Yet Another Renter Dealing With Foreclosure Issues

Here is another report of a renter having to deal with the foreclosure fallout. There appears to be no real statistics on investment properties and foreclosure numbers. Of course owners are going to fight much harder when foreclosure hits their families rather than their investments. Lets watch -



Paying the rent on time - and still faces problems. Renters really are the forgotten victims...

2009 Housing Forecast

The current expectations for 2009 is for the continuation of the housing price plunge. Hopefully stabilization will occur in 2010 or 2011. Meanwhile the downward spiral of more foreclosure and falling home values continues onward. CNN Money have an article titled The 2009 Economy and Your Wallet that discusses some house value issues. Lets take a look -

One in 10 mortgages is either in foreclosure or delinquent on payments. That's costing the rest of us big-time: If two houses on your street go into foreclosure, you can shave 10% off the value of your house, says Mesirow Financial economist Diane Swonk. The home-equity bonfire has eliminated an easy source of credit - a heavy drag on an economy that has depended on consumer spending for 71% of GDP.

What to expect from Obama: Obama will be under intense pressure from both left and right to expand Washington's footprint in the housing market. That's because none of the efforts so far have had much impact. The Hope for Homeowners program, which offers banks a government guarantee in exchange for reducing the principal on mortgages, has led to just a few hundred loan modifications.

One reason: Many mortgages are serviced by firms that don't actually own the debt. Those servicers have less incentive to act - and may fear lawsuits from far-flung investors holding bits and pieces of the mortgage. "It's been like using a paper cup to bail out a sinking ship," says Mark Zandi, chief economist of Moody's Economy.com and a former McCain adviser. "We need some real big buckets."

What would bigger buckets look like? First, Obama can attack the slump in demand. The administration might pull the trigger on a proposal from the current Treasury team to finance new mortgages at rates as low as 4.5%.

To stanch foreclosures, Obama wants new bankruptcy rules that would allow judges to modify some mortgages. Many Democrats also back a plan from Sheila Bair, current head of the Federal Deposit Insurance Corporation. The government would offer a deal: If the lender lowers the mortgage payment, Uncle Sam will pick up 50% of the losses if the borrower ultimately defaults. This might require a law to shield servicers from investor lawsuits. The FDIC estimates that this could stop 1.5 million foreclosures, at a cost to taxpayers of about $24 billion.

Some voters will find this hard to swallow. Bair's program pays out to homeowners and financial players who made bad bets, while the rest of us keep living in the houses we could actually afford. And there's an argument that home prices have to find their natural bottom. But many economists worry that the market will overshoot on the way down just as it did on the way up. "We could be looking at a death spiral in prices if the rate of foreclosures isn't reduced," says Nariman Behravesh, chief economist at Global Insight.

Even if intervention works, things will be ugly. "You can't stop the correction that is still required to offset the speculative excesses of the bubble," says economist Jared Bernstein, an adviser to Obama's campaign. "That correction is going to continue through 2009."

The recommended strategies for a seller is if you have to sell price it low. For buyers the prices will continue to go down so don't rush - the big gamble will be buying at the lowest point while interest rates are still low - but no hurries there. And the rest of the homeowners should look to refinancing. And that advice sounds about right to us.

Bankruptcy To Include Mortgages? Possibly In The Future

The current system has HELOCs pitted against VISAs. And VISA is winning. With our current bankruptcy system, mortgage and equity lines can not be modified by judges. For those who are financially in trouble - whether due to being underwater or having the ever-increasing ARMS - often foreclosure becomes the only option. Can't sell the property. Can't refinance the property. Banks often won't negotiate until payments are late, then with all of the added on penalties and fees the hole becomes too big for the homeowner to dig themselves out of.

While New Jersey just started a mortgage mediation/modification process most states have nothing of the sort. Many on the verge of bankruptcy may just as well say goodbye to their homes. With the avalanche of foreclosures lenders are already being pitted against lenders. The credit card companies know that will see something if bankruptcy comes. Those that own the mortgage just get to keep the depreciating properties - properties that may have trouble selling, or sell at a price much less than a renegotiated loan may have.

These are probably some of the reasons we are seeing pressure for bankruptcy reform that includes mortgages modifications. In an article from Bloomberg, and printed in the Silicon Valley Mercury News, titled Mortgage bankruptcy reform may speed losses the potential changes are discussed. Lets take a look -

A change in bankruptcy laws to allow judges to reduce the mortgages of consumers would probably boost filings, accelerating lenders' losses on home-equity, automobile and credit-card loans, according to Keefe, Bruyette & Woods.

...
Bankruptcy reform legislation has "increased momentum," the analysts wrote, after Citigroup Inc. endorsed a Democratic proposal last week that would give judges the ability to adjust the principal, interest rates and terms on mortgages during bankruptcy proceedings.

The deal has yet to win support from the rest of the banking industry, which joined Republicans last year to help kill a similar idea aimed at slowing foreclosures.

The provisions would force some lenders to take losses without a say in bankruptcy court proceedings. Home equity loans will be the "first to come under pressure," the analysts wrote, and banks and other companies holding mortgage bonds without government backing may also see higher losses.

The effect on financial-services companies of the bankruptcy law change would vary and even those firms harmed may benefit in some ways, the Keefe, Bruyette analysts wrote. Credit-card companies, for example, may find some troubled borrowers are better able to repay their debt as judges rework home loans to a more affordable level, the analysts wrote.

With the housing market turning to a turning from a discussion from falling prices to the new worry about overshoots - housing prices falling too much too fast that are even below the lowest projected value - the support appears to be rising. Neighborhoods decimated by foreclosures and turning into worthless ghost towns. Mortgage companies once in the business of lending money to buy houses now the owner of more and more decreasing and unwanted properties.

Changing Our Consumption Habits

Spending money that we do not have on things we do not really need has come to an end. Much of our patriotic consumption during the last decade (of things mostly made in other countries) with money fueled from the housing boom appears to be unsustainable. The overweight and excess debt that has caused this collapse is bringing about a new spending paradigm, which for some reason appears similar to that of the Great Depression.

When AdWeek is publishing articles about the new consumer attitudes you know there has been a pronounced shift in worldviews. In an article titled Boomers Caught in Squeeze Play the new spending patterns are evaluated. Lets take a look -

American consumers have no recollection of life in the Great Depression. Not only are most simply too young to remember it, but for the last quarter century they've lived without extended economic hardship, becoming ever more acquisitive in a world of instant gratification and easy credit. No one knows how long or severe the current downturn will be.


The circumstances of this recession are unprecedented in the history of modern consumerism: For a generation that has substituted rising home equity and stock prices for personal savings, the current economic meltdown -- with the value of the Dow Jones Industrial Index plunging 40 percent from its peak and $4 trillion lost in home equity -- has been psychologically wrenching after a quarter century of unquestioned prosperity.


...
"This is not a normal recession. This is a tectonic, structural shift, a global realignment," says Umair Haque, director of Havas Media Lab. "The post-war industrial era was the era of production. Now we're seeing the birth of the real 21st-century economy and marketing has to adapt. We'll see a world where consumption [will] slow -- especially in developed countries where there will be a shift from consuming to saving -- and production will slow."


Gallup chief economist Dennis Jacobe concurs that "a fundamental change is taking place" in the behavior of U.S. consumers, even if it's not clear how permanent it will be. While gas prices have dropped 57 percent since peaking last July, cheaper petrol has done little to loosen consumer purse strings. And for more affluent American households, their declining confidence and spending track with a time line that started last fall with Lehman Brothers' bankruptcy filing, and worsened with the once-unimaginable sale and bailouts of troubled financial institutions that quickly followed.


...
"The last cataclysmic event was 9/11, caused by a terrorist attack. It was patriotic to get out and shop," says Alison Burns, global client services director, JWT, New York. "This downfall is of our own making -- greed, mismanagement and all sorts of things much closer to home. Now it's not patriotic to go shopping. It's all about being prudent, back to basics, valuing the things we have more highly."


...
[ Ben Kline, chief strategy officer at Allstate agency Leo Burnett,], whose agency works for McDonald's, adds: "The 'apex predators' of categories that didn't add enough value as consumers traded up are going to be in trouble. People are realizing they don't need a $4 latte; $4 goes further at McDonald's."

If having money in the bank worth more than a $4 cup of coffee? Is having no HELOC better than having a late model vehicle? During the bubble the answers were different then they are now.

And notice the huge shift of patriotic behavior, once we showed pride in our country by going out shopping every chance we had. Now we are good Americans when we don't.

NJ Foreclosure Mediation Website

We have visited the NJ Foreclosure Mediation Website. Talk about plain vanilla with not much there, there.

Other than reminding visitors to call the 888 number there is not much there. For some reason you have to call to submit your data - that can not be done online. Lets take a look -





Why even bother publicizing the website? When all the website does is tell you to call the phone number. The should be other options, success stories, perhaps even a page to send general data so they can contact the homeowners in distress.

While the program is better than nothing, hopefully this push is being coordinated with the state's 21 county clerks offices. The people who are filing the lis pendens and foreclosure paperwork could also be the ones notifying people that there is a place to get help, what it has done for others and what can be done to prevent another foreclosure level.

We suggest the state send people to all 21 county clerks office to give them a briefing on this program. Talking to the people at the front lines can help the program as well. On the otherside, reaching out to the lenders about the program would also help. How many more properties do lenders really want to own? Many would like the pre-screening on the modifications done before the paperwork lands on the door. With the right footwork this program could work wonders - it all depends on the implementation!

Withdrawing Equity in Jefferson

Mortgage Equity Withdrawal was a big thing during the bubble. Using a HELOC meant that you were in charge of your money. Smart investors withdrew that equity and used it for more important investments. Investments like dinners out, vacations, coach purses, new cars, and buying things that you wanted NOW.

Equity withdrawal was part of the bubble mentality. Our new financial outlook would revolution financial planning. Since house prices only went up if someone ran into trouble they could just sell, or refinance. Pay the mortgage with the HELOC. There were solutions to everything. But then the bubble burst. Our solutions did not work the way we planned.

The new financial outlook was unsustainable. And yet enterprising homeowners could still find lenders with the bubble mentality. There would still be lenders who gave 120% of the property value in 2007. We found one of these lenders and enterprising home owners in our example today. Lets take a look -

Here is the property -

The front of the house.The Living Room with hardwood floors.

The gourmet kitchen with Housing Bubble mandatory Stainless Steel appliances and granite counters. (Notice the property meets the required bubble favorite pergraniteel!)

Here is the property info -

Property Features
Single Family Property Status: Active County: Morris Subdivision: The Peaks Year Built: 2006 4 total bedroom(s) 2.5 total bath(s) 2 total full bath(s) 1 total half bath(s) 9 total rooms Style: Colonial Master bedroom Living room Dining room Family room	Kitchen Den Basement Bathroom(s) on main floor Master bedroom is 18x13,Includes: Full Bath, Walk-In Closet Living room is 14x14 Dining room is 14x12,Formal Dining Room Family room is 19x14 Kitchen is 26x12 Den is 14x10 Basement is Partially Finished, Full Hardwood floors Fireplace(s) Fireplace features: Family Room, Wood Burning Parking space(s): 3	2 car garage Parking features: Built-In Garage Heating features: 2 Units,Electric Water Heater,Gas-Natural Forced air heat Central air conditioning Cooling features: 2 Units Exterior construction: Stone, Vinyl Siding Roofing: Asphalt Shingle Pets allowed Lot features: Level Lot, Open Lot Utilities present: Cable TV Available,Public Sewer,Public Water,Electric Service, Gas-Natural

Here are the financials -

• The property was purchased as a new construction from the builder for $564,889.74 in January 2006.

• The original mortgage on the date of purchase was for $451,911 with an ARM from Wells Fargo.

• In April 2006 the property was refinanced with cash-out for $532,000 using an ARM from Heritage Mortgage Banking Corp.

• The next month, May 2006, a HELOC was opened with Wachovia accessing $28,416.00 of the equity, the line was eventually closed.

• In February 2007, the previous HELCO was closed and a new HELOC was opened with Bank of America for $103,000.

• A Lis Pendens was filed against the mortgage that originated with Heritage Mortgage in November 2008.
  

• The property is currently for sale and listed with a realtor for $519,000.

• The property taxes for 2009 is $10,555.25.

For potential owners, if the property is purchased for full asking price with 20% down (which would be merely $103,800) using a 30-fixed at today's rate of 4.875, the payment with taxes would be just $3076.58 per month. Just add insurance and you are well over $3100 per month. With the 28% debt ratio, the potential buyer(s) should make about $130,000 per year to purchase this property.

Now lets go analyze the current owners situation. When the new construction was purchased, the owner put a hefty 20% down, which equaled $112,978.74. A huge down payment during the bubble, and still very respectable.

It must have been too much down, since just 4 months later the owners refinanced with cash out - withdrawing $80,089 of their equity out of the property. However that was obviously not enough cash-out since just one month after that the first HELOC was opened for $28, 416. After this extraction a mere $4,473.74 of the original down payment remained.

After 9 months the first HELOC must have run out - the homeowners closed that line and opened a new HELOC for $103,000, taking out potentially an additional $74,584. The new HELOC made the potential equity extraction $635,000, which was $70,110.26 more than the original purchase price. As home values were declining, the equity extracted from this property increasing.

Obviously there is a large discrepancy between what was (possibly) borrowed and what is owed. And since a Lis Pendens was filed, payments were not always made. [The refinanced mortgage was resold several times during its existence so there is a slight chance the Lis Pendens was a paperwork issue not a payment issue - we have heard rumors of this happening.]

Now on to potential losses. If the property sells for full asking price, with the realtor receiving the standard commission, the lender(s) will probably lose between $44,140 and $147,140 depending on HELOC usage. That loss is just for the money lent to the homeowners. This is listed as a short sale, but we are inclined to believe anyone who enjoys MEWs would be bringing a check to closing.

Just remember, this purchase and equity withdrawal were basically after the bubble burst. Lenders could see trouble coming and yet the withdrawals were still occurring.