Date: 30 November 2009

Link: http://www.cnbc.com/id/34207654

Should homeowners who are behind in their mortgage be allowed to just walk way from the payments? A University of Arizona law professor suggests that maybe they should. While not recommending that homeowners forgo their responsibilities, Professor Brent White told CNBC Monday that there is a different set of rules for the business community and homeowners. “There’s a double standard when it comes to banks and homeowners,” said White. “Businesses often walk away from bad contracts, but homeowners can’t. The banks need to modify bad loans.” White recently issued an academic paper saying that he’s surprised that more of the 15 million US homeowners who have underwater mortgages—or mortgages that are worth more than the value of the house— are still continuing to pay. White said he was not advocating what homeowners should do, but raising a key issue—that homeowners need to think what’s best for them.

Somewhat predictably, those within the real estate industry are not endorsing White’s point of view. “It’s not a responsible thing to do (not pay a mortgage),” National Association of Realtors spokesman Walter Maloney said. “He’s making assumptions about property values that are not correct. Values are starting to stabilize. More important, it’s not ethical to walk away from the mortgage.” But White, in his paper, is throwing ethics right out of the equation. He says, people are too worried about the feelings of shame and embarrassment of a possible foreclosure and “ignore the powerful financial reasons for doing so.” White attacks the banks in his thesis for “being slow to modify troubled mortgages and reluctant to reduce principal debts” with falling housing prices. He says homeowners have to think about themselves and what’s do right for them. And White says the penalties for skipping mortgage payments are “not as bad as people think.” He says that “if you stay current with other creditors, one can have a good credit rating within two years. Most individuals should be able to plan in advance for a few years of limited credit.”

But having a bad credit rating even just for a couple of years, should not be a goal, says Diane Saatchi, vice president of Corcoran Realty, in East Hampton, New York. “I grew up knowing your most valuable asset is your credit rating,” Saatchi says. “It’s foolish to deliberately make credit rating worse. If you can’t or won’t make the payments, get in touch with lender, and work it out.” In his paper, White laid out his strategy for the non-payment program: homeowners would buy the items they’ll need, like a car or even another house, over a couple of years just before they stop making mortgage payments and are eventually forced out of the home. But that’s not much of a plan says Greg McBride, senior analyst at Bankrate.com. “Buying a home is long term investment, it’s not a get rich quick scheme,” says McBride. “If you can make the payments you should, unless there’s a major event, like a job loss or transfer that makes things worse. If that happens, you can negotiate with the bank.”

While White’s ideas are mostly considered extreme within the housing industry, there is an alternative to stopping mortgage payments if you want leave a house that is “underwater’, says Johnny Martinelli Broker owner of Levy Mart Real Estate in Norman, Oklahoma. “It’s called deed in lieu,” says Martinelli. “Say your house is worth $140,000 and the mortgage is valued at $200,000. You could go to the bank and say here’s the deed. If the bank agrees, they would take over the house. But you would have to claim the difference of the $60,000 on your tax returns. That’s considered income. Of course, you have to find another place to live.” The tax rules can vary at times, due to recent changes in guidelines. Martinelli says this type of deal is better than a foreclosure and wouldn’t hurt a homeowner’s credit rating as much. Advantages to a lender include a reduction in the time and cost of a repossession, which can take months. Not all banks might accept such an offer, but there are some that do, says Martinelli.

Most analysts agree that if a homeowner can pay the loan, do so even if the value has dropped. If the owner can’t afford the payments, go to the lender to try and work out a lower payment. Not all lenders will, but experts advise trying. There’s also a short sale if the house must be sold. That’s where the mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the homeowner. The homeowner sells the property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Whatever action a homeowner is contemplating, they should think long and hard before doing something that could be short sited says Diane Saatchi. “Blaming the bank is a losing proposition and could have long term consequences,” Saatchi says “Don’t think by not paying your mortgage you’re able to get ahead financially. It’s a risky idea and not worth it.”

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1- Moisture Problems

When a house is closed up, the climate is humid, or there are ongoing water leakage issues visible, mold is commonly found – and has the potential to be extensive. When a foreclosure home is boarded up, it exacerbates the situation, creating a high humidity environment in which mold thrives. HouseMaster inspectors have seen homes covered in black mold after just a few weeks, but these problems can be prevented and eliminated through proper clean up and ventilation.

2- Defective, Leaky Gaskets, Valves, and Hoses

It’s common for home inspectors to find leaking vales, gaskets, and appliances in homes that have been foreclosed or vacant for an extended period. No matter how big or small, every appliance or plumbing fixture in a home includes at least one valve, gasket, and/or hose which can dry out – creating gaps and leakages. Freeze damage can cause a burst pipe, damaged valve, or gushing water. Even a minor leak can cause consequential water damage and/or mold.

3- Vandalism

Foreclosed homes may be subject to damage from vandals, frustrated homeowners, or thieves looking to steal anything of possible resale value. HouseMaster inspectors have found homes stripped of everything from kitchen cabinetry to plumbing, wiring, and even structural elements. Usually these items are removed without consideration for safety or consequential damage. Home buyers should factor in the cost of new appliances, fixtures, walls, ceiling or other repairs needed when considering the reduced price of the property.

4- Unwelcome Guests

Overgrown vegetation, broken windows, scattered debris, and water leakages are an invitation to many unwelcome guests such as insects, rodents, and raccoons. Whether these vermin are present for a short or long period, they can cause damage and create secondary problems such as an unsanitary buildup of droppings, fleas, and/or other health concerns. Home buyers should arrange for proper cleaning and extermination prior to inhabiting a home with these conditions.

5- Blocked or Damaged Waste & Sewer Lines

Issues withe house drains, and waste and sewer lines are also not uncommon. Deliberately blocked lines may result in overflow damage – an inconvenience that could be costly to repair. In other cases, the normal buildup of waste products in the lines will harden and contribute to flow restriction or blockage. Even minor leakages can cause soil to dry out in the wrong area, which can contribute to pipe movement and damage. Home buyers may consider sewer line or drainage pipe inspections to assess potential issues.

Some of the costs banks pay when foreclosing on a home include:

• Attorney Fees
• Filing Fees
• Court Costs
• Sheriff Costs
• Loss of Mortgage Payments
• Holding Costs: Taxes, Insurance, Liens, Utilities, Association fees
• Cleaning costs
• Lawn care and snow removal

By eliminating these expenses the bank will often end up with less of a loss on a property.  Some short sale homes are marketed in the MLS (Multiple Listing Service) as such.  Other times agents may know of someone that is in a situation where a property owner is on the verge of foreclosure.  In Wisconsin the foreclosure process is quite long and involved.  Properties that will be put up for Sheriff auction are listed in the Daily Reporter newspaper one day each week.  Most city halls in Milwaukee County also have a bulletin board with listings of upcoming sheriff auction properties.  Contacting these home owners may yield an opportunity to do a short sale purchase.  The biggest thing to remember when submitting your offer to a bank is patience.  Short sales I have been involved with have taken weeks and months to get approved.  Count yourself lucky if the bank does finally come back and negoiate or accept your offer.  Some properties have 2 or more mortgages so getting multiple banks to approve of the transaction can be very challenging and time consuming.  If you are trying to keep to a specific time line for your purchase this might not be for you.  If you have any questions about short sales or want to know what properties are available in the SE Wisconsin market feel free to call or email me and I will be happy to help you.  troy@chowanec.com or 414-688-3678

• What will the term of the lease option be? (1 year, 2 years, 5 years or more???)

• What will the cost of the lease option be? ($1000, $2000, $3000 per month?)

• What the lease payment cover? (taxes, utilities, principle reduction, just the option?)

• What is allowed to be done to the building (cosmetic changes or extensive renovations?)

• Who will pay for these changes? (the tenant or the owner)

• How much money is required as a down payment? (is this applied to the principle if the option is exercised or is it just the cost of the option?)

Once you have these questions answered you can then create a contract that covers these issues. This formal offer is then presented to both parties for consideration.  Typically there is a lot more ground to cover in an option verses an outright sale of a property.  As such negoiations can take longer and be more complicated.   Beginner investors many times have a view that is skewed in their favor to the extent that it does not make financial sense to the seller.  Remember the seller is the one that has the most to loose on this transaction so the higher the risk the higher the cost for the buyer.

Qualified borrowers may be able to modify thier home mortgage in one of the following ways:

• A reduction in the interest rate for 5 years

• Payments to be stretched out to 40 years

• A temporary reduction of their principle loan amount.  However, the reduction would be due without interest if the home was refinanced or sold.

The goal is to cut monthly payments to 38% of the borrowers monthly pretax income.

Bloomberg.com reports:

“The worst U.S. housing slump since the 1930s is being compounded by a recession that began in the third quarter and may last a year or more, according to Jay Brinkmann, chief economist for the Mortgage Bankers Association. Home prices in 20 U.S. metropolitan areas fell in July at the fastest pace on record, and of previously owned homes in August were 32 percent below the peak reached in September 2005.”

As these programs start taking place the supply will start coming down and we should see a stabilizing of housing prices in the market.  If you are planning on making a home purchase in the next 6-12 months, now is the time to start doing your due dilligence and educate yourself on the particular market you are interested in.  Start by working with a lender and securing the funds necessary for that purchase.  Market conditions in Milwaukee are particularly good right now for buyers to consider making a move in buying real estate.

First- The home is listed in the MLS making everyone aware it’s available. This property is no secret. In fact, the County is looking to get top dollar for this property.

Second- These properties often require lots of work and are not for the squeamish. I am sure that this is not a surprise to most people. The county gets these properties typically because the owner failed to pay the property taxes, often for several years. If the owner couldn’t come up with the money for taxes chances are they weren’t able to keep the property maintained either. So lots of differed maintenance can be expected. The question becomes how extensive is the work? Well, the last one I was in had plumbing that froze thus rendering the entire plumbing system defective. Because of the cost of copper, there have been occasions where the plumbing is stripped altogether from the home. Sometimes the defects are not visible making it more difficult to judge how much money and work you will need to put into the project.

Third- The property is sold in “As-Is” condition. Do all your checking before you write an offer. Once your offer is accepted, there will not be an opportunity to back out because of the property’s condition.

Forth- Make sure you have your financing in order. Chances are the County will sell it to a cash buyer. The property probably won’t qualify for traditional financing anyway. Having a line of credit or proof of funds will make your offer that much more attractive to the County. Knowing how you are going to pay for the property and the work that needs to be done before submitting an offer. This is very important to the success of getting the property.

Fifth- This will not happen over night. While it is important for you to be ready to move when the time comes, you are still subject to the slow grinding gears of our government. All offers are subject to the approval of the Milwaukee County Board of Supervisors and the County Executive. Thats right, this sale has to be approved by the County Board and the County Executive Scott Walker! That means that your offer will be an agenda item for a County Board Meeting. Once the Board approves the transaction it is on to the County Executive for a final signature of approval. Allow approximately 60 days for this to happen.

In summary, Make sure you do all your “Due Diligence” before writing an offer. Be sure your financing is in order. Submit your highest and best offer there will not be an opportunity to negotiate later. Finally, be patient as the whole process takes lots of time. Can a good deal be had? Is it worth the time and effort? Only you can answer these questions.