Foreclosure

1. CNN reported today that foreclosure filings are up 120% more in the second quarter of this year than what they were this time last year. It really should come at no surprise to anybody.

2. Right now a lot of people that took out adjustable rate mortgages from 2003-2005 are starting to see their interest rates finally adjust on them and are trying to deal with the increased payments. Many of these same people that took aout an adjustable rate mortgage also took a home equity line of credit when their property was increasing in value. They also took out their home equity loan right up to 100% of the value of the home more than likely to pay off credit card debt or other things they did not need. Now they have two loans combined and owe around 125% of what the home is worth.

3. Parts of the country like the mid-west, especially Detroit (1 in 66 homes in foreclosure) and parts of Ohio like Akron and Toledo are being severely hit with this foreclosure epidemic. The crazy thing is that they do not even lead the nation in this category. Stockton, CA leads it with 1 out of every 25 homes. Its probably due to the ridiculous home prices that were in that area during the refi boom because San Francisco is so expensive to live there. People thought they could make the drive from Stockton to San Francisco for their jobs but now with fuel prices around $4 a gallon its just too much to do.

4. The mid-west is suffering from major job losses in the automotive industry. It’s almost everyday that you hear one of the auto manufacturers like Ford, GM, and Chrysler laying off more workers. Its not that home prices were very high even during the refi boom because many auto workers made good money to afford the homes. Now its that just don’t have any money to pay their mortgage payment. In California and Nevada home prices were past what market levels should have been at and people are now stuck owing 25% more than what they owe on them. Inflation is pushing home owners out west to foreclose, not loss of jobs.

5. The National Realtors Association has been changing their estimates on how many homes they think are going to be sold. I don’t know why they make estimates in the first place. Why don’t they just say that “there are a ton of homes for sale and nobody wants or can afford to buy them.”

6. With all of the bad publicity about adjustable rate mortgages and sub-prime home loans you will see pretty much everybody start asking for 30 year fixed rate mortgages. I guess we all learned from out mistakes and know that gambling on what interest rates will be like in the future is not a calculated risk. Many mortgage companies told clients that rates go up and down every 3 years and that when their loan would adjust they would refinance them into a fixed loan.

7. Of course they would refinance them into a fixed loan because then that meant more fees and closing costs they could collect. Mortgage companies do not get paid on the interest rate they charge. They get paid when they originate your loan and sell it on the secondary market to a larger bank or hedge fund that collects the interest from your payment.

8. Right now this strategy from the mortgage companies is back firing on them because now you would think that there are a ton of people (there are) looking to refinance their home and get out of the adjustable rate. Problem is that they cannot refinance because the mortgage companies guidelines have changed dramatically in the past year and many home owners cannot get approved on a new home loan.

9. Many people are stuck in loans in which they owe more than what their house is worth. No mortgage lender will do loans over 100% of the value of the home and most will only do up to 95% at the maximum. The FHA loan is becoming popular again because of funding from the government (thanks but no thanks). This takes the burden off of the mortgage lenders because the FHA is insuring the loan in case of default. Interest rates on a FHA loan are usually .5% lower than a normal conventional loan but it does not matter. On a FHA loan the borrower has to pay a mortgage insurance either up front or monthly with the payment. This extra insurance should be considered an interest rate. Interest rates on a 30 year fixed as of July 25, 2008 are around 7.5% with no points on a 30 year conventional loan. A FHA loan is around 6.75% with no points. The reason the FHA does this is because they determine what they want to do (because they are the man they set prices on whatever they want) while major investment firms cannot do this. You can see why the FHA is becoming popular again.

10. We should expect foreclosures to continue well into 2010 at the same rate before things start leveling off. There is not going to be a real estate rebound or recovery. How will it? People are losing jobs left and right and there is no new technology or thing we can manufacture on the horizon. So many home owners are doing their best to avoid foreclosure but there is not that much they can do. If you are smart you will wait to buy a home until 2010 regardless of where you live. Foreclosures affect every home value for every property within a 1 mile radius.

1. The housing boom is turning out to be quite a bust right now. There were a lot of people that got rich very fast and now there are some people that are in the poor house. What is interesting is that you would never think that the person who probably did three refinance loans for you on your house is probably in worst financial shape than you are in right now.

2. It does not take that much to be a mortgage broker, loan officer, mortgage banker, etc.. You do not need any type of training or certifications. Some states make you take open books tests that you do online and its more like you pick an answer, it says your wrong, you keep guessing until you get the right one and then you move on. Not that hard. All it really takes to be a successful mortgage person is good salesmanship and a will to push. I’m not saying this is an easy job at all. The turnover at most mortgage companies is around 70% in the first 3 months. Be prepared to work long hours staring at a computer and being on the phone.

3. When mortgage rates were so low during the 2002-2006 time period everybody and their mother was either refinancing their mortgage, buying a second home or picking up multiple rental homes. All of this cheap money had never been heard of and you know what it…it made sense to do this. In a matter of time from the year 2000-2003 the 30 year fixed mortgage rate went from 8.5% to 5.25%. That is a huge drop. As an example lets say you have a 30 year loan of $150k at 8.5% your monthly payment would be $1153. The same $150k 30 year fixed loan at 5.25% monthly payment is $828 giving you a monthly difference of $1153 – $828 = $325. This a huge difference. That is a car payment. Over 1 year that is a saving of $325 x 12 = $3900.

4. With so many people looking to refinance their homes somebody had to be there to do the loans. Mortgage brokers were popping up every where. In most states all you had to do was contact a bank that would actually lend you the money and you had to get some license saying that you were an official business. It was so crazy that there are even stories of people writing mortgages from the back seats of their cars. With the influx of customers mortgage lenders were growing at a very rapid rate. They were hiring left and right and if you worked at a smart mortgage company, with just the right amount of advertising you could sit at your desk and the phone calls would roll in asking for somebody to redo their loan. So here is a new mortgage officer with little training saying “we have a rate at 5.5% and that is better than your 8% do you want it?” Of course they want it.

5. So now the mortgage person is starting to get better at their trade and is learning the programs and their sales skills are going up to. They are finding an angle for every person they talk to to do a loan. What does this mean to the mortgage banker. One easy answer…money. Talk about huge commission checks. It was not uncommon for average mortgage brokers to be making over $25k a month. All that they would do is sit at a desk, pick up the phone, say this is what it is, send out some application documents, get you to sign them and as long as you W2’s, bank statements, pay-stubs, etc matched up and the appraisal came in (every appraisal was great from 2003-2006) then the loan would close.

6. Since there was no training involved in becoming a mortgage banker/loan officer anybody could do the job as long as they had the right attitude. There were people working at mortgage companies that had PhD’s and some that had not finished high school. Its hard to believe but knowing that you could possibly make $50k in two months, who would not want to do it even if you had to work a bunch of hours.

7. The mortgage broker is so happy and is on track to make $200k in their first year. This new found money is starting to get to their head and instead of saving the money they go out and buy a $400k home in some suburbia town which has a new housing development going on. They feel like the gravy train is going to keep on coming so its ok because next year they know that they are going to make $300k. Why wouldn’t they feel this way, the majority of the people they did loans for took out adjustable rate mortgages and are going to refinance them soon and hopefully they did such a great job that the referrals are rolling in.

8. Here you have a person making ridiculous amounts of money doing a job that anybody can do. Its kind of like one of things that “sounds to good to be true” and you find out it is years later the hard way. Some Doctors do not even make $200k a year and here is somebody selling mortgages making serious loot. The home has been bought and you know what, that Cadillac Escalde is looking pretty good too. Let’s not forget the boat. The money is still rolling in and interest rates are still low so you finance all of it anyways. You can make the payments so who cares.

9. The gravy train starts slowing down and you notice that some of your clients are calling you back to do another cash out refinance. You say no problem, and send the appraiser out to the home. The appraisal comes in at the same or just a little less than what it did 8 months ago when your clients took out money to buy some crap they didn’t need. This baffles you because every time you sent your appraiser out there the home went up 25% in value. You can’t do the mortgage for them. Another one of your past clients calls in to do the same cash out refinance. Appraisal comes in low again. This process repeats itself for two months straight and you commission check drops in half. Oh poop!!

10. The mortgage broker cannot close a loan because now all of his clients owe more than what their houses are worth. The bank you go through said none of the loans you send to them to process meet any of their guidelines anymore. This is even happening to some of the larger mortgage companies like Countrywide, Chade, Quicken Loans, etc. Nobody can do a loan for anybody anymore. Here sits the mortgage banker/mortgage broker at their desk waiting for the phone calls or new mortgage leads to come rolling in that day and they don’t. Well, they still come in, but a lot of these people you talk to are in desparation mode and you can’t help them. Guess what, the mortgge broker is next to where they can’t be helped. Most mortgage brokers get paid a small salary, but 80% of their income is commission. Good bye commsions. How are they going to be able to pay for the Escalade, the boat, and most importantly the $400k house that they did not put a $1 down on it themselves without being able to close any loans. The answer is that they can’t. Many. many people in the mortgage business over the past coupleof years made some very easy and quick money. Too much money for a job that requires little real talent or skill. This includes the owners of the companies too. Many thought the money train would roll on forever because real estate has always been such a safe investment. If any of them had ever of taken a Finance or Economics course they would have read about supply and demand for one and would have realized that there had to be a tipping point where the market was going to push back. Nobody thought it would come and it did quickly. So the mortgage broker who probably kept telling you to take more cash out of the equity on your home and who probably did three new mortgages for you over 2.5 years time has no money coming in and can’t pay his bills. You will probably see a for sale sign from the real estate company that is working for the actually lender that bought the loan he wrote for himself in the front yard saying “foreclosed home for sale” on it. Its really sad because they could have said this money and lived the same lifestyle they had been before the money and could have just lost their job but had $150k in the bank. Now they have nothing.

1. First off I want to say that I am not promoting going into foreclosure but let me tell you something about when it makes sense to do it. Foreclosure is now a word that every American now knows. Ten years ago you might hear that word occasionally or maybe when a business was going bankrupt, but not as much as you do now. The mortgage industry is having the worst time of its existence and their is not one person who is not affected by it one way or another. This is a story for the people who can pay their mortgage but need to move or downsize or something else but just cannot sell their house.

2. Many people around the country are losing their jobs right now because the economy is heading or already is in a recession. When people don’t have the money coming in to pay their bills the bills do not get paid. The first things that usually get passed up on are the credit cards and car loans. The last one that you want to pass up on is your mortgage payment. You need a place to live so you keep paying it as long as you can without being late.

3. Let’s say that you are one of the people who have a job right now and are not affected by what’s going on in the economy around you. You have enough income coming in your household to continue living your current lifestyle. You keep paying your bills but are at the point where maybe you live to far from work right now and with gas prices going up its just eating away at your wallet. Maybe your kids are moving out and its time to downsize. Time to sell the home.

4. You walk out your front door and you look to the right then the left and you count 14 for sale signs just on your street. This is pretty common in the Detroit area right now so don’t feel like I am exaggerating. It’s reality. Eight of those homes are going into foreclosure so you know already that the price of those homes is going to be way below what you perceive the value of your home to be. You also owe on your house $40k more than what all of the foreclosed homes are selling for.

5. Your options are to put it up for sale and hope somebody just really loves your house more than the other 8 homes that look identical to yours, same sq footage, bedrooms, tiling, everything, and wants to pay top dollar for it walks into your house and slaps down cash. This is more than likely not going to happen. Another option is to sell the house for what the foreclosed homes are selling for and bring $40k to the closing table out of your pocket to cover the difference. You don’t have $40k and if you did you wanted to use that for your down payment. What to do now?

6. You game the system. That’s right, game the system so it comes out in your favor. Keep making the payments on your home while you are looking for the new house that is closer to work or a smaller one. You should be able to find exactly what you want nowadays with so many homes up for sale. Take your time. You still have money coming in to pay your bills and home prices (including yours) are dropping every month. Make a low ball offer on every home that you think is going to be the one that you want. Just remember that the real estate market around the country is going to be heading back to what home prices were in the 2001 era. Do your home work and see what it sold for then. The home is still probably over prices and offer them near to what it sold for. Maybe they take it.

7. You find the home you want. This is when things get into action. You call up your local bank, credit union, or national lender to get approved on a mortgage. You talk mortgage rates with them and tell them that you are trying to buy a new home. The new home is probably going to have a much smaller mortgage than the home your currently living in. You tell the lender that you are keeping your current home as a second home or that your going to let your kids or family live in it while you move. You ask them if you can be approved on the new mortgage with your current income.

8. If they say yes then the game is on. What the mortgage lender just told you is that you are approved for a new mortgage to buy a new home and that you make enough money (in their eyes, based off a credit report) to handle two home loans, car payments, etc. If they say no, then most mortgage companies will ask you if you plan on renting it out? Say yes. What the mortgage lender will do now is see how much comparable homes are renting for in the area, get a dollar number and put that number in their approval process as income. They shouldn’t do this because you have no way of showing them that you are going to rent it at all. Remember, the mortgage lender is there to make loans and as long as their guidelines permit it then they will do it.

9. Let’s say though that you are approved just based on your income and no additional rental income is needed. At this point you have to ask yourself a real personal question. How bad do I want this home and am I willing to live with what is going to happen to my credit if I let the home go into foreclosure? If you say yes then this is what you will have to do. If you plan on getting any new cars within the next 2-3 years go out and get them now if you plan on leasing or financing a new car purchase. If you do not have a credit card go out and apply for 2 or 3 of them. If you want to buy a time share in Cancun get it now. If there is anything that you think you are going to want to finance over the next 2-3 years get it before you let your home go into foreclosure. The reason is that when you let your home go into foreclosure your credit history is going to get jacked up. Its going to show that you have paid all of your bills on time, credit cards, car loans, time shares, etc. All that is besides a home foreclosure. Since you have taken the cars, credit cards, time shares out before the foreclosure those lending institutions are not going to know the difference. They don’t care and as long as you are paying them its all the same. You can still charge things to your credit cards and use them as normal, just pay them off in full every month. You are going to need those things opened to help rebuild your credit over the next two years. Most mortgage companies are not even going to look at you to but a new home or refinance one if it has been two years since a foreclosure. After that then you can do it. In those two years you have been paying every thing on time so your credit scores should be on their way down. Be prepared to see you credit score drop 150 points or more on your credit report. Who cares. As long as you pay all your bills and use cash for alll of your purchases then you do not need any more credit. All a credit report is is a piece of paper. Do not let it tell you how to live your life. It does not know what;s going on in the outside world. Look down at your desk, find a piece of paper, write credit report on it and rip it in two. This piece of paper will mean nothing.

10.  So you buy the new house and get moved in. As an example let’s say your old house had a mortgage on it for $150k and the exact same homes that foreclosed sold for $110k. Instead of paying the bank $40k, you keep it in your pocket and put it into a savings account or mutual fund earning you interest. You buy your smaller home for $100k and you probably got a home that is not a fixer upper. You are in the new home, your loan is closed and the new mortgage shows up on your credit report the next month along with your old one and the other cars you just leased or purchased. You lock up your old house because you still technically own, collect the mail and wait for a notice of foreclosure. The notice comes, you call the bank and drive up there and drop off the keys. They of course will not be happy. Now look how much grief you saved yourself. You have $40k still in the bank (if you even had it). You are now in the house you need.  Your mortgage payment probably dropped by $100 month. For fun lets calculate it. $150k at 7% on a 30 year fixed rate mortgage is $998 a month. $100k at 7% for 30 years is $665 which is $998 – $665 = $333 in savings a month. I was way off in my guess. That’s the car payment on the car you just leased before foreclosing. Most importantly, you are no longer stuck with a house you are never going to be able to sell without having to bring money to closing. The reality of the real estate market is that home prices are never going to be as high as they were from 2002-2007. Just like I stated when I started writing, I don’t promote you foreclosing on your home. I’m just saying that if you have everything else in order and it makes sense don’t feel bad about doing it. All that is going to get messed up in your name is your credit report. Since you have everything you were going to finance for the next couple of years and you still make good money then your all set. If you like the area you live in then you might be biting the bullet now but that’s the price you pay if you have to stay.