Jon Griffith, Certified Short Sale Negotiator

Last year in Maricopa County, there were roughly 35,000 single family homes that sold.  That number almost matches the prior year.  Of those homes sold in 2009, 12,975 of them were Short Sales.  That’s 37% of the market.  That’s HUGE!  Most of those can be attributed to the sub-prime mortgage crisis and subsequent market crash.

While there are reports that have surfaced about the market improving, prices on the rise, etc., one of the more important topics that needs to be addressed is the impending wave of 5-year option-arm “smart loans” that will be resetting this year.  During 2010, I believe that we will see a huge influx of foreclosures in the 400K+ market.

In 2005, buyers were qualifying for homes that were twice as expensive as they could afford because of products that had interest only payments with huge adjustments on the horizon.  At the time, people believed that real estate just continued to go up in value, so it seemed to make sense to purchase a $400,000 home based on income that would qualify you for a $200,000 home, in the hopes that within the next 5 years, the home would be worth at least $600,000.  That’s not what happened.  Now homeowners in the jumbo and luxury market are as stuck as the rest of us, being completely upside-down in their homes.  As a result, they are trapped with a ticking time bomb.  As soon as those 5/1 ARMs reset, they’ll be headed for foreclosure, and the 2nd wave will begin.

I would encourage you to watch this video created by Jonathan Jarvis which explains why our market experienced what it did, and also makes a great case against borrowing money.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Short Sales are a tricky beast.  There are two sides to the argument when it comes to paying off a loan that you’ve promised to pay.  The first argument is that you’ve signed a promise to pay and you have a moral obligation to do so.  The second argument says that the lenders took advantage of us, so why should be pay them back?  They are the cause, right?

It doesn’t exactly work that way.  When you signed the note on your home, there was no clause within it that stated that you promise to pay “when the market is good.”  You signed a promise to pay no matter what.  Let’s face it.  I think we all can take a step back and say that we’ve learned a huge lesson about borrowing money in this day and age, and the lenders have clearly taken a step back to re-evaluate how they lend money.  So, it’s arguable that both parties are at fault for the disastrous market conditions.

That doesn’t release you from the obligation that you agreed to.  So, what are you supposed to do now?  Repay, or walk away?

That all depends on your financial outlook.  If you are in a position of financial distress, and you’re headed towards an inevitable foreclosure, then you’re probably a candidate for a Short Sale, which is the best option for you because it’s not really walking away.  It’s asking the lender for permission to sell for less than you owe. Foreclosure is what happens when you simply don’t pay. Foreclosure is not an option, it is a symptom.  People who don’t pay their mortgage lose their homes.  People that walk away from their homes, lose their homes.

It’s critical that you determine whether or not you qualify for a Short Sale.  A short sale allows you to move on with your life with the permission of the lender.  The lender agrees to release you from the note, and release the mortgage, and in most cases, you can walk away with peace of mind and a bright outlook on your future.

Why would a lender allow this?

Banks don’t want real estate.  They want money.  They lend money to make money.  Without cash, a bank goes out of business.  We’ve seen this happen time and time again.  When you quit paying your mortgage, and the bank reposesses your house, they have to spend thousands upon thousands of dollars to maintain the house, prepare it for sale, and sell it.  It will cost them more to foreclose than it will to allow you to sell it for current market value.

You have a moral obligation to pay your debts.  You signed a promise.  When you walk away, you are invalidating your credibility and as a result, regaining trust in you as a borrower will take years.  Don’t walk away without attempting to sell the property, and make sure you hire someone who knows what they’re doing.

Reinstatement

Bring your loan current.  Contact your lender, let them know you’re going to get caught up, and you’ll be able to remove the Notice of Trustee’s Sale and your home won’t go to auction.  Make sure you and your lender are on the same page, and that you get everything in writing.

Forebearance

Contact your lender and work with them to come to a temporary repayment plan.  Keep in mind that this also needs to be in writing.  Bank collectors are not friendly people and what comes out of their mouths is usually not true.  Forbearance is a temporary solution, and it will ultimately benefit the lender over you, but for now, it may relieve a cash-flow problem.

Refinance

Find a better deal.  The ability to do this hinges on your ability to qualify, and the value of your property.  If you owe more than it’s worth, you won’t be able to refinance without bringing the new loan to value ratio within an acceptable range.  This will mean coming out of pocket to bridge the gap.  Not many people can do this, so it may not be an option for you.

Loan Modification

It’s possible, but not likely.  Over 60% of those who attempt to modify don’t even qualify.  The rest manage to arrange something with the lender, but rest assured, it will be in the banks best interest, not yours.  Loan modification doesn’t usually solve the long term problem.  Prinicpal modification is extremely rare.  Don’t bet on it.

Sell the Property

If your payments are too high, sell the house.  If the home is worth more than you owe, you’re going to solve a huge financial burden in your life and you’ll have some cash left over.  Most people in this situation don’t think to down-size, but if you have equity in your home, and your income is such that you’re headed towards financial difficulty, sell the house.  Downsize and live within your means.

Rent the Property

Renting out your property may be a good option for you, but I would encourage you not to carry unnecessary risk in your life.  Renting out, while you’re renting, is a risky proposition because there are costs associated with being a landlord.  If you’re in foreclosure, you still need to be current with your lender to stop the auction process.

Short Sale

Even if you owe more than the property is worth, you can sell the home.  Most lenders will allow this to avoid the extensive costs of foreclosure.  It’s in their best interest to do so, and if you haven’t caught the tone of this message, I’ve been quite clear about the banks.  They typically only do what’s in their best interest.

Deed in Lieu

This is when you voluntarily hand over the keys to your house, much like when you voluntarily hand over the keys to your car.  The problem with this is that it doesn’t solve the problem.  When you hand it over, the bank, who is not in the real estate business, will have to pay the associated costs of selling the house, and that means that every penny that doesn’t cover your loan is a penny they’ll chase after legally.

Bankruptcy

Stupid.  Bankruptcy is something that you should only consider if you’re forced into it. It will slow the process down, but it will not prevent foreclosure.

It is estimated that most American Families can only maintain their current living expenses for 60 days or less when their income is interrupted for any reason.

My financial counselor, Dave Ramsey, provides a 6 step plan to financial success.  The first step is to sock away $1000.00 in an account that’s very easy to draw upon in times of emergency while you work hard at step 2.  The reason it’s only at $1000.00 is because the debt that you may be carrying, which is knocked out in step 2, needs your full financial attention before you build your full emergency fund of 3 to 6 months living expenses.  That’s step 3.

If your monthly expenses are $2000.00, then you need to have $6000.00 – $12,000.00 in reserve just for emergencies. This money should be in an account you have quick and easy access to, and should be used ONLY for true emergencies.  A prom dress is not an emergency and niether is a vacation.

If you don’t have this, you are like most Americans with a mere 60-days worth of reserves.  To make matters even worse, a majority of those people will rely on credit card limits to continue to carry them past the 60-days, which will send them diving into a spiral of financial defeat.

That is distress.  So, what are some of the causes of financial distress?  Hopefully the following 16 points will give you a greater understanding of what causes the distress that you may be right in the middle of.

1.  Payment Increase or Mortgage Adjustment

Currently, this is the most common reason for financial distress.  Billions of dollars of bad loans were written during the most recent real estate boom, and many of them were “creative products” designed to bring borrowers who couldn’t normally afford to buy a home into the home-buying game.  Now that those products are adjusting, the result is typically a payment that the borrower can no longer afford.  The tragic part is that the terms of the loan make it clear that the adjustment is part of the plan, yet most home owners do nothing to prepare for the change.

2.  Loss of Employment

No income?  No payment.  If you lose your job, in most cases, unless you’re fortunate enough to receive a severance package, you are without income immediately.  This will suddenly become a source of seemingly insurmountable stress.

3.  Business Fails

For the self-employed, your income depends on your skills as an entrepreneur, and the market you’re in.  Without a solid contingency plan for your business finances, the loss of your business also means the loss of your income.

4.  Unexpected Damage to Property

“It will never happen to me.”  Sure it won’t.  When there’s damage to your home, it will cost you.  When your insurance company fails to provide for the full amount of your claim, you’ll be left filling the gap, which in many cases exceeds 60 days reserves.

5.  Death of a Spouse

One of the most devastating life experiences is the loss of a loved one, especially if they were the primary income earner in the family.  This is why it is critical that you have a plan in place and have proper life insurance for your situation.  If your primary wage earner dies, it’s just like losing your income, instantly.

6.  Death of a Family Member

When a family member who is not earning income dies, it is emotionally devastating and the ripple effects will spread throughout every area of your life, affecting your work, your business, and your relationships.  This can produce undue stress and affect your earning ability.  It may even lead to needing to support survivors which will increase your costs.

7.  Severe Illness

No insurance for that cancer diagnosis?  Good luck covering your costs with 60-days reserves.  Illness can lead to extremely high medical debt and loss of income during recovery.  Disability insurance and health insurance are two very important planning products that you need to consider to avoid distress as a result of severe illness.

8.  Inheritance

Believe it or not, an inheritance isn’t always a blessing, especially if it’s happening in the midst of grieving from an unexpected family death.  If you inherit a home that isn’t paid for, you inherit the debt and the expenses of keeping it up as well.  Your 3 to 6 months of reserves will need to be much higher now.  Even if the property you inherit has significant equity, carrying the cost of maintaining it and paying the remainder of the mortgage may lead to foreclosure.

9.  Divorce

This is an extremely common reason for distress.  It can be an emotional and expensive situation to be in.  Spousal support, child support, attorney’s fees, etc., can all lead up to distressed finances.

10.  Separation

One step below divorce is separation, and it can strain a 2 income earning household as housing costs will typically double, and now the person left holding the big house will no longer be able to afford it.

11.  Relocation

Sometimes your employer will require that you move, which may mean you’ll have two households to maintain.  Again, your costs just doubled, and even though you may be able to rent out your current residence, in this market, it’s unlikely that you’ll be collecting more in rent than you’re paying in mortgage payments.  Your relocation may end up adding an entire household’s worth of expenses.

12.  Military Service

Except for relief provided in very specific situations by the Servicepersons Civil Relief Act (SCRA), military service can lead to unexpected financial issues.  There are thousands of service personnel who have had their periods of active duty unexpectedly extended and are now suffering a tremendous amount of financial pressure.

13.  Insurance or Tax Increase

With only 60 days of expenses on hand, if that annual tax bill goes up, or an unexpected increase in insurance premiums occurs due to a claim, you’ll be draining that reserve much faster, and that can cause distress.

14.  Too Much Debt

Mortgages, Credit Card Debt, Auto Loans, Student Loans.  These are all weighing millions of Americans down.  If you graduate, you now have additional payments to make if you haven’t deferred your student loan payments.  Your credit card rates may be unexpectedly increased, etc.

15.  Reduced Income

There’s always the possibility that your commissions will be less than they were last year due to the economy, or your company may scale back and reduce bonuses or even reduce your salary.

16.  Incarceration

How are you going to make a living from the slammer?

Many of these are no-brainers, but the key to avoiding the distress that results from any of these is to have a plan, make sure you have the right insurance in place, pay off all of your debt, and keep a healthy emergency fund of at least 3 to 6 months living expenses socked away.

Most of these are things that “will never happen to me.”  Well, that’s just not true.  You never know what will happen from one day to the next, but you can be sure that if you have a plan, you will not find yourself looking for a way out of foreclosure.

Experiencing foreclosure is an extremely emotional event in one’s life. It ranks in the top 5 most-traumatic things that can happen to an individual. The ramifications of foreclosure reach much further than most people understand. Here are the top five reasons why avoiding foreclosure is the best choice you can make:

Disclosure

For the rest of your life, you will always have to disclose that you have been through a foreclosure.  When you fill out any application that asks whether or not you’ve been through a foreclosure, you’ll find that the only options are YES, or NO.  You will be required to answer truthfully in order to avoid being involved in mortgage fraud.

Credit Score

When your bank repossesses your home, your credit score can drop by 300 points or more.  It takes a long time to repair your credit history, and this will surely knock you into a no-qualify position financially.  Not only that, but it will affect other service providers that you may have, and could affect your future employment.  Some insurance companies check your credit score and use that as a measurement of risk.  Your rates could sky-rocket as a result.  You can be assured that your credit card rates will also be raised the next time your creditors check your credit status.  All of that can be extremely costly down the road.

Permanent

Foreclosure is a permanent event.  You cannot have a foreclosure removed from a credit history report.  In fact, the only information you have have modified on your credit history is data that is considered an error.  All other events will remain on your report for a long time.  A foreclosure will stick with YOU forever, even if it disappears from your report.  You will always be obligated to report it if asked on a legal document.

Security Clearance

If you work in an industry that requires security clearance to do your job, such as the military, or other high level security jobs, you will be at risk of losing that clearance.  In most cases, when people lose their clearance, they lose their job.  Foreclosure can lead you to unemployment.

Job Hunting

There are plenty of companies who run your credit history report when you apply for a job.  If your record is tarnished by a foreclosure, your future employer may consider this when they compare you to another candidate with a clean record.  You want to remain as marketable as you can, so having a foreclosure will impact your ability to find new work.

There is a clear difference between living with foreclosure and moving forward without it.  I can help you prevent it through the process of a short sale.  Contact me today for more information.

1. For the REST OF YOUR LIFE, you will ALWAYS have to disclose that you have been through a foreclosure when you apply for a mortgage.
2. Your credit score will drop by up to, and perhaps more than 300 points.  Credit scores are being reviewed by insurance companies and other service providers to assess risk and determine what they’re going to charge you.  In EVERY CASE, a low credit score costs more than NO credit score or a high credit score.
3. It is virtually impossible to reverse or repair your credit report and the foreclosure will remain on your record for up to 10 years.  Regardless of the length that it remains on your credit report,