Arizona Loan Modifications: Right for Arizona Families?

In our previous discussion of Arizona Loan Modifications, we discovered what a “loan mod” is, who can do one, and the process of doing one. This time, we’ll look at the pros and cons of actually doing one. Most of the clients who call our offices asking about loan modifications end up not seeking to do one. Why is that? If you can get an affordable new mortgage, and you can stay in your home, why wouldn’t you? Let’s take a look.

 The Case for Loan Modification

     A loan modification will be just right for many Americans, and can indeed save their homes from foreclosure, if “the price is right.”  The key consideration for these people is the level of price declines in their area or city. You see, only about 7 states have foreclosure “crises,” and of those 7, only 4 are causing most of the trouble (AZ, NV, CA, FL). If you live in any of the rest of the 96% of the country, the chances that a loan mod will work for you are pretty good. Let me explain.

    If you live in Cedar Rapids, Iowa, your home has definitely decreased in value over the last 3-5 years, but the price declines were fairly mild, and in fact, home prices INCREASED 1.8% from 2007 to now. Therefore, if you have negative equity in your home, it is likely to be not quite as severe. For example, let us assume that you bought a home Cedar Rapids for $200,000 in 2005. Chances are good that your home is still worth about $175,000 to $185,000. Result: you’re not upside down by a “prohibitive” amount. The loan modification in this case will make your payments more affordable for 5 years. Because of the relatively shallow negative equity, you will likely not have a problem selling your home in 5 years when the loan begins adjusting upward again.

     So, what if you DO live in one of the 7 states where prices have declined up to 54%. Does this mean that you can’t do a loan modification because have too much “negative equity?” Absolutely not, as there are no negative equity restrictions to participation in the program. The question is not whether you CAN, but whether you SHOULD.

The Case Against Loan Modification?

     According to the Congressional Oversight Panel that regulates loan modification programs, loan modifications are probably NOT going to help families with tremendous amounts of negative equity, or families who default because of job loss. For obvious reasons, you can’t modify a loan if you lack sufficient income. But, what about negative equity? Why would this cause a problem for loan modification?

     Let’s use another example, and this time, we’ll apply greater negative equity. If you live in one of the handful of states with the most severe foreclosures, it is likely that your situation looks something like this:

a.)    Bought house for $400,000 (First mortgage balance of $387,000, possible second?)

b.)    Homes just like yours are now worth $197,000.

c.)    You now have approximately $182,600 in “negative equity”.

You now do a loan modification of your interest rate (as occurs in 97% of cases), and as a result:

                                       1.) Old Payment: $2575 p/month

                                      2.) New Payment: $1750 p/month

                                       2.) This modification is in force for five (5) years.

Sounds fabulous, right? Maybe, but this is where practical reality sets in as people contemplate the future:

The Facts:

“I have a new, affordable mortgage payment.”

“I still owe my lender $387,000, plus some late charges, etc.”

“My house is still only worth about $200,000.”

“My loan is going to readjust in five years.”

 The Burning Question:

“Will my home double in value  in 5 years, so I can actually sell it if I have to?”

     This last is what causes many to decide NOT to do a loan modification. They are reasoning, and quite soundly unfortunately, that there is no way their home is going to almost double in value within 5 years. Not only are prices projected to fall for most of 2010, even if they stopped falling and began to rise again (using an optimistic rate of increase of 10% per year), it will still take almost 10 years before the negative equity is wiped out.

     You can see the problem: five years from now, there is a likelihood that you’ll be in exactly the same position you are in now. Your mortgage payments will start to increase again, while the situation at large hasn’t changed much, if at all. To make matters worse, your credit score has likely already taken a hit due to your current troubles. So, just when you’ve got your credit built back up, you’re faced with the negative equity problem again.

     Now, please understand, I am NOT advocating that you dismiss a loan modification as a possible solution to your mortgage troubles. You just need to be fully aware of what your true situation is, and what it needs to be in the future for a loan modification to actually solve your mortgage/housing problem. Many families, when they discover the real situation, decide that a loan modification is simply delaying the inevitable, and it is preferable to just “cut the losses now”. Cutting your losses now is becoming a strong mindset for many borrowers.  These homeowners reason that it is better to get rid of the ridiculously over-valued home (either through foreclosure, a deed in lieu of foreclosure, or a short sale), take a credit hit, and start life over. It’s like pressing the “reset” button.

     These “strategic foreclosures” are absolutely on the rise among many homeowners. Of course there is an ethical and moral consideration to this, but practical economic reality often overtakes the struggling homeowner. Provided that they do not actually go to foreclosure, and instead work with their lender to do a deed in lieu of foreclosure or a short sale, they WILL be better off. Consider: our latest research shows that the average borrower who conducts a short sale or deed in lieu of foreclosure within 5 months of default will suffer a 175 – 225 pt drop in their credit score. These same people are reporting that they are qualified to purchase a home again within 2-3 years.

     The practical reality is that, if you move quickly to expedite the transfer of the home to someone else (the lender or another buyer), your credit damage is fairly manageable. Furthermore, this leads to the positive conclusion that homeowners are much better off dumping their over-priced homes and just buying another home later. Not only will they probably save lots of money on a rental each month, but their credit scores will rebound fairly quickly, enabling them to purchase a newer, cheaper home, WELL BEFORE their old home would have appreciated to the level of the old mortgage. This is hard to argue with, as it makes both economic and common sense. 

     When the Congressional Oversight Panel reviewed the efficacy of the government’s programs to save families from foreclosure, they were extremely concerned. Their skepticism is valid indeed. The foreclosure programs in place now DO NOT address the issue of job loss, or of homeowners who simply decide that staying in the home makes no economic sense. To the extent that these problems continue and increase, well. . .use your imagination. But only for a few minutes; it will lead to anxiety and depression ;>)

Free Loan Counselors Available Now!

By Phone: (602) 499-4798  or by Email: therealtybutler@gmail.com

*Disclaimer: Please always remember: I am NOT an attorney, and neither do I play one on TV or the Internet. None of these pontifications should be construed as specific legal advice. If you need specific legal advice regarding your personal situation, give us a call. We can help you ourselves, or provide a list of housing counselors that are free!

Arizona Loan Modifications: What Are They, and Who Can Do One?

*In this first part in the series, we’ll cover what a loan modification is, and who is eligible. Please keep in mind that if you have lost your job, or have extremely limited income, you probably will not qualify for a loan modification. You must have income in order to pay any loan, even a modified one. If you are in this category, help may be on the horizon. For now, please start with our Help with Arizona Short Sales and Foreclosure series. Next time, we’ll look at the pros and cons of doing a loan modification. 

Part II in this Series: Is a loan mod “right” for Arizona Families?

The Rise of “The Loan Mod”     

 Until just this last March, if you couldn’t afford your home, you had little choice but to allow the lender to foreclose, or try to do a short sale. In other words, you were moving; there were no options to stay in your home. Now, in an effort stop foreclosures and stabilize the economy, the federal government has created some programs to enable you to stay in your home and avoid foreclosure by modifying the terms of your current mortgage. 

     There are currently four federal programs to make mortgage modifications available to the public: HARP (Home Affordable Refinance Program), HAMP (Home Affordable Modification Program) HOPE for Homeowners, and the FDIC’s Mortgage Modification Program for IndyMac.  Of these four programs, only HAMP has made any real progress in modifying mortgages. The other programs do not have broad lender participation, and the guidelines are too strict for many borrowers.

     The Congressional Oversight Panel (who oversees these programs) in their review released in October 2009,  reported that 85% of all servicing lenders are either participating in the HAMP program, or have programs of their own that are comparable. For this reason we will focus exclusively on HAMP, as this is how most people will modify mortgages. HAMP modifications are made on a 3 month trial basis first, and if you make the new payments and provide all documentation that your lender requests, your loan modification will become locked in for five years. After the five years, your loan will gradually revert to either your original loan interest rate, or the Freddie Mac 30-year fixed rate at the time of your modification, whichever is less. (The Freddie Mac rate is currently around 5%.)

How Does A Loan Mod Work? 

     How is a mortgage modified to make it more affordable? First, we have to define “affordable.” For the purposes of this plan, the government has determined that a monthly mortgage payment that is 31% or less of your monthly income is affordable. If your monthly mortgage is more than 31% of your monthly income, it is not. In order to reach this 31% affordability level, lenders can make several changes to your mortgage. Before we get to the actual modifications that can be done, we must first advise of a few key points of the program.:

-Lower your interest rate to as low as 2% for a period of up to 5 years.

           *After 5 years, your loan rate goes up again. This is the method used in almost all modifications. The average modified loan rate goes from 7.58% to 2.92%.

-Extend the term of your loan, or re-amortize, for up to 40 years

          *Most lenders are not doing this for two reasons, 1.) an interest rate reduction will usually work to reach the desired 31%, and 2.)  most lender’s Pooling and Servicing Agreements (PSAs) will usually not allow them to modify  loan lengths.

-Principal Forbearance

     *A portion of your loan is “lopped off” and placed into a “bubble” that you don’t pay any interest or payments on. This portion of your loan is due “later”. This is very rare.

-Principle Forgiveness

     *A portion of your loan is again “lopped off,” but this time, it’s forgiven. It’s gone. This is not only rare, it’s an anomaly: of the 362,348 borrowers placed into HAMP loan mods, only 5 had principal forgiven.

   Who Can Participate in The Loan Mod Program?

   So, does anyone who can prove that their mortgage is more than 31% of their monthly income get a loan modification? How do the government and lenders determine who is eligible? The eligibility requirements for HAMP are fairly simple, but also prohibitive for some:

#1.) You must be in default or be in imminent danger of default.

     *Default is defined as “behind on payments,” and in order to be eligible, you must have either already stopped making payments, or demonstrate that your ability to make payments is about to end.

#2.) You must have a certifiable hardship

     * You must be able to explain why you now CAN’T pay your mortgage, whereas you COULD before. Did you lose a job? Get divorced? Get ill? These reasons and others like them are certifiable hardships.

#3.) Your loan has to have been issued prior to January 1^st, 2009

#4.) Only 1^st Mortgages are eligible under the program’s guidelines

     *2^nd loans or home equity lines are not eligible (Treasury is working to include these.)

#5.) Mortgage balance cannot exceed $729,750

* If a review of your finances indicates that 55% or more of your income is servicing consumer debt (credit card, mortgage, etc), enrollment in a credit counseling program is mandatory for program participation.

 What’s To Come:

While mortgage modifications will be a ray of hope for some homeowners in distress, many more will either not qualify for a modification, or will choose not to do one. Why would an Arizona Homeowner NOT do a loan mod?

Part II in this Series: Is a loan mod “right” for Arizona Families?

Free Loan Counselors Available Now!

By Phone: (602) 499-4798, or 

By Email: therealtybutler@gmail.com

*I am not an attorney, and neither do I play one on TV or the Internet. This article  should NOT be construed to impart specific legal recommendations or advice to ANYONE. If you have questions regarding your specific set of circumstances, please call our office, or contact an attorney. (Our Office: 602-499-4798)

Wise Buyer Strategies: Offer Pricing

     Since launching our Wise Buyer Strategies planning earlier in the year for our select buying clients,  we have been pleased to discover  that the strategies planning worked so well, and our clients were so thrilled with it, we have decided to publish the entire strategy series on line.  If you’d like to start at the beginning, please start with our Wise Buyer Strategies home page.

     In this first part of our new series on how to strategize your offer on an Arizona foreclosure, short sale, or owner-occupied home, we’ll deal with the basis of all purchases, the price. In later articles, we’ll cover the remaining offer strategies (terms, concessions, inspections, repairs, costs, and closings). Our hope is that once the series is complete, you’ll have a clearer picture of how to write a strong offer on the Arizona home you want, and actually get it. In regards to your offer pricing, you have a few considerations: How much should you offer? Do you have to pay full price, or even over full price to get a home right now?  

How do I determine what a home is worth?   

Home prices are always approximate, and are based on what similar buyers are paying for similar homes, in similar neighborhoods, in the last few months. This will be the case for all homes in neighborhood tracts, condo complexes, etc. Custom homes in custom locations will differ slightly, but not much. For example, when your real estate agent runs a market analysis on the home you would like to make an offer on, they’ll give you a list of homes that are similar to the one you are considering, that have sold most recently. In this example, the prices people paid for those homes will range in price from say, $125,000 to $137,500.  This means that if the “Market Climate” is good for sellers, the seller will be expecting to get near, or over $137,500. Why would a seller expect to get over what the market says a home is worth?

 How Market Climate affects home values.

     Market Climate is an expression that means, “Who is in control of the real estate market?” There are two controlling sides here, the buyers and the sellers. Therefore, we have “Buyer’s Markets,” and “Seller’s Markets.” (There is actually a “transition period” between these two that is very short and usually imperceptible called “Stability”.)

     When you’re a buyer looking for a home in a market where there are many more buyers than there are homes for sale, and competition is fierce, this is called a Seller’s Market. The seller is on control. When the market is flooded with homes for sale, and buyers are few, a buyer is in home-buying-heaven: the Buyer’s Market.  Market climate at the time of this writing is definitely a strong Seller’s Market. In a Seller’s Market, there are likely to be multiple buyers bidding on a single home, and someone is going to offer more than what the seller is asking.  This places pressure on prices, causing them to rise.

Wise Buyer Pricing Strategy

     The first thing that you must remember when the buyer market is competitive is that you probably will not be able to buy a home at the top of your price range. If you have $150,000 cash, or a bank says they’ll lend you the $150,000 to buy a home, should you go look at and bid on homes that are priced at $150,000?  Why would you? Chances are, there are at least 5 other people just like you that are interested in that same home, and at least one of them is likely to bid more than the asking price, and then you’re stuck. You’ve got nowhere to go.  The first part of the strategy involves looking at homes that are priced below your spending limit. This will get you into negotiations, and some wiggle room for when you get there.

     The second part of the strategy is to carefully balance the negotiations from this point. Remember the golden rule of pricing: a house is worth what someone is willing to pay the owner in cash.  If you’re paying cash, you can pay whatever you want. But, if you’re getting a loan, a problem can come up: you may be willing to pay the owner X, but the bank you’re borrowing the money from may not be. This is where the appraiser comes in. The appraiser’s job is to tell the bank if the house is worth the price you are offering. Remember those homes that sold from our previous example for between $125,000 and $137,000?  The appraiser will look at that data, and make a determination.  Can he tell the bank that the home is worth more than the current sold comparables indicate? Yes, he can, but only by a little. What is a safe range in this example? I personally would not advise a client to offer more than $140,000, and would advise them of the dangers of doing so.

     What is the danger? The danger is that the appraiser comes back with a figure of $138,500. Does the seller want the $140,000 you offered? Absolutely, but they can’t get it. You are under no obligation to pay what you offered, but unless the seller agrees to lower the price to the appraised value, the deal falls apart.

     So, when pricing your offer, look carefully with your agent at the comparable sales, and determine a safe range for your offer, keeping in mind the appraisal issue. If you’re paying cash, your strategy will be slightly different. If you are a cash buyer seeking guidance on your offers on investments, give us a call for alternate strategies.

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