New Vocabulary for a New Market –“Strategic Default”

It used to be unthinkable to stop paying the mortgage.

More Americans are finding themselves “underwater” on their mortgages. They owe more to the bank than their properties are worth. A house that was purchased for $240,000 several years ago, and there is still $218,000 outstanding on the loan, now finds the property is only worth $130,00 or less. Even if the homeowner can still afford to pay, should they? Especially when they can rent a comparable space for less than their mortgage payment.

More and more people, where house values have plumpeted are considering a “strategic default” – walking away from their mortages – not out of necessity, but because they think it is in their financial best interest.

A standard mortgage-loan document reads, "I promise to pay" the amount borrowed plus interest, and some people say that promise should remain good even if it is no longer convenient. What makes it immoral for a homeowner to walk away from debt, but we have allowed banks to walk away from debt with impunity? Should borrowers take a cue from lenders that ruthlessly sought to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.

Strategic Default is not without its risks. Walking away isn't risk-free. A foreclosure stays on a consumer's credit record for seven years and can send a credit score plunging. A lower credit score means auto and other loans are likely to come with much higher interest rates, and credit card issuers may charge more interest or refuse to issue a card.

As the idea of a strategic default makes more sense to homeowners with negative equity, will we see more decline in values. In neighborhoods with high concentrations of foreclosures, is it going to be really difficult to prevent a “cascade effect" as one strategic default emboldens others to take that drastic step?

First American CoreLogic, a real-estate information company, estimates that 5.3 million U.S. households have mortgage balances at least 20% higher than their homes' value, and 2.2 million of those households are at least 50% under water. The problem is concentrated in Arizona, California, Florida, Michigan and Nevada.

What would you do?

If You Walk Away, Who Can Sue You for a Deficiency Judgment... And Will They?

What is a Foreclosure?

Foreclosure is a legal process by which a bank, mortgage company or other creditor takes a homeowner’s property in order to satisfy a debt. The foreclosure is the result of non-payment of the mortgage (including second mortgages and home equity loans); however, people also lose their homes due to unpaid property taxes. As a result of the foreclosure (at the end of the redemption period), the homeowner loses the rights he or she had to the property.

FORECLOSURE TIMELINE:

Day 1-15
Mortgage payments are typically (not always) due on the first of each month. If the payment is not made by the due date it is considered delinquent.
Day 1-15
A late fee is usually assessed to the mortgage account after day 15. The first notice is usually mailed on the 16th of the month. You may begin getting phone calls at this time.
Day 31-45
Servicer sends “demand” or “breach” letter to the borrower pointing out that terms of the mortgage have been violated.
Day 61-90
When a loan is 60 days past due, the lender may initiate acceleration procedures by sending a letter notifying the borrower that foreclosure is the next step. At this time the lender will only accept your total past due which includes: all past and current payments with late fees and interest.
Acceleration procedures include lenders refusing to accept any partial payments and requiring that the past due balance on the mortgage be paid in full, and can even mean that the lender will void any payment agreement and call the loan due in full.
Day 91-105
Servicer refers loan to foreclosure department. Hires local attorney or other firm to initiate foreclosure proceedings.
Once acceleration begins, if you abandon the property or the property is red tagged, your home may be repossessed. This may include your locks beginning changed and your utilities are disconnected.
Foreclosure proceedings can start any time after the acceleration notice is sent, but usually happens when the loan is 90 or more days past due. This is when attorney fees become a significant part of the fees due.
Day 150-415
House sold at foreclosure sale or auction. Wide time range due to different state requirements. Foreclosure can happen in Michigan either by judicial action or by newspaper advertisement (sheriff sale). The most common foreclosure action in Michigan is by advertisement. In this procedure, the lender’s attorney advertises the property for sale in a general-circulation newspaper for four consecutive weeks.
The sheriff sale date is listed in the advertisement, and following the four weeks the county sheriff sells the property to the highest bidder (which is usually the lender).
The officer conducting the sale will execute and deliver a “sheriff’s deed” for the premises to the highest bidder. The deed will specify the last date that the mortgagor can redeem the property. This deed must be recorded within 20 days of the sale, and the person recording the deed will endorse the date and time it was received on the document. If the property is redeemed the sheriff’s deed will be destroyed.
Day 150-415+
After the property is sold at a sheriff sale the mortgagor has a redemption period during which time the property can be reacquired. The redemption period in Michigan is usually six months, except in situations where there are more than four units; less than 2/3 of the original debt owed, multiple acres and/or abandonment occur. In order to redeem the property at this point you must pay off the mortgage, all interest and late fees, court costs, attorney fees, title and appraisal fees. If the sheriff deed holder paid taxes or insurance after the sheriff sale, the mortgagor must pay those fees as well. Redeeming the property by getting another mortgage is very difficult because of the bad credit rating that resulted from the foreclosure. Redeeming the property by selling it on the market is often a good option. If the property is redeemed, the original rights and obligations of ownership are reinstated.

Home Inspections Avert Future Headaches

Suppose you bought a house and later discovered, to your dismay, that the stucco exterior concealed a nasty case of dry rot. Or suppose that when you fired up the furnace in the winter, you discovered a cracked heat exchanger leaking gas into your home. The best way to avoid unpleasant surprises like these is to arrange for a home inspection before you buy.

Home Inspections Help You Avoid Unpleasant Surprises

A good home inspection is an objective, top-to-bottom examination of a home and everything that comes with it. The standard inspection report includes a review of the home's heating and air-conditioning systems; plumbing and wiring; roof, attic, walls, ceilings, floors, windows, doors, foundation and basement.

Getting a professional inspection is crucial for older homes because age often takes its toll on the roof and other hard-to-reach areas. Problems can also be the result of neglect or hazardous repair work, such as a past owner's failed attempt to install lights and an outlet in a linen closet.
A home inspection is also a wise investment when buying a new home. In fact, new homes frequently have defects, whether caused by an oversight during construction or simply human error.

Getting an Inspector

Real estate agents can usually recommend an experienced home inspector. Home inspections cost about a few hundred dollars, depending on the size of the house and location. Inspection fees tend to be higher in urban areas than in rural areas. You may find the cost of inspection high, but it is money well spent. Think of it as an investment in your investment – your future home.

Some builders may try to dissuade you from getting a home inspection on a home they've built. They may not necessarily be trying to hide anything because most builders guarantee their work and will fix any problems in your new home before you move in. Some builders, in fact, will offer to do their own inspections. But it’s best to have an objective professional appraisal - insist on a third-party inspector.

An Inspection Will Educate You about Your House

Education is another good reason for getting an inspection. Most buyers want to learn as much as they can about their purchase so they can protect their investment. An examination by an impartial home inspector helps in this learning process.
Ask if you can follow the home inspector on his or her rounds. Most inspectors are glad to share their knowledge, and you'll be able to ask plenty of questions.

Inspection Timing and Results

Homebuyers usually arrange for an inspection after signing a contract or purchase agreement with the seller. The results may be available immediately or within a few days. The home inspector will review his or her findings with you and alert you to any costly or potentially hazardous conditions. In some cases, you may be advised not to buy the home unless such problems are remedied.

You could include a clause in your purchase agreement that makes your purchase contingent upon satisfactory inspection results. If major problems are found, you can back out of the deal. If costly repairs are warranted, the seller may be willing to adjust the home's price or the contract's terms. But when only minor repairs are needed, the buyer and seller can usually work out an agreement that won't affect the sale price.

What does REO mean?

What does REO mean?

REO stands for Real Estate Owned. In the current real estate market, banks and lending institutions have had to take back thousands of properties in the foreclosure process. Bankers are now finding themselves in the real estate business instead of the lending business. Whole new departments are springing up inside of a bank’s organization. In 2005 you never heard of a short sale department or loss mitigation. Now they are commonplace.

Military Families Receive Extra Benenfit from Home Buyer Tax Credit

Members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit.

Thus, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2011. If a binding contract is entered into by that date, the taxpayer has until June 30, 2011, to close on the purchase.

Members of the uniformed services, members of the Foreign Service and employees of the intelligence community are eligible for this special rule. It applies to any individual (and, if married, the individual’s spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.

More on Military Family Benefits

IMPORTANT! - HOME BUYER TAX CREDIT IS REFUNDABLE!

-A refundable credit means that if the amount of income taxes you owe is less than the credit amount you qualify for, the government will send you a check for the difference.

-For example:-A first-time buyer who qualifies for the full $8,000 credit who owes $5,000 in federal income taxes would pay nothing to the IRS and receive a $3,000 payment from the government. If you are due to receive a $1,000 refund, you would receive $9,000 ($1,000 plus the $8,000 first-time homebuyer tax credit).

-A repeat buyer who owes $5,000 would pay nothing to the IRS and receive $1,500 back from the government. If you are due to get a $1,000 refund, you would get $7,500 ($1,000 plus the $6,500 repeat buyer tax credit).-All qualified homebuyers can take the tax credit on their 2009 or 2010 income tax return.

More on Tax Credit

HOME BUYER TAX CREDIT EXTENSION Q & A

As part of its plan to stimulate the U.S. housing market and address the economic challenges facing our nation, Congress has passed new legislation that:
1. Extends the First-Time Home Buyer Tax Credit of up to $8,000 to first-time home buyers until April 30, 2010.
2. Expands the credit to grant up to $6,500 credit to current home owners purchasing a new or existing home between November 7, 2009 and April 30, 2010.

Who Qualifies for the Extended Credit?
1. First-time home buyers who purchase homes between November 7, 2009 and April 30, 2010.
2. Current home owners purchasing a home between November 7, 2009 and April 30, 2010, who have used the home being sold or vacated as a principal residence for five consecutive years within the last eight.
Which Properties Are Eligible?
The Extended Home Buyer Tax Credit may be applied to primary residences, including: single-family homes, condos, townhomes, and co-ops.
How Much Is Available?
The maximum allowable credit for first-time home buyers is $8,000.
The maximum allowable credit for current homeowners is $6,500.
How is a Buyer's Credit Amount Determined?
Each home buyer’s tax credit is determined by two additional factors:
Price
Under the Extended Home Buyer Tax Credit, credit may only be awarded on homes purchased for $800,000 or less.
Buyer Income
Under the Extended Home Buyer Tax Credit, which is effective on November 7, 2009, single buyers with incomes up to $125,000 and married couples with incomes up to $225,000—may receive the maximum tax credit. These income limits have changed from the 2009 First-Time Home Buyer Tax Credit limits.
If the Buyer(s)’ Income Exceeds These Limits, Can He/She Still Get a Credit?
Yes, some buyers may still be eligible for the credit. The credit decreases for buyers who earn between $125,000 and $145,000 for single buyers and between $225,000 and $245,000 for home buyers filing jointly. The amount of the tax credit decreases as his/her income approaches the maximum limit. Home buyers earning more than the maximum qualifying income—over $145,000 for singles and over $245,000 for couples are not eligible for the credit.
Can a Buyer Still Qualify If He/She Closes After April 30, 2010?
Under the Extended Home Buyer Tax Credit, as long as a written binding contract to purchase is in effect on April 30, 2010, the purchaser will have until July 1, 2010 to close.
Will the Tax Credit Need to Be Repaid?
No. The buyer does not need to repay the tax credit, if he/she occupies the home for three years or more. However, if the property is sold during this three-year period, the full amount credit will be recouped on the sale.

Article from: The Basics: Extended Home Buyer Tax Credit 2009/2010