004. news on friday

In this segment, titled “News on Friday”, I discussed three articles that discussed that state of the real estate market and homeowners’ struggle with making payments on homes that are “underwater”. This video turned out longer than anticipated, but in an effort to do things on the first take, I didn’t want to go back and shoot a shorter version (I’m trying to be less of a perfectionist and the Reside Daily Bite is challenging me). On future news on Friday segments, I will be just featuring one news article. I’d love to hear what you think about this segment so please leave a comment by clicking on the comment tab above the video.

Hello everybody and welcome to the Reside Daily Bite; I’m your host, David Doucette and today’s segment is a segment that I called “News on Fridays”. Even though today is Thursday, I wanted to bring it to you today because tomorrow, we’re going to go shoot some footage of them setting up the finish line of the LA marathon (which is happening on Sunday which I’m running in). So very excited about that. And that’s what we’re going to do for tomorrow. But I do want to start the news on Friday’s segment.

I’m going to talk about a couple of articles. This was recently in the San Francisco Chronicle titled Strategic Defaults on Homes on the Rise” and what they’re talking about in this article is a couple of interesting facts, “Of all U.S. mortgage holders, about one quarter, or 11.3 million households, are underwater”. Now what underwater means is it’s a term used when somebody owes more on the house than what it is worth and it’s something we’re seeing more frequently now especially for people who bought within the last 3 or 4 years.

For example, 3 years ago, somebody might have purchased a home for $500,000 -that’s what their mortgage is- but because of the economic down turn, the value of that house today is only $400,000. So, they are said to be underwater. Now, if somebody is going to be staying in their home for the long term (5-10 years), it really isn’t an issue, it becomes an issue really just on paper but for somebody who is wanting  to move or needing to sell, it becomes more of an issue.

And the article talks about strategic defaults that are resulting in foreclosure and how many homeowners are opting not to make their monthly mortgage payments. They discussed if homeowners say they want out, banks typically encourage them to market their property as a short sale which is when the property can be sold for less than what is owed on it.

And we’re going to be seeing more of the short sale terminology. For example, if somebody owes $500,000 on their house (but it’s only worth $400,000), the homeowner can put it on the market or can list it with an agent and the bank can accept that short sale. But there are a lot of stipulations for that to even happen and it has really to be a financial direct situation or distress, I should say, for the homeowner.

And something else I thought was interesting in this article: TransUnion, one of the 3 credit reporting companies, noticed a striking change in recent months -that people are actually paying their auto loans and credit cards off first before their paying their mortgages. And that’s a huge shift from recent times and typically, the payment hierarchy would be that people will be paying their mortgage first. And their saying, the reason for the shift is that consumers who are upside down on a mortgage, when they encounter adverse circumstances, they are less likely to make a rather large payment on a home that is not worth what it was when they (bought it).

I want to read another article, this is from the LA Times, and this came out recently. It talks about a couple who have not made a home payment in 16 months and they live Paris, California. They talked about more people are continuing to default on their home loans — but lenders are backing off a little bit on forced evictions allowing many people to remain in their homes,  essentially rent-free.

“Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.” So, the banks are working with homeowners to try and keep them in their home and it really is in the bank’s interest to do this because they really do not want these homes back, they do not want to foreclosed, they have a surplus of inventory now.

“Areas like Southern California’s Inland Empire, Nevada and Arizona, lenders are loath to depress housing prices further by dumping more properties into a weak market.” And a spokesman from Chase says allowing borrowers to stay in their homes helps protect the bank’s investment as it negotiates with the homeowners. This is an important concept because if a homeowner is still living in the home, there’s less chance of vandalism, there’s less chance of damage to the property. If the bank was to foreclose on it then it is vacant then it’s more prone to vandalism and essentially more expensive for the bank to maintain and keep until the bank can sell it.

An also interesting point here is that in California, a firm by the name of ForeclosureRadar, who tracks a lot of the foreclosure statistics and notice of defaults, says right now it takes an average of 229 days for a bank to foreclose on a home in California. So, that’s 229 days that a bank is taking after they send a notice of default -that is up from 146 days in August 2008.

A year and a half earlier, it was taking 146 days; now it’s taking an average of 229 days and they go on to say, “”For some reason, banks are being more lenient with homeowners who are behind on their loans; whether it’s a strategy to try and slow down the volume of foreclosures or simply a matter of the banks being able to keep up with volume is something that banks only know for sure.”

And a spokeswoman from the Bank of America says, “Lenders say the trend reflects their efforts to work with borrowers to modify loans to avoid foreclosure. They continue to exhaust every possible option to qualify customers for modification or other solutions.”

I think there is a willingness on the part of banks to work with distressed homeowners. I think we’re going to see more of it. The short sale process right now can take anywhere from 3-6 months. It’s a long, laborious process and lot of red tape still involved. It’s not an easy solution yet.

But another article recently printed in the New York Times called “Program Will Pay Homeowners to Sell at a Loss” talked about the Obama Administration. They’re saying “more than five million households are behind on their mortgages and risk foreclosure.”

“Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.”

And a senior Treasury adviser says, “We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender.” This is really a big deal and I hope that this can work out; I hope they can really streamline the short sale process.

And here’s an example of why they really need to do this:  it is highlighted by a routine case in Phoenix. A real estate agent has a house he is trying to sell on behalf of its owner, who owes $150,000. He has an offer for $48,000 (which is a hundred thousand dollars less than what he owes), but the bank holding the mortgage says it wants at least $90,000. The frustrated owner is now contemplating foreclosure.

Now I don’t know what that house is worth in the area, maybe it is only $48,000, and if that’s the case, the bank has to really take a hard look at their demands for wanting $90,000 and why they want that.

But the point is that this is going to help banks streamline the short sale process because we really need it. They also talked about the incentives – if they prove successful, the short sales program could have multiple benefits, there is the prospect of getting more money with a sale than with a foreclosure (for the lenders); for the borrowers, there is the likelihood of suffering less damage to credit ratings because the short sale is better on your credit report than a foreclosure.

They also talked about the benefits of which to communities. It will mean fewer empty foreclosed homes; because once a home is foreclosed on, that means it goes back to the bank -the bank owns it and now the bank has to fix it up and try and sell it. The banks have a lot of inventory and I don’t think they want to take on more. And I think that is why they are letting homeowners stay in their homes longer and trying to work with them. And I think this year; we’re definitely going to see more of this.

One thing I do want to point out about the short sale, as the spokeswoman in this article from Wells Fargo says, “This is not an opportunity for the customer to just walk away. If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ we’re not going to do a short sale.” So the banks are saying you need to meet these really financial distress criteria to be considered for a short sale.

If you find yourself in that situation where you are behind on your payments for whatever reason, definitely seek out a local real estate agent to discuss the options because certainly a short sale is much better than a foreclosure -definitely take those steps to do that.

If you don’t know where to go, feel free to email me david@residerealestate.com. The office I work with, Keller Williams, have over 600 franchises or locations in the country, and I can try and point you in that direction. Don’t do just do nothing, which I think a lot of people feel the tendency to do because they don’t know what else to do and they sort of give up. Talk to an agent, talk about the short sale process and they will be able to give you more information on that.

I want to thank you so much for joining me today and please be sure to tune in tomorrow when we will have some exciting footage from the finish line of the Los Angeles marathon.

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