bank and a request for short sale approval. If the bank approves, you are given permission to sell and resolve your mortgage. However, in some states, mortgage companies are given the right to potentially collect on the mortgage balance at a later date.

Home Affordable Modification Program (hamp)

The government offers a special loan program that temporarily sets your mortgage payment to 31% of your monthly pre-tax income. While the program provides noticeable payment relief, it doesn’t forgive your loan or relieve you of your debt. It merely allows you to pay reduced payments for a period of time.

There are other related programs as well like the Second Lien Modification Program, which lowers payments on 2^nd mortgages.

Special Bank Programs

The government is not the only institution that can offer loan modifications. Some mortgage companies have their own programs.

For example, Bank of America has a Loan-to-Lease program. It works a lot like a deed-in-lieu of foreclosure except that after a homeowner surrenders their deeds they become tenants in their own home.

Another example is Mortgage reduction. This is where the bank forgives a portion of the borrowers mortgage balance.

Whether it’s a bank or government program, if you are facing foreclosure there are plenty of options. You just need to pick the one that is right for you.

Legislation Slowed Foreclosures in 2011

In October 2011, legislation took effect to slow the foreclosure process. Banks are now required to file an additional affidavit to begin the foreclosure process. That additional paperwork adds time, and moved many homes facing foreclosure in 2011 into the 2012 foreclosure season. This was more than evident in the dramatic increase in homeowners underwater in their mortgages.

Major Banks Off the Hook

We are now coming to an end of the year of the “robo-signing foreclosure scandal.” Due to improper foreclosure processing by banks, major commercial banks like Wells Fargo and Bank of America found themselves the subject of a massive lawsuit filed by most states. While the court drama played out, the nation’s largest mortgage holders slowed down the pace of foreclosures to avoid fallout from the cases.

However, we’ve seen a settlement and end to the lawsuits and banks aren’t wasting anytime accelerating foreclosures in 2012.

Strategic Default

The federal government, in an election year, is aggressively pushing for a mortgage write-down policy. Essentially, those with underwater mortgages can have their mortgage principal magically disappear overnight. The idea has some merits. Those with equity in their home tend to resume payments. However, it also undoubtedly encourages people to default in order to benefit from the write-downs. With agreements with BofA already made and talk of a Fannie-Freddie write down policy, we may be starting to see the fruits of strategic defaults.

Shifts in Debtor Preferences

Sometimes it’s hard to separate the cause from the effect. Recent studies have shown that debtors have switched their preferences in loan repayment. Americans used to pay their mortgage first, auto loans second and credit cards third. However, that traditional order in consumer payment preference has shifted to car loans first, credit cards second and mortgages third.

It could simply be a product of all the factors above: underwater mortgage, strategic default or slow down in foreclosure process. Regardless, the way people treat mortgage as debt has altered, perhaps for the long-term. It could be an indicator for rises in foreclosure rates.

The housing industry has had a direct impact on our current economic turmoil. The fact that home foreclosure is picking up could mean more unemployment and slower growth. If you want to gauge what the future of the economy will be, keep an eye on the foreclosure indicators I’ve detailed above.

Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to multiple income. The intricate world of family finance unlocked, one post at a time.

Of course, this means that the interest rates rise or fall depending on the market situation.

This fact is especially important when you are living in a crumbling economy like that of the United States with hardly any national income growth these days.

These are the basic features of adjustable rate mortgages:

• Initial interest rate- this is the beginning interest rate; usually low.

• Index rate- this is the base on which the mortgage is based 1-year, 2-year and 5-year treasury securities are common.

• Adjustment period- this is the length of time that the interest rate on the ARM is set to remain unchanged; normally reset at the end of this period.

• Interest rate caps- these are limits on how much interest rates or monthly repayments can be changed by the end of the adjustment period or the loan lifetime.

• Margin- these are percentage points that the lenders add to the index rate given in order to determine the interest rate of the adjustable rate mortgage.

• Negative amortization- this basically means that the mortgage balance is increasing gradually. This arises when the monthly mortgage payments are not large enough to pay the interest amount due on the mortgage in full at once.

• Initial discounts- a super-benefit of ARM’s are the initial discounts. These are interest rate concessions normally given in the first year of the ARM or other subsequent years to reduce the overall interest below the prevailing rate.

• Prepayments- these may arise where the agreement requires the buyer to pay some special fees or a penalty in case the ARM is paid off too early. These terms are negotiable in most cases.

• Conversion- in some cases, the agreement may allow the buyer to convert the ARM into a fixed rate mortgage. This can be quite essential in times when the prevailing market rate is fluctuating abnormally.

Most people pocket some pretty dollars in the housing boom if they have ARM agreements. This happens because they took the mortgages when the interest rate was low and they can therefore sell these houses when the interest rates are high.

You shouldn’t plan to stay in the same house for the long term if at all you want to enjoy the benefits associated with ARMs.

A great benefit enjoyed with adjustable mortgage rates is the fact that there is no need to refinance the loan in case the interest rates are dropping. The overall payment and monthly interest rates instead drop at the scheduled evaluation rate thus adjusting to the market condition. This is not the same case with fixed rate mortgages where one must refinance the mortgage in order for the rates to drop.

Since adjustable rate mortgages’ interest rates are usually lower than those of fixed exchange rates; owing to the discounts offered, the borrower can comfortably afford the risk of a future increase in the rates. We can, therefore, say that the buyer of an ARM ends up saving some money due to the lower interest rate paid initially.

Recently, an observation of the current crisis in America has laid the blame on ARMs for the housing crisis being faced. However, this is not the case because there are several other thousands of mortgagors who are enjoying great benefits attributed to ARMs. It all depends on the choices that one makes. It is also important to be on look out to know when the interest rates have began to rise so that you can sell the house and earn some profit.

Do you have an ARM? Would you purchase a house with an ARM? Why or why not?

YFS is owner and author of Your Finances Simplified. He was born and raised in West Philadelphia and is now a financial adviser, IT contractor, landlord, and treasurer of a non-profit. He created his blog partly due to his desire to help people with their finances.

What Is The Program?

Instead of loan modifications or foreclosure, Bank of America is proposing the mortgage-to-lease program. It offers struggling mortgagees the opportunity to convert their mortgages into lease agreements. Essentially, you give up ownership of the house and become a renter. However, your payments will be reduced dramatically and you can lease for up to three years.

Who Qualifies for the Mortgage-to-Lease Program?

You can’t get into the program unless you qualify. Here are the qualifications:

• Live in AZ, NV or NY – BofA is testing the program in only these three states at this time
• More than 60 days delinquent
• Have exhausted modification solutions or have not responded to alternatives to foreclosure
• Have no junior liens
• Make adequate income to pay rent
• Stuck with an underwater mortgage

What Do You Get Out of It?

It’s important to understand that this program is a new option for you and more options are usually a good thing. However, options also make things more complicated, so you really want to understand what your choices are. While I have some serious reservations about the program, I cannot disagree that it might be a good option for some people, given the right circumstances.

One piece of BofA marketing that needs to be exposed is that this is not a program to keep you out of foreclosure. The program has you turn ownership of your home to the bank. So in reality, this accelerates the foreclosure process for the bank. What this program will do is stall eviction for up to three years.

According to the BofA news release, the mortgage is canceled as a term of the program. This means that if you were looking at a short sale, this program might keep you from continuing to pay your mortgage principle after you’ve said goodbye to the home.

It’s a Bank Program That Mostly Benefits the Bank

Yes, there are some potential benefits for current homeowners who are underwater on their mortgage. However, this is really a program meant to provide huge benefits to the bank. Just take a look at these benefits that BofA gets out of the deal:

• Easier path to foreclosure, in that you agree to the foreclosure up front. Government regulators have been making the road to foreclosure more complicated for banks. This program, if popular, would make that headache go away.
• Quicker eviction for you, the homeowner. I’m certain that the bank would prefer that you pay the rent, but you need to understand that it’s much easier to evict you as a tenant instead of a homeowner. You only need to be a little late with rent and the bank can start the eviction process. You lose some of your legal rights when you have no ownership.
• Your tenure as a renter will help BofA fill in that gap between principle balance and home value. Good news for BofA, as you pay for rent, you’ll be helping move the property out of underwater status.
• Renters will start making payments again. Sure, rent is less than your mortgage, but homeowners who have stopped paying on foreclosed homes have no money coming in the door until they are sold to a new homeowner. This program keeps at least some money coming in the door.
• You could potentially occupy the home while the bank sells it. Sure, you are guaranteed rent for up to three years, but the bank is able to sell the home to anyone during that three years. When the three years are up, you can be sent packing.

Important Downsides for Homeowners

For the most part, I’ve already covered many of these in the last section, but I feel that it is important to reiterate some of the downsides to this program.

First of all, it isn’t an alternative to foreclosure or even eviction for that matter. You turn over your rights as homeowner much quicker under this program than if you went through foreclosure. It allows you to delay eviction for up to three years. It’s probably best if you count on being evicted by year three.

You lose some of your power when it comes to eviction. Laws favor property owners, which is why it takes BofA effort to evict mortgagees. Once you are a tenant, the advantage of law switches hands and BofA will have an easier time evicting you. Don’t do this program if you have even the slightest doubt you can make rent payments on time.

Is The Program Right for You?

In my opinion, this program is best for those that are going to still owe the bank money after foreclosure or short-sale. The program wipes the slate clean, which means that there is no recourse to the mortgagee once you become a tenant. It could be a way to wipe the slate clean.

However, I do have to question whether delaying eviction is really that big of a benefit. As I discussed on Smart Family Finance last week, when you face foreclosure you risk losing your down-payment and closing costs. This program doesn’t abate those loses, in fact, they make them more certain.

If you ask me, eviction is eviction whether it’s three months from now in foreclosure or three years from now. Your losses will be the same. However, it’s your money. If you think delaying the inevitable will benefit you, this program might be a good fit for you.

Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to multiple income. The intricate world of family finance unlocked, one post at a time.

Rent is on the Rise

According to Zillow, median rent went up nationally by about 3% last year. The median doesn’t give full justice to how much rent has increased in some locations. In Orange County, CA, rent has increased up over 13%. Minneapolis, MN saw over 11% for rent increases. Chicago, IL topped out just over 9%.

While the percent increase in gas may seem more alarming, it is important to put these expenses into perspective. Housing is the largest total expense by far in the average budget. Transportation comes in a distant second and fuel is only a portion of the transportation category. In other words, small increases in housing costs have big impacts on your budget.

The important question to ask is why.

Increase of Home Foreclosures

Places that have seen some of the largest rent increases are the same locations with the largest foreclosure rates. When homeowners are faced with bankruptcy or foreclosure, they usually have no recourse but to become renters. After all, no bank is going to hand out a mortgage to someone who just defaulted on one.

A sudden spike in once homeowners-now-renters increases demand, which means increase in price. This reality is evidenced by record low vacancy rates.

Slow Growth in New Apartments

The recession was a double-edged sword for rent prices. The economic downturn converted homeowners into renters, but it also dried up interest in new construction. With rapidly falling housing prices, there hasn’t been a lot of interest from landlords in purchasing and building a new supply of apartments to meet the new demand. Stagnating supply all but guarantees an increase in rental prices.

Harder to Get a Mortgage

As the banking industry reeled from distressed mortgage portfolios, government and the Fed have tightened requirements for new mortgages. Prospective homebuyers now need more money for down payments, are able to get less in seller paid concessions and must have higher FICO scores. For many prospective buyers, the economy has exacerbated the difficulty in reaching these more stringent requirements.

Since attaining a mortgage is essential for keeping renters in the rental market and preventing new landlords from acquiring new units for rent, the ability to attain new mortgages has impacted the supply and demand for rental property.

Your housing expenses are about to go up in 2012 and there’s not much you can do about it.

Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to multiple income. The intricate world of family finance unlocked, one post at a time.

Ask for Advice

When I started looking into real estate investing, the first thing that I did was buy a few real estate investing books. I figured it would allow me to get acquainted with the various aspects without having to look stupid to the more experienced investor. The down side is that it took me a long time to learn the basics. If I had just asked for rental property advice, I would have learned much faster. When it comes down to it, an experienced investor can answer your direct questions much faster. Instead of having to search for the questions as you have them, being able to ask a quick question and have an immediate answer means a lot.

Look for Partnerships

If you are serious about investing in real estate, you may consider a partnership to start out. You could parse this many ways, but the most obvious possibilities would be either a business partner or property manager. Both of these have benefits in and of themselves, but suffice it to say that each would offer you someone who could help you learn the ropes of real estate investing. You could always consider a professional partnership with someone like Ipin property investments where they help their members with their investments. Finding the partnership that is most beneficial is something that you will have to decide.

In case it isn’t already obvious, investing in real estate for the first time is best when you have advice or assistance from someone else. It lowers the risk of making a bad investment and protects your return. While it may mean a lower rate of return, it is better (for your sake) to have a steady return (even if it is lower) to encourage you to keep investing.

The two wealthiest socio-economic demographics made up the largest share of foreclosures during the housing bust. These individuals had the highest average salary, highest level of average educational attainment and the greatest amount of financial promise. How do the most promising Americans lead a foreclosure tsunami?

No doubt the reasons for the Great Recession will be argued for decades. However, judging from the political narratives that have already taken hold, you probably never would have thought low closing costs were a major contributor.

The Importance of Closing Costs in a Mortgage

All first-time homebuyers should be thankful for those giant, upfront cash requirements banks establish as a requirement for a mortgage. I know. It’s a lot of money and a massive one-time expense. I’m certain that there are plenty of people who think it’s overly burdensome or even unfair. However, there is a very good reason the bar is set so high.

First of all, coming to the closing with a hoard of cash is a benchmark for soon-to-be homeowners. Like a test, banks make the initial investment requirements large to see if you have the ability to come up with the money. If you struggle saving for down payments and origination fees, how can you expect to weather a mortgage payment and additional costs associated with homeownership?

Additionally, by putting up a large chunk of your own cash when buying a house, you are putting skin in the game. If you paid no costs at the time you bought the house, what would you lose if you decided to never make a mortgage payment? Putting your own money on the line makes it harder for you to walk away from the house. It does one more thing, too:

The motivations above are effective enough to decrease your chances of foreclosure.

Few People Have to Front Closing Costs Anymore

Now that I’ve explained the importance of closing costs in preventing foreclosure, you should know that many homebuyers no longer pay them out of their own pockets.

Many opt to bargain for the seller pay their closing costs instead of asking for a price reduction. A survey by a California realty firm listed seller paid closing costs as the most common concession offered to buyers in purchase agreements. Nearly 66% of all home sales included these provisions. HUD found that homeowners with FHA loans where sellers paid closing costs were three times more likely to end up in foreclosure.

If it’s not the seller paying the closing costs, it is mom and dad. The same California realty survey reported that on one in four homebuyers receive assistance from their parents to pay closing costs.

I commiserate with prospective home buyers that large initial cash requirements are a tough nut to crack, but an important one to tackle on your own.

But, Is Making Closing Costs Even Higher the Answer?

So if paying large sums of money through closing costs is somehow good, requiring two or three times the current minimal down payment must be extra good for prospective homebuyers?

New financial regulations enacted by the recently passed Frank-Dodd bill aim to make it more costly for homebuyers with less than a 20% down payment to obtain a mortgage. While I’m clearly a proponent of going it alone in obtaining money for your closing costs, I think the new regulations are taking this concept too far.

It isn’t necessary to raise the amount of money people need to pay at closing. Homebuyers just need to pay the rates, as they currently are, on their own.

Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to multiple income. The intricate world of family finance unlocked, one post at a time.

More troubling data on real estate and foreclosures as a whole from the NYT:

In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.

Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.

In the 27 states where the courts play no role in foreclosures, the pace is much more brisk — three years in California, two years in Nevada and Colorado — but the dynamic is the same: the foreclosure system is bogged down by the volume of cases, borrowers are fighting to keep their houses and many lenders seem to be in no hurry to add repossessed houses to their books.

“If you were in foreclosure four years ago, you were biting your nails, asking yourself, ‘When is the sheriff going to show up and put me on the street?’ ” said Herb Blecher, an LPS senior vice president. “Now you’re probably not losing any sleep.”

Bottom line: slow and steady won’t win this race.

All this accomplishes is a reduction in the rate at which home prices are falling (presumably to prop up the real estate market as long as possible) and reduces stress upon the big banks (who have unofficially become real estate investment trusts). The only thing delays in foreclosures, as unpleasant as they are, will mean is a slower recovery since delinquent homeowners aren’t paying their mortgages, their property taxes, HOA fees, etc.

Those states who have a lawful and judiciously efficacious — not of the JP Morgan foreclosing on deployed soldiers variety — will claw their way out of fiscal Hell faster than those who do not.

Source
New York Times
DAVID STREITFELD
Backlog of Cases Gives a Reprieve on Foreclosures

Too bad the Case Shiller model doesn’t take condos, bank owned real estate, short term prices, etc. Wouldn’t want to show chartology for the most distressed segments of the market… that might undermine confidence and investor psychology.

From the article:

This chart is really astounding. It shows the average number of days that homeowners with defaulted loans (NOD) have not made a mortgage payment. For New York, one of the states which requires court approval (judicial) of a foreclosure, it is more than 21 months. Can you imagine how many seriously delinquent loans there are in that state?

This figure for the average number of days delinquent continues to grow in nearly every state. It is the source of the “shadow inventory” pipeline. As prices continue their descent, the total number of properties in this situation will almost certainly increase. That’s because a growing number of seriously underwater homeowners are beginning to sense that their property’s value will not return to what they paid for it for many years, if ever.

The findings of a shocking new survey reported jointly by trulia.com and realtytrac.com were released on May 18 of this year. It revealed a dramatic change in consumer attitudes about when the housing market will “recover.” Only last November, 37% of those polled believed the recovery would begin no later than the end of 2012. That number plunged to 18% by April.

Most ominous in the report is that 54% of those surveyed thought the recovery would not occur until “2014 or later.” This percentage was only 34% in November 2010. Such an extraordinary shift in six months tells me that the number of potential walkaways is growing by leaps and bounds.

There are dozens of infamous quotes that would adequately sum up the ominous overtones of such bearish data, but I think I’ll let this one go and let the chart do the talking.

Of course, if you’re a vulture real estate investor looking to score serious discounts at foreclosure auctions, you’re about to enter the “seven fat years” period.

Source
Keith Jurow
Seriously Delinquent Homeowners Undermine Hopes of a Market Recovery

Image via Chart of the Day

A 20 second scan of the headlines for the real estate tab on this blog will show you I’ve been bearish on U.S. real estate since this blog began several years ago, but I’m thinking it might be time to go from ultra bearish to neutral on select markets based on the following chart.

In certain areas, where supply trumps demand, home prices are ridiculously cheap when bought at foreclosure. In other markets, where supply is a problem and where the local economy supports a strong to average job market, homes are still a bit overpriced.

But on the national level, after averaging in the dogs (Phoenix, Miami, etc) along with the high fliers (New York, DC, etc.), it would appear we’re back to early 1990s levels on the median home price index, and could be closing in on early 1980s levels.

My only concern is that during the early 2000s, we built a disproportionate number of low to middle income housing — that has resulted in overwhelming numbers of foreclosures – to take advantage of the credit bubble, and that could potentially be dragging down the national index, where in the past, this wasn’t such a pressing concern.

If you or I did this, like having someone else pose as us when buying a house but forge our name in our place, we’d almost certainly be facing criminal charges. But it would appear Too Big To Fail also implies To Big To Jail.

The sad thing is that so many sources, both governmental and private industry, went out of their way to give everyone the “all is well” spiel while knowing it was anything but.

And the new homes sales data released today is just one more coffin nail. Then again, if you’ve been following the real estate topics covered on this blog, you knew that years ago.

[see video]

Being a chartporn aficionado, it’s hard to not to look at such a chart and wonder if precious metals and real estate markets from the late 1970s/early 1980s will do an encore.

Real estate still has a long way to fall, in my opinion as well as many others who follow real estate on a daily basis, but the momentum in gold is no where near played out. That’s a nice way of saying this trend isn’t going to be over anytime soon, and a dip into the double digits for the home prices to gold ratio is becoming more and more likely.

However, trends change. When one asset becomes cheap enough, and another asset becomes too expensive, investors have this nasty little tendency to cash out of one and move into another. Rinse, wash, repeat.

Note: the home to gold ratio was ~25 ticks higher just 10 months ago.

• sell existing waterfront property (especially low sea level property).
• buy real estate several miles inland.

Why? As you’ll see in the video:

Environmental scientists expect sea levels to rise 3 feet more in the next 80 to 90 years, which would reek havoc on shoreline countries across the globe. In the US, low sea level coastal areas like New York, Miami, New Orleans, the Carolinas [the entire Outer Banks area], parts of California [San Francisco], Norfolk — all of them could be in serious danger.

Watch the full episode. See more Need To Know.

In other words, what isn’t beachfront property now, will almost certainly be beachfront property several decades from now without some terraforming, dike building and carbon reduction.

The saddest thing: you can almost see the cognitive dissonance in the Norfolk waterfront homeowner’s eyes as he literally says “you just don’t want to think about it; it’s really hard.”

Ignore the politics. Ignore mainstream media. Go to a place like Norfolk or New Orleans and realize that it’s just a matter of time before Mother Nature puts this one in the win column.